Star Textiles and Industries Ltd. vs Olive Tea Plantations P. Ltd. (No. 1)

Sanjib Banerjee, J.—The petitioner cites the company''s failure to return a loan as the ground to hold that the company is unable to pay its debts and liable to be wound up.

A total sum of Rs. 86,91,000 according to the petitioner, was made available to the company between February 13, 2002 and March 31, 2004. Of this, the company repaid a sum of Rs. 5,49,400 leaving an unpaid balance principal of Rs. 81,41,600. The petitioner sought refund of such sum together with interest thereon at the rate of 15 per cent, per annum by its statutory notice of September 20, 2004. The company''s response to such demand and the subsequent stand taken in the affidavit filed in these proceedings is, by and large, the same. It alleges that one Harsh Bajoria was the principal person in control of the company prior to the present management taking over and that such Bajoria had shown payments being made to the company from entities under his ultimate control without the company having received any benefit against such payments. Such Bajoria is also alleged to be at the helm of the petitioner, whether directly or through persons accustomed to obey his dictates.

There is no agreement in writing that is relied upon by the petitioner. There is no demand made by the petitioner prior to the statutory notice. There is no acknowledgment of indebtedness by the company or even any writing where the transaction has been referred to in passing. The petitioner relies on a statement that it furnishes; its demand contained in the statutory notice ; and, what it claims to be, the baseless denial of the company''s liability in the response of October 5, 2004. The petitioner suggests that even though there are no documents in support of the transaction that it claims, there is no denial by the company of having received the funds. It is submitted that even if a petitioning creditor is required to affirmatively establish its claim on the basis of the papers appended to its petition, once an affidavit is used by the company, the defence put forth is required to be tested and the petitioner''s entitlement to the money claimed is to be weighed against the plausibility of such defence rather than the unimpeachable character of the documents relied upon by the alleged creditor. In a sense, the petitioner asserts that upon a company not using an affidavit to a winding up petition, it is the petitioner''s case that calls for closer scrutiny than when an affidavit is used; upon the company disclosing its defence in its affidavit, it is such defence that needs to be examined without the petitioner being put to such strict proof of its case.

In the statement of accounts forming part of the petition, it is shown that a sum of Rs. 5 lakhs made available during the last month and a half of the financial year ended 2001-02 was repaid by the company within the first three weeks of the following financial year. It is the balance sum, claimed to have been made available by the petitioner to the company between August 26, 2002 and March 31, 2004, that is the subject-matter of the petitioner''s claim. In the petition a sum of Rs. 49,400 is shown to have been refunded on account of the principal during the financial year 2004-05. On such scanty material as its own statement, statutory notice and the company''s response thereto, the petitioner found its claim to wind up the company. It is the more substantial affidavit filed by the company that the petitioner pounces upon to establish its case by almost discarding the petition. The petitioner relies on the accounts found at pages 79 and 80 of the company''s affidavit to suggest that in the labyrinth of denials issued by the company and the wave of extraneous materials alluded to, the two page accounts substantiate the petitioner''s claim. The petitioner submits that upon the kernel being sifted from the husk, what appears in the accounts is that moneys obtained by the company from one set of concerns said to be controlled by the petitioner''s mentor were repaid by moneys obtained from another set of the petitioner''s associates and finally from a third set of companies also controlled by Bajoria. It is argued that if money is taken from B to repay A and a subsequent loan is taken from C to repay B, the loan from C would remain outstanding and the petitioner is in the position of C.

The petitioner not so much attacks the plaint in the suit filed by the company and its new management against the petitioner and its associates, as it relies thereon. Such suit came to be filed after the company''s receipt of the statutory notice and the issuance of its reply thereto. The petitioner highlights the inconsistencies in the company''s plaint and insists that such action was an obvious counterblast to the petitioner''s demand. It is urged that such suit notwithstanding, the incredulous case run therein should encourage the company court to speed up the last rites of the company than to await the suit ripening for trial.

