Sudhiya Nath Bhaduri vs Bihar National Insurance Co., Ltd.

Agarwala, J.—This is an application for the winding up of the Bihar National Insurance Co. Ltd. which was incorporated in 1929 and commenced business in 1932. The authorized capital is Rs. 10,00,000. The issued capital is Rs. 3,00,000 divided into ordinary shares of Rs. 10 each. Of the issue capital Rs. 2,84,870 has been subscribed. Rupees 7-8-0 per share has been called up.

The applicant S.N. Bhaduri is a contributory of the company, being the holder, of 50 partially paid shares The application is supported by the Bihar Bank Ltd., which is the holder of 900 fully paid shares. The grounds on which it is sought to wind up the company are two, namely that the company is unable to pay its debts and that it is just and equitable that it should be wound up. Owing to the manner in which the case for the applicant was presented it has not been easy to ascertain exactly how these grounds are supported. No evidence in support of the allegations in the petition for winding up was given. The learned advocate for the applicant stated that he would rely on the balance sheet of the company for the half-year ending 31st December 1989 for the purpose of establishing his contentions. Turning to this balance sheet, on the liability side are found the following items:

Calls in advance... ... Rs. 5,250-0-0 Shares suspense... ... Rs. 4,573-10-0 Forfeited shares account ... Rs. 3,187-8-0 Loans and advances ... Rs. 66,850-12-10 Deposit against premium ... Rs. 2,085-4-0 Claims outstanding ... Rs. 13,492-8-0 Outstanding liabilities ... Rs. 2,372-6-0 3. It is contended that the company is unable to pay these debts. When these items were examined however it is clear that with regard to some of them there is no question of the company being called upon to pay. The item "calls in advance" represents money voluntarily deposited by the shareholders with the company to meet future calls. The item "share suspense" represents money paid to the company by applicants for snares to whom shares have not yet been issued. The "forfeited shares account" represents payments made by applicants for shares which the company is entitled to forfeit if proper steps are taken on account of the failure of the applicants to pay call-money. The item "deposit against premium" represents sums paid by policy-holders in respect of future premia which will be adjusted when those premia fall due. None of these items, it seems to me, should be taken into account in the present application as the company could not be called upon to pay these sums immediately. There remains therefore three items, namely loans and advances (Rs. 66,850-12-10), claims outstanding (Rs. 13,492-8-0) and outstanding liabilities (Rs. 2372-6-0). These amount to Rs. 82,715-10-10. On the asset side of the balance sheet are the following items: Loans, investments, furniture and fittings, motor-cars, library, stock of stationery, balances with agents, outstanding premiums, ''outstanding interest and deposits, sums remaining unadjusted and cash and bank balances.

Now, as I understand the law, when the Court is asked to wind up a company on the ground that it cannot meet its debts what has to be ascertained is not whether the company if it converted all its assets into cash, would be able to discharge its debts but whether in a commercial sense the company is solvent. Now, it is contended on behalf of the applicant that so far as the loans are concerned the bulk of the money has been advanced on personal security and that it is impossible to say whether this money could be made available for the discharge o� the company''s debts. With regard to the investments: this represents money or securities deposited with the Reserve Bank of India u/s 7, Insurance Act, 1938, Section 8 of which provides that such a deposit

shall not be available for the discharge of any liability of the insurer other than liabilities arising out of policies of insurance issued by the insurer.

The assets represented by furniture, motorcars, library, stock of stationery, cannot, in the sense to which I have referred, represent money available for the present discharge of the company''s debts. The balances with the company''s agents and the amount outstanding on account of unpaid premia, it is contended, are also not immediately available. Of the cash and bank balances amounting to Rs. 15,678-4-1, Rs. 444-14-0 is due from the Benares Bank, Ltd., which is in liquidation. The sum immediately available from this source is Rs. 15,233-6-1. The "outstanding interest" is what is due on the company''s investment in the hands of the Reserve Bank and is, therefore, available. Against the debts which the company might have to meet immediately, therefore, amounting to rupees 82,715-10-10, the amount of cash available is Rs. 16,138-5-1 leaving a deficit of rupees 66,577-5-9. Even if the amount due to the company on account of loans and unpaid premia and the balances with its agents be immediately available they will still be insufficient to meet this, deficit. But on the subscribed capital of the company a sum about Rs. 70,000 is due which has not yet been called up.

The question is whether this should be taken into account in deciding whether the company can pay its debts.

In In re National Live Stock Insurance Co. (1858) 26 Beav 152 an application to wind up a company on the ground that it was unable to pay its debts was refused, the Master of the Rolls holding that the company was entitled to call upon its directors to pay what was due on the shares subscribed by them and to enforce payments of the calls which, he observed, would make a great difference in the amount of the funds of the company. It seems to me, therefore, that the company is entitled to regard the money which it is entitled to call up on account of shares from the contributories as money available for the discharge of its debts.

I would, therefore, hold that the applicant has not proved that the company was not in a position to pay its debts.

With regard to the second ground on which it is sought to wind up this company, namely, on the ground that it is just and equitable to do so, the general principle seems to be that the decisive question is whether at the date of the presentation of the petition there was any reasonable hope that the object of trading at a profit was attainable: D. Davis & Co. Ltd. v. Brunswick (Australia) Ltd. AIR 1936 P.C. 114. The onus of proof rests upon the petitioner (ibid). In the case referred to, their Lordships of the'' Privy Council held that it is not the function of the Court to determine the question of the prospects of the company in future on its own views as to probable success or failure, but to form the best opinion it can upon the evidence given by persons with a practical knowledge of the trade in question and the local conditions where these affect the matter. "Where, at the relevant time there is a reasonable hope of tiding over a period of difficulty and emerging into a region in which the company might reason, ably expect to carry on at a profit, there is no sufficient reason why the Court should wind up the company under the just and equitable clause. There is no evidence from persons with practical knowledge of the business in question before me, the case having been founded entirely upon the balance sheet.

In this connexion, it is relevant to observe that the Insurance Act of 1938 provides for the appointment of a Superintendent of Insurance whose duty it is to protect the interests of the policy-holders. The powers of a superintendent are described in Section 38 of the Act. Under Clause (5) of that section if the superintendent, as a result of any investigation into the affairs of the company, is of opinion that it is necessary in the interests of the policy-holders that the business of the insurer should be wound up, he may, after giving notice to the insurer and giving him an opportunity to be heard, apply to the Court to have the business of the insurer wound up. The fact that the superintendent has not taken action to wind up the company is, of course, not a deciding factor in determining whether a petition for winding up by a contributory should be granted or not; but when the petitioner relies on the just and equitable clause and. there is no evidence of the future prospects of the company before the Court, the fact that a public officer, whose duty it is to intervene in cases where the affairs of the company are not conducted in a sound manner, has not found any reason for doing so, is a fact which is deserving of consideration.

In the present instance the Superintendent of Insurance has not taken any steps u/s 83 of the Act for the winding up of the company. The principal ground on which I am asked to interfere under the just and equitable clause is that a considerable portion of the subscribed capital is not represented at present by any tangible asset. The first three items on the asset side of the balance sheet are as follows:

Preliminary expenses ... Rs. 8028-0-0 Organization expenses ... Rs. 17,962-12-6 Bad debt ... Rs. 52,926-2-0. 12. The last item represents a sum misappropriated by a member of the firm of managing agents who has since been convicted of criminally misappropriating this amount. These three sums total Rs. 1,78,916-15-3. As the paid-up capital is only Rs. 1,79,408-8.0 it is contended that all but a sum of Rs. 6000 of it has been "recklessly" dissipated. There is no proof as to the specific items on which the amount entered as ''organization expenses'' has been expended. Whether the expenditure was reckless or not, as alleged in the petition, would appear to be a domestic matter which the share-holders were entitled to raise at the general meeting which adopted this balance sheet.

There is no evidence that any objection was taken to this item, nor is there any allegation of fraud on the part of the directors. Reference was made however to In re Bristol Joint Stock Bank (1890) 44 Ch. D 703. That was a company formed for the purpose of carrying on the business of bankers with a capital of �24,000 divided into, 2400 shares of �10 each. �5 had been paid on each share and the other �5 was not to be called up except in the event of and for the purposes of the company being wound up. In the course of its six years of existence the company never made a profit and at the time of the petition for winding up the business was being carried on in small premises and the staff consisted of one individual whom Kekewich J. described as an office boy. All the capital of the company had been exhausted except �337. The petition for winding up was supported by a considerable number although not the majority of the share-holders. The learned Judge held that it was impossible for the business to be carried on with any reasonable hope of success and, therefore consented to the winding up order. The learned Judge pointed out that the sum of �3800 which had been charged as preliminary expenses had positively gone and could no longer for any purpose be treated as an asset of the company with the result that the only fund at the disposal of the company for carrying on its business was �337, part of which consisted of office furniture. On the analogy of this observation it is argued that the amount in the present case charged as ''organization expenses'' no longer represents an asset of the company.

In the absence of evidence to show the items on which that money was expended, it is not possible to accept that contention. This is a comparatively new company formed for the purpose of carrying on the business of an insurer. Presumably such a business requires that foundations for success shall be laid in making contract with the public and building up public confidence. Money spent in this way is not, in my opinion, aptly described as "reckless" expenditure. To some extent at least it represents the good will which the company is building up and which is an asset. Since the share-holders have passed this balance sheet it may be safely assumed that they are not dissatisfied with the manner in which the directors are building up the business of this company or with the amount which has been expended for that purpose. The most that can be said about this balance sheet is that it reveals that the persons responsible for the affairs of this company have not perhaps been as economical as they might have been considering the comparatively small amount of the company''s capital; but it does not by any means show that the prospects of its future success are so exiguous as to warrant a compulsory winding up at the instance of a comparatively small share-holder.

Although in considering whether the company is in a position to pay its immediate debts I have left out of account a considerable sum due to the company from its debtors, agents and policy-holders and the value of its tangible assets in the form of furniture, motor cars, books, stationery, etc., I have no doubt that the value of these items should be taken into consideration in applying the just and equitable clause, together with the fact that the company has a substantial amount in deposit with the Reserve Bank.

In considering whether the company shows reasonable prospects of success, in my opinion, the balance sheet of the company as it stood on 31st December 1939, does not reveal such a state of affairs as will warrant me in winding up this company compulsorily.

I would therefore dismiss this petition with costs; hearing fee ten gold mohars.