THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Company Petition No.24 of 2008 (Dated : 26-04-2010) Between Indian Overseas Bank Himayathnagar Branch, Hyderabad Rep. by its Branch Manager …Petitioner A n d M/s.Sanghi Polyesters Limited Rep. by its Managing Director …Respondent THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Company Petition No.24 of 2008 ORDER: This Company Petition has been taken out under Section 433(e),434 (a) and 439 (b) of the Companies Act, 956 seeking direction for winding up of M/s. Sanghi Polyesters Limited- respondent and to appoint the Official Liquidator as its liquidator with all powers under Section 450 of the Companies Act, 1956. 2. The Indian Overseas Bank, a body corporate constituted by and under the Banking Companies (Acquisition and Transfer of Undertaking) act, 1970 is the petitioner. It is represented by its Branch Manage of Himayathnagar Branch. M/s.Sanghi Polyesters Limited is a company registered under the Companies Act. It has registered office at Sanghi Nagar, Hayathnagar Mandal, Ranga Reddy District. It’s Managing Director is Sri Sudhir Sanghi S/o Sri Ram Sharan Sanghi. The respondent company approached the petitioner bank for loan facilities for running its unit for manufacture of polyester yarn (MLI) in the year 1994. The petitioner bank sanctioned various credit facilities such as Cash Credit Hypothecation, Term Loan, WCTL, FITL, LC and LG. The respondent company having availed the above referred credit facilities failed to repay the amount due. The petitioner bank issued number of notices calling upon the respondent company to repay the amount due under various credit facilities availed by it. The outstanding amount, which the respondent company has to pay under various credit facilities is Rs.2468.45 lakhs. The petitioner bank issued a statutory legal notice on 21.02.2008 under the provisions of Section 434 of the Companies Act demanding the respondent company to pay the amounts due under various credit facilities within 21 days. The notice was duly served on the respondent. But the respondent neither gave a reply nor paid the amount as demanded. As on 14.02.2008, the respondent company was due in a sum of Rs.37,96,23,482/- . The respondent company is unable to pay the debts within the meaning of Section 434 of the Companies Act, and therefore, it is liable to be wound up. 3. Notice before admission came to be ordered on 08.12.2008. The respondent entered appearance through a counsel and filed counter. 4. The counter affidavit of the respondent, in brief, is:- The respondent company is an industrial unit being a sophisticated manufacturing polyester yarn had so many requirements of finance on need base. The petitioner bank having sanctioned the credit facilities never cared to consider need based finance and the requirement of restructuring the loans. The petitioner bank had not sanctioned their share of required working capital during 19996-97 when all other banks have sanctioned the same. The respondent company had gone for expansion of the project and the working capital was essential to utilize its added capacity. From 1996-97 onwards, there was a short decline in POY prices and the slowdown in demand due to Asian Currency crisis and gradual lowering of domestic custom duty, which declined from 85% in 1993-94 to 20% in 2000-01. There was consistent decrease in margin of POY from average of Rs.45/- per Kg in 1996 to a low of Rs.21/- per KG in 1999. Taking into consideration all these circumstances, the consortium lead by Allahabad Bank had sanctioned a proposal in the year 1998. The petitioner bank did not sanction above proposal, which lead to account becoming non performing asset. Apart from that the petitioner bank had always charged higher rate of interest inspite of repeated requests for reduction of the same by the respondent company. The consortium had again approved debt restructuring package during 2001-02 to reduce the rate of interest, and also further postponement of future principal instalments. The petitioner bank had sanctioned debt restructuring package, vide letter dated 1.1.2002. However, the petitioner bank had not allowed to utilize the LC limits and LG limits. The respondent company paid around 170 crores to all banks and more particularly, 12 Crores to petitioner bank during the period 1998- 99 to 2006-2007. The petitioner bank field a suit before the Debt Recovery Tribunal, Hyderabad for recovery of outstanding dues referred to above. The notice issued by the petitioner bank under Section 434 of the Companies Act is intended to bring pressure on the respondent company to repay the amount. The respondent company has valuable assets and is running industry with thousands of employees. Any action threatened under the Companies Act would effect the livelihood of thousands of employees. 5. Paragraphs 20 and 21 of the counter affidavit need to be noted and they read as hereunder:- “20. I submit that the petitioner Bank as stated above has already filed a recovery O.A before the Hon’ble DRT (Debt Recovery Tribunal) having availed the remedy of filing application before DRT, the petitioner bank cannot invoke Section 434 of the Companies Act on the ground that the Respondent Company is unable to pay the debt, moreover the petitioner bank is silent with regard to material particulars to allege that the respondent company has become commercially insolvent and as such liable for winding. 21. I submit that once a forum has been invoked for recovery of amount, the petitioner Bank is precluded from issuing a notice under Section 434 of Companies Act and contend that the respondent company is unable to pay debts. Therefore, the petition is liable to be dismissed. There are several disputed facts in the transaction which