The petitioner is the eighth defendant in the suit pending before this Court in which the company and the Mores now running the company have claimed the following:

(a) An enquiry into the damages caused by the defendants to plaintiff No. 1 and a decree for such sum as may be found due and payable upon such enquiry;

(b) Decree for Rs. 3,54,50,000 as against the defendants jointly and/ or severally;

(c) Declaration that no money is due or payable by plaintiff No. 1 to defendants Nos. 8 to 14 and in the alternative if at all any amount is found due or payable, mandatory injunction directing defendants Nos. 1 to 6 to make such payment to the said defendants Nos. 8 to 14;

(d) Declaration that no money is due or payable by plaintiff No. 1 to defendant No. 7 and in the alternative if at all any amount is found due or payable, mandatory injunction directing defendants Nos. 1 to 6 to make such payment to defendant No. 7 ;

(e) Perpetual injunction restraining the defendants, their agents, servants and/or assigns from interfering with the management, control and affairs of plaintiff No. 1;

(f) Interim interest and interest on judgment at the rate of 24 per cent, per annum;

(g) Receiver; (h) Injunction; (i) Costs;

(j) Such further or other reliefs.

Such reliefs have been based on, inter alia, the following averments 7 found at various places in the plaint:

Defendant No. 1 (Bajoria) was in control of a company by the name of M/s. Olive Securities P. Ltd. Later, the name of the company was changed to M/s. Olive Tea Plantations P. Ltd. (''the company''). During the year 2000, defendant No. 1 informed plaintiffs Nos. 2, 3 and 4 that he was in the process of procuring 1,850 bighas of land in a place called Kalechera, district Karimganj, Assam. Thereafter, defendant No. 1 informed plaintiffs Nos. 2, 3 and 4 that he had procured 1,611 bighas of land in the name of M/s. Olive Securities P. Ltd., and had also started to prepare the said land for cultivation of Tea.

Defendants Nos. 2. 3, 4 and 5 were the previous directors of the said company and the persons in control of the company till such time as the change of management took place, in favour of plaintiffs Nos. 2, 3 and 4. Defendant No. 7 is one of the banker(s) of the said company. Defendants Nos. 8, 9,11,13 and 14 are the concerns who are claiming to be creditors of the company in respect of the monetary dues allegedly created during the tenure of the erstwhile management of the company. Defendant No. 1 is in control of the other defendants. Defendant No. 6 is the son of defendant No. 1.

The new management headed by plaintiffs Nos. 2 and 3 took control of the affairs of the company only in March, 2004. Prior to that, the management and the bank accounts of the company were being totally operated by defendants Nos. 1 to 6 and/or their nominees. In fact, the bank accounts were mainly operated by defendant No. 6, the son of defendant No. 1, as authorised signatory, without any knowledge of plaintiffs Nos. 2 and 3.

Even though defendant No. 1 did not hold any position in the company, he was in de facto control of the entire affairs of the company. Defendants Nos. 2 to 5 were appointed as directors of the company at the instance of defendant No. 1. These defendants were actually the employees of defendant No. 1. Defendant No. 1''s son being defendant No. 6 herein was made one of the authorised signatories of the bank accounts of the company in Calcutta maintained with Standard Chartered Bank, UCO Bank, Central Bank of India, etc., 50 per cent, of the shares of the company were held by Arnav Financial Services P. Ltd., and Shreekunj Securities P. Ltd., being the concerns under the control of defendants Nos. 1 and 6. The aforesaid facts would exhibit that defendant No. 1 was actually in control of plaintiff No. 1 prior to March, 2004.

Even though plaintiffs Nos. 2 and 3 were inducted as directors of the company in December, 2002, the management continued to be under defendants Nos. 1 to 6 and especially defendant No. 1. Plaintiffs Nos. 2 and 3 did not receive notice of a single board meeting of the company. Plaintiffs Nos. 2 and 3 were not the authorised signatories in respect of the bank accounts of the company in Calcutta. None of the documents executed on behalf of the company were by plaintiffs Nos. 2 and 3, other than the Central Bank of India, Silchar, loan documents, which was done in good faith and at the request of defendant No. 1. Only after the change of the management in the end of March, 2004, did plaintiffs Nos. 2 and 3 take control of the affairs of the company.

Plaintiffs Nos. 2 and 3 were inducted as directors of plaintiff No. 1 in 2002. The two retiring directors were defendants Nos. 2 and 3. After such retirement defendants Nos. 2 and 3 ceased to have any connection with plaintiff No. 1. However, the said defendants continued to operate the bank accounts of plaintiff No. 1. On the other hand plaintiffs Nos. 2 and 3 were not signatories to the bank accounts of plaintiff No. 1 nor was their induction as directors of plaintiff No. 1 intimated to any of the said bankers of plaintiff No. 1 except to defendant No. 7 at the time of sanction of the loan from the said bank. The same was evidently done to perpetrate fraud upon plaintiff No. 1 without any hindrance and/or obstruction from plaintiffs Nos. 2 and 3.

It now appears that plaintiffs Nos. 2 and 3 were only inducted in the board of directors of the said company for the purpose of obtaining the loan from Central Bank of India, Silchar, Hospital Road Branch. The said plaintiffs were made guarantors to such loan. The fraudulent motive and mala fide intention would appear from the fact that there was a withdrawal of Rs. 75 lakhs from the bank within 10 days of the loan being sanctioned in favour of the companies controlled and managed by defendants Nos. 1 and 6.

In the circumstances, the plaintiffs state that the defendants, in collusion and conspiracy with each other, have defrauded plaintiff No. 1 company to the extent of over Rs. 3,54,50,000 particulars whereof are given hereinbelow:

(Rs.) (a) Moneys disbursed/adjusted by defendants Nos. 1 to 7 in 2,20,25,000 favour of defendants Nos. 9 to 13 against false and fabri cated bills and loans alleged to be due from Plaintiff No. 1. (b) Fictitious expenses demanded by defendants Nos. 9, 11, 1,34,25,000 13 and 14 on account of land development, consultancy, etc., aggregating to 3,54,50,000 13. The plaintiffs state that no money is in fact due and payable to any of defendants Nos. 8 to 14 and liabilities created by defendants Nos. 1 to 6 in the books of plaintiff No. 1 including false loans taken from defendant No. 8 are false and not actually payable by the plaintiffs. If at all any money is payable to the said concerns, the same should be paid by defendants Nos. 1 to 6 as because the real beneficiaries of the said moneys are the said defendant.

The petitioner has relied on a supplementary affidavit filed by the plaintiffs in such suit and made part of the company''s affidavit in these proceedings. The petitioner submits that sub-paragraph 6(f) of such supplementary affidavit and the documents referred to therein as bearing the forged signatures of one or more of the Mores, are stuff more suited to fairytales than statements made before the court on oath. The verisimilitude of the signatures disowned with the ones admitted would make it apparent that the suit was a thinly-veiled attempt to ward off the proceedings threatened by the statutory notice and defer the adjudication to such a time when it became irrelevant. The document that finds place at pages 140 and 141 of the company''s affidavit is singled out for special attention. It is shown that the company''s application to Central Bank of India, Guwahati, for loan in May, 2003, records two of the Mores as part of the three-member board of the company and the offer of the company was to secure the loan sought by the personal guarantees of such Mores. In the context of the company''s shifting stands as to the date on which the new management took over (March, 2004, at two places in the plaint and September, 2004, at the third), it is submitted on behalf of the petitioner, that such letter written by the company to the bank would demonstrate that the Mores were firmly in control of the company even before financial year 2002-03 had run out as the company''s letter of May 7, 2003, was in response to the bank''s letter of March 24, 2003. The petitioner argues that despite the involved facts that the company presents, the basis of the yarn spun by it that the loan predates the change-over in the management is a myth; the loan was acknowledged in the company making part repayment at a time that the Mores were firmly astride the company''s management.

In addition to the Bajoria-centric defence adopted in its first reaction to the petitioner''s claim, the company has put up the shield of limitation before other matters on merits can be looked into. It alleges that the company was used merely as a conduit for funds of Bajoria to be routed from one set of his concerns to another and then to a third. The entirety of the company''s defence is summarised at paragraph 6 of its affidavit which deals with the heart of the petition:

With reference to paragraphs 6 to 13 of the said petition, I deny that the company was indebted to the petitioner for a sum of Rs. 1,15,59,525.86 or any part thereof. The alleged agreement referred to in the paragraphs under reference is false and concocted. There was no such agreement nor could any such agreement be entered into between the petitioner and the company. As stated earlier, this was a part of fraud perpetrated by the previous management in process of siphoning out money from the company. I deny that there was any agreement for repayment of interest at the rate of 15 per cent, per annum or at all. All the amounts allegedly paid by the petitioner to the company were all siphoned out to pay off the fictitious dues of Fastrack Real Estate P. Ltd., and Mitsubishi Trading P. Ltd. All the payments allegedly made by the company to the petitioner were also internal transaction between two concerns owned and controlled by the same person, i.e., Harsh Bajoria and his nominees. The alleged payments made by the company to the petitioner were all during the time when the previous management was in control of the company. I reiterate that there was no loan in fact taken by the company from the petitioner. As to the alleged part payments, I subject the petitioner to strict proof thereof. I also call upon the petitioner to state how the alleged payment of Rs. 49,400 was made by the company to the petitioner during 2004-05. The books and records of the company do not reflect this payment of Rs. 49,400 in the year 2004-05.1 deny that any such repayment was made by the company to the petitioner. I deny that Rs. 34,57,925.86 or any part thereof is due or payable as and by way of interest as alleged or at all. I deny and dispute the particulars given in annexure ''A'' to the petition. I state that no amount is due and payable by the company to the petitioner as falsely claimed by it.

The petitioner brushes aside such preliminary challenge to its entitlement by relying on two statements forming part of its affidavit-in-reply; the first, a small chart detailing the break-up of the repayment of Rs. 49,400 and the second, showing such part repayments to have been made on August 19, 2003, August 30, 2003 and September 9, 2003, as reflected in the petitioner''s bank statements for the months of August and September, 2003. Three entries in such bank statements reflecting deposits by way of transfer cheques are relied upon to substantiate the petitioner''s claim of partial repayment, albeit the bank statements not recording that such payments were by cheques issued by the company. The petitioner says that the details of the relevant cheques appear in the first annexure to its reply and the company had neither cared to deny such details nor so much as sought leave to deal with the documents disclosed in the reply. The petitioner glosses over the small matter of the dates of the part payments now relied upon being at variance with what was suggested in the single page statement appended to the petition. If, indeed, a part of the petitioner''s claim can be said to be barred by limitation, as it is suggested, then it could only be the sum of Rs. 70,000 shown to have been made available on or about August 26, 2002, that would be unrealisable, as the petition came to be instituted by the end of November, 2005. It is submitted that the other larger sums out of the petitioner''s principal claim remained immune to the challenge by way of limitation as the earliest of the remaining payments was shown to have been made on January 3, 2003. The company''s bogey of limitation (though limitation, by name, does not find any mention in its affidavit) is laughed away by the submission that it would scarcely be worth the while for the petitioner to, in effect, establish a claim of Rs. 20,600 in respect of the payment of Rs. 70,000 by showing repayment of Rs. 49,400, particularly in the context of the petitioner''s principal claim of nearly Rs. 87 lakhs. The petitioner exhorts that such dishonest defence as the company''s should not be countenanced and should be treated as an additional ground for it to be wound up.

The company submits that it would be dangerous to conclusively pronounce upon the matters in issue in summary proceedings and the company court would do better to await the trial of the suit upon all evidence being received. It is urged that a petitioner has to stand or fall on the strength of his petition and the falsity of the company''s affidavit is only of corroborative value. In the absence of primary documents in support of its claim of loan, it is argued by the company, the petitioner cannot prick holes in the company''s defence to squeeze its claim through. For one, it is asserted that the petitioner had altered its stand as to the dates of part payments and had exposed the unreliability of the averments in the petition. It is pleaded that a transaction involving crores of rupees should be substantiated by documents. The petitioner''s claim of interest-bearing loans having been advanced, is questioned by pointing out the petitioner''s failure to demonstrate that any interest was paid by the company even during the time Bajoria was in control. The company refers to its plaint and of the claims made against Bajoria and his associates and submits that upon a counter-claim being cited, the company court should not easily receive a winding up petition unless the counter-claim was demurrable.

The company relies on the judgment reported at Sant Lal Mahton Vs. Kamala Prasad, , for the proposition that mere part payment would not keep alive a claim otherwise barred by limitation; the part payment ought to be accompanied by an acknowledgment thereof by the debtor. The Supreme Court was considering Section 20 of the old Limitation Act in that case which is in pari materia with the provisions of Section 19 of the Limitation Act, 1963:

Effect of payment on account of debt or of interest on legacy.--Where payment on account of a debt or of interest on a legacy is made before the expiration of the prescribed period by the person liable to pay the debt or legacy or by his agent duly authorised in this behalf, a fresh period of limitation shall be computed from the time when the payment was made:

Provided that, save in the case of payment of interest made before the 1st day of January, 1928, an acknowledgment of the payment appears in the handwriting of, or in a writing signed by the person making the payment.

Explanation.-For the purposes of this section,--

(a) where mortgaged land is in the possession of the mortgagee, the receipt of the rent or produce of such land shall be deemed to be a payment;

(b) ''debt'' does not include money payable under a decree or order of a court.

The company contends that upon the challenge made by it at paragraph 6 of its affidavit, it was incumbent on the petitioner to bring forth the acknowledgment that accompanied each part payment. In the absence of any document in support of the part payments being produced, a triable issue is raised that merits deferment of the adjudication that the petitioner seeks.

The point of limitation raised is of limited importance in the present case. At the highest it is relevant only for the one payment of Rs. 70,000 made three years prior to this petition being filed. Again, the company has not questioned the petitioner''s assertion of the new dates of repayment. To begin with, the company had not altogether denied the repayment but had suggested that such repayments were not reflected in its books for the relevant period. For a second, if part payments are by cheque that would suffice to meet the test required in the proviso to Section 19 of the Limitation Act. As Sir Lawrence Jenkins, C.J., put it in the judgment reported at AIR 1916 Cal 580 (Kedar Nath Mitra v. Denobandha Saha) : "(the) proviso (could not have been) as a sort of a trap to enable debtors to escape from the result of what they have done". That case has been cited by the petitioner, as have been the later judgment of this Court reported at Prafulla Chandra Nag Vs. Jatindra Nath Kar, and the Division Bench authority reported at Thavva Subrahmanyam Vs. Chenna Venkataratnam, for the same purpose.

There is no black and white answer to the argument that the petitioner makes and which the petitioner uses as its legs to carry it beyond the sparse details found in the petition : that once a company uses an affidavit, it is the defence which is to be tested as much as the initial case run by the petitioner. At the one end of the spectrum there could be a case where a petition or the claim therein is demurrable, yet the company admits it in its affidavit. Surely, such generosity of the company cannot resurrect the claim. At the other end of the spectrum there could be a one-line, unsubstantiated and improbable claim that is also greeted by an admission in the company''s affidavit. The company court will then not look beyond the admission. But these are the unlikely, and somewhat theoretical, situations. The company judge is confronted daily with matters that lie in between. And in these in between cases, the clarity of the debt has ordinarily to be apparent from the petition rather than the vagueness of, or inconsistencies in, the company''s response.

There is now the more engaging matter of the petitioner''s claim and the company''s defence that needs to be gone into. Before a company can be sent to liquidation, it must be found that it is unable to pay its debts. This would pre-suppose an existing debt and the company''s inability to discharge it. A creditor who cannot obtain payment of his debts is entitled, as between himself and the company ex debito justitiae to an order for winding up if he brings his case within Sections 433(e) and 434(1)(a) of the Companies Act, 1956. But he must first establish that there is a debt owing and then satisfy the court that the company is unable to pay the same, before his petition is received. The court is entitled to investigate whether a dispute has been manufactured in order to delay and defeat the realisation of the petitioner''s dues and whether the defence is merely a cloak for the company''s inability to pay its just debts. But for such inquiry to be answered in favour of the petitioner, he must establish that the company "neglects to pay" its debts without any justifiable cause. Mere omission to comply with a demand may not amount to "neglect" within the meaning of the phrase in the Act if the company cites reasonable cause for the omission. But before the reasonableness of the cause proffered by the company is ascertained, the petitioner needs to establish his debt.

The earliest assertion of the petitioner''s claim here is found in its statutory notice which is greeted by a prompt denial and a counter-claim. The company does not deny receipt of the payments but seeks to show that it retained little of it and the most part seeped through, at the instance of the petitioner''s alter ego then in control, to other agencies of Bajoria. In the accounts relied upon by the company, all of the funds that were parked in the company by the petitioner is shown to have found its way to Fast rack Real Estate P. Ltd., and Mitsubishi Trading P. Ltd., save a sum of Rs. 1,71,600 which stood transferred to the garden account of the company. The petitioner has made little attempt to disown Fast rack Real Estate P. Ltd., and Mitsubishi Trading P. Ltd., as being part of the group to which it belongs.

The petitioner''s attempt to blow away the company''s defence on the strength of the company''s application for loan to the bank in May, 2003, has to be discounted on account of the minor mention of the third security offered in that document by the company. Such third security, and of considerably more value than the personal worth of the two Mores, was the corporate guarantee of one Arnab Financial Services P. Ltd. Such proposed corporate guarantor appears to be another in the Bajoria fold. If, indeed, Bajoria and his nominees were no longer associated with the company in May, 2003, as the petitioner suggests, there would be no need for a Bajoria concern to stick its neck out and bear the maximum exposure for the company obtaining a loan.

Just as there is merit in the petitioner''s contention that the accounts at pages 79-80 of the company''s affidavit show that money was received from the petitioner and the petitioner has remained unpaid in respect of its principal claim, there is also the company''s counter-claim that has to be appreciated. The company''s simplistic stand that money sieved through it from one set of Bajoria entities to a second and to a third, does not fit in with the indisputable dates of the payments having made by the petitioner and undeniably received by the company. Yet, it is equally true that Bajoria was in control of the company and may be the person lurking behind the facade of the petitioner. However improbable the company''s claim in its suit, it is not impossible that a decree may be passed. The grey area between what is improbable and what is impossible, belongs to the company. Once a company can show that there is likelihood of the defence succeeding, never mind the degree thereof, it succeeds in resisting winding up as there is no longer any inability to pay on its part within the meaning of the test in that regard set in the applicable provisions of the Companies Act. The mere filing of a suit is not adequate defence, a show of a possibility of success in such suit is and when there is doubt, there can be no security directed to be furnished.

There is only a thin distinction between the facts obtaining in a case that warrants admission of the petition and the facts obtaining in a case which calls for conditional rejection of the petition subject to furnishing of security. In either case, the defence has to be found to be moonshine or sham, no less would do. Despite finding that a defence was moonshine, there may be other considerations that could weigh with the company judge to permit the petitioner''s claim to be relegated to a suit on condition of security being furnished by the company. But here that part of the petitioner''s loan that the company shows had crept into the coffers of Fast rack Real Estate P. Ltd., and Mitsubishi Trading P. Ltd., is not so free from doubt that would call for weighing the option of admission or security.

The other part of the petitioner''s claim, one for Rs. 1,71,600 which is admitted to have been transferred to the garden account of the company, is free from doubt. While the company can be afforded the luxury of dealing with the petitioner''s claim of such money that the company says was paid to Fast rack or Mitsubishi in more protracted proceedings, it would be harsh to require the petitioner to await the company''s suit for the comparatively small change of Rs. 1,71,600. Notwithstanding the weight of the crores claimed by the company in its suit, there is no justifiable cause shown to retain Rs. 1,71,600.

The petition is admitted for the principal sum of Rs. 1,71,600 together with interest thereon at the rate of 10 per cent, per annum from September 20, 2004, the date of the statutory notice. The balance claim of the petitioner for the principal sum of Rs. 79,70,000 is relegated to a suit. If such amount of Rs. 1,71,600 together with interest thereon, is paid off by the company to the petitioner within three weeks from date, the petition will remain permanently stayed. In default of such payment, the petition will be advertised once in The Financial Express and once in Jansatta. The publication in the Official Gazette is dispensed with. The advertisements should indicate that the matter would be returnable on the next available court day four weeks after the date of publication.

Urgent photostat certified copies of this order, if applied for, be issued to the parties upon compliance with requisite formalities.