Syed Murtasa Ali Khan vs Stressed Concrete Constructions Private Ltd.

(1) This is a petition for winding up by court of the respondent-company, the Stressed Concrete Constructions Private Ltd.

(2) The respondent-company was formed to take over the assets, rights and goodwill of the business known as Rayalaseema Constructions. The

petitioner is stated to have advanced a sum of Rs. 15,000 to the respondent-company by way of loan on 14-8-1953 carrying interest at six

percent per annum. This has been acknowledged in writing by the Director incharge of the Respondent-company on 30-8-1955, showing the

amount due to the petitioner as amounting to Rs. 13,807-12-0 as on 30-6-1955. The balance-sheets of the respondent-company for the years

ending with 30th June 1954 to 1957 contain specific admissions of the amounts due and payable to the petitioner. On 13-11-1956 when the

petitioner had sent a registered communication to the Managing Director of the respondent-company threatening legal action in default of payment,

the Managing director by his letter dated 15-12-1956 requested the petitioner to stay his hand for sometime. On 10-1-1957 the petitioner made a

further demand calling for payment of the amount due to him which was duly served on the respondent-company on 15-1-1957. On 17-2-1958

the petitioner had another notice sent to the respondent-company demanding payment and that notice also has been duly served on the

respondent-company at its registered office by registered post on 19-2-1958. The respondent-company has not paid its debt due to the petitioner

and therefore the petitioner has filed this petition for the winding up of the respondent-company.

(3) The respondent-company has come out with a long and involved story which it is very difficult to make out, viz., that they are now disputing

this debt and that they are investigating and intending to establish in future that this debt and other debts taken over them are not genuine debts

which they ought to have taken over. In short, they are hinting at conspiracies and frauds in the matter of the taking over the Rayalaseema

Constructions and in the formation and floating of the respondent-company and which mysteries they hope to unravel on an unspecified future date.

They say that if these questioned liabilities are omitted, their financial position would even improve.

(4) The law regarding disputed debts as a defence for not proceeding with a winding-up petition is well settled, both in England and in India under

their respective Companies Act. In fact the Indian Companies Act is practically based upon the English Companies Act, 1948.

(5) In regard to this bona fide disputation of debts, the following extracts from the standard authorities on Company law in England and India are

apposite:

England:

Palmer''s Company Precedent, 16th Edn. Part 2, page 34, has the following to say:

It is now well settled that a petition for winding up with a view to enforcing payment of a disputed debt is an abuse of the process of the court, and

should be dismissed with costs.

But, of course, if it is shown that the alleged dispute is not a bona fide one, the objection to the petition fails. Thus, it is not uncommon for a

company after again and again begging for time, for payment of a debt, to spring on the petitioner, at the last moment the assertion that the debt is a

disputed one. Such a defence is naturally open to great suspicion, and meets with no favour from the court.............

Buckley on the Companies Act, 13th Edn. (1957) page 451:--

A winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the company. A petition

presented ostensibly for a winding up order but really to exercise pressure will be dismissed, and under circumstances may be stigmatised as a

scandalous abuse of the process of the court. At one time petitions founded on disputed debt were directed to stand over till the debt was

established by action. If, however, there was no reason to believe that the debt, if established, would not be paid, the petition was dismissed. The

modern practice has been to dismiss such petitions. But, of course, if the debt is not disputed on some substantial ground the court any decide it on

the petition and make the order. The fact that the company has obtained unconditional leave under R. S. C. Order 14 to defend an action for debt

does not preclude the court, when considering a petition for winding up the company founded on the debt, from finding on the evidence that the

debt was owing and that the company could not pay its debts.

Great damage might obviously be done to a solvent company by a winding up petition presented by an unreasonable creditor, whose debt the

company we are able to willing to pay if established, but to whom they bona fide believe they are not indebted. In such a case, on writ issued by

the company, an injunction will be granted to restrain the creditor from presenting a petition. If a petition has been presented which the court finds

to be an abuse of process, the court may on motion stay all proceedings under it or dismiss it.

Topham''s Company law, 12th Edn. at page 297 sums up:

A creditor whose debt is disputed on some substantial ground cannot generally get a winding-up order. The court may either order the petition to

stand over until the validity of the debt can be determined or may dismiss the petition, and may even restrain the creditor by injunction from

bringing a threatened petition.

India:--

Rustomji''s Company Law, 2nd Edn. page 375, has the following to say:--

If the court sees a petition to wind-up presented, not for a bona fide purpose of winding-up the company, but for some collateral and sinister

object, on that ground it will be dismissed. It is the inherent right of the court to dismiss and disregard mala fide petitions for winding-up. A person

who threatens to present petition which, if presented, would amount to an abuse of the process of the court, will be restrained by injunction from

so doing. Thus, in the case of disputed debts, intending petitioners have been restrained from presenting petitions in respect of such debts. In these

cases the court has jurisdiction to interfere, because the mere representation of a petition would amount to irreparable damage.

Where a petition against a company is presented ostensibly for a winding up order, but really for another purpose, such as putting pressure on the

company, the court has an inherent jurisdiction to prevent such an abuse of process, and will do so, by restraining the advertisement of the petition,

and staying all proceedings upon it. A creditor of a solvent company, whose debt is bona fide disputed, will be restrained from presenting a petition

for winding up the company. Winding up proceedings are not to be had recourse to for the purpose of recovering a debt which is bona fide

disputed, especially when the company appears to be solvent, but the court must see that the dispute is based on a substantial ground, that is, if the

defence set up (to a creditor''s winding up petition) is that the petitioner''s claim is disputed, it must be shown that the dispute existed before the

presentation of the petition and is a real one and not merely got up to meet the petition.

''A creditor'' said Sargant J. ''is prima facie entitled ex debito justitiae to a winding up order, and it seems to me to be impossible to displace that

prima facie position without the very strongest proof that the petition is being improperly made use of for some utlerior motive.'' Where the debt is

undisputed, it is futile for the company to say ''We are able to pay our debts, but we do not choose to pay this particular debt.'' The Court will not

listen to such a defence.

K. Venkoba Rao''s Commentaries on the Companies Act, 1956, Vols. II and III, at page 611:

Where there is a substantial and bona fide dispute as to the debt, a winding up order will not be made; so also where there is no dispute as to the

existence of the debt but there is a bona fide dispute as to the maturity of the claim and as to the company''s liability for immediate payment. Mere

fact that unconditional leave to defend an action relating to the debt has been given does not make it a disputed debt. If the debts are actually paid

before the winding up petition is filed into court no winding up can be ordered. As to case where Government agreed to make grants to Flying

Club and it was held the winding up petition presented by Government was not made with a view to escape this liability. See In re, Punjab Flying

Club Ltd, AIR 1933 Lah 301. As between himself and the company, a creditor is entitled to obtain an order on this ground but not as between

himself and other creditors. Assets 10 lakhs, debts 4 lakhs, does not come within the sub-clause (e). Court''s power is discretionary: Dwarkadas

Agarwall Vs. Dharam Chand Jain and Others, : see also Chellaradh and Co. Ltd. v. M. V. K. Sundaram AIR 1955 Mys 122; T. K. Narayanan v.

Alleppey Chamber of Commerce. AIR 1952 Trav Co. 435; Discount Bank of India Ltd., Delhi Vs. Triloki Nath and Others, .

K. M. Ghosh''s Company law, 10th Edn. part II, pp. 27-28:

When a debt is bona fide disputed by the company order for winding up will be made and the petition will be dismissed. Where a petition against

a company is presented ostensibly for a winding up order but really for another purpose such as putting pressure on the company, the court has an

inherent jurisdiction to prevent such an abuse of process and will do so, without requiring an action to be commenced, by restraining the

advertisement of the petition and staying all proceedings upon it. But if the debt is not disputed on some substantial ground, the court may decide it

on the petition and make the order. Where a company has a bona fide defence, the petition should be dismissed; but it is otherwise if the petitioner

would in the circumstances be left without a remedy. Where the court is satisfied that the debt is a knotty contested debt and doubtful, then the

court would not pass a winding up order. Non-payment of a disputed debt is no proof of insolvency.

The principle upon which the court will forbear from deciding the dispute as to liability from for immediate payment and making a winding up

order in case it decides it against the company, is that winding-up proceedings are not intended to be exploited as a normal alternative to the

ordinary mode of debt-realisation, and that it is more convenient that claims should be investigated and decided in a regular action. Even though

there is no dispute as to the existence of the debt, where there is a bona fide dispute as to the company''s liability for immediate payment, no

winding up order can be made till the dispute is decided. If it finds the issue regarding bona fides in favour of the company, it will ordinarily not

proceed further and decide the dispute itself, or it will either dismiss the petition for winding up or keep it pending till the creditor has established his

claim in a regular action.

(6) These principles will be found embodied in the following English and Indian decisions: In re, London and Paris Banking Corporations, 1875 19

EQ 444; P.R. Doraiswami Ayyar Vs. Coimbatore Easwara Sahaya Nidhi Ltd., , Mohammed Amin Bros. Ltd. Vs. Dominion of India and Others,

; Rani Ajit Kunuarba v. Rajputana Cold Storage Ltd. AIR 1955 NUC (Raj) 4045; Tulsidas Lallubhai Vs. The Bharatkhand Cotton Mills Co. Ltd,

; P. Satyarazu Vs. Guntur Cotton, Jute and Paper Mills Co., Ltd., Re a Company, 1894 2 Ch. 349; King''s Cross Industries Dwellings Co. 1870

11 EQ 149; Vanaspati Industries Ltd. v. Firm Prabhu Dayal Hari Ram AIR 1950 EP 142; Coal-fields of Burma v. H. H. Johnson, AIR 1925

Rang. 128; In re, Russian and English bank, 1932 1 Ch. 663; Bengal Luxmi Cotton Mills Ltd. and Others Vs. Mahaluxmi Cotton Mills Ltd. and

Others, : In re, Welsh Brick Industries, Ltd. 1946 2 All ER 197 C. A.

(7) Bearing these principles in mind, if we examine the facts of this case, we find that this is not a case of a bona fide disputed debt. The debt due

to the petitioner has been acknowledged till the present winding-up petition has been filed. The respondent company after again and again begging

for time for payment of the debt, has sprung upon the petitioner on the last moment the assertion that the debt is a disputed one. But even now

there are no substantial grounds for holding that there is a bona fide dispute. On the other hand, the respondent-company, is mysteriously hinting at

conspiracies and frauds in the taking over of the assets of the Rayalaseema Constructions and the formation of the present respondent-company

and in regard to which they did not examine either Mr. C. P. Venugopal or Mr. Moraka, though opportunity was given to the respondent-

company to examine them, if so advised. Therefore, I hold that this is not a case of bona fide disputed debt.

(8) The respondent-company is directed to be wound up under S. 433 of the Indian Companies Act. I appoint the Official Liquidator as the

liquidator. The petitioner will get his costs of this petition from the assets of the respondent-company. The respondent will take out his costs from

the company. Advocate''s fee Rs. 500 on each side.

(9) Before parting with this appeal, I must acknowledge my indebtedness to Messrs. V.C. Gopalaratnam, A. R. Krishnaswami and V. V.

Raghavan for placing all the relevant authorities before me.

(10) Winding up ordered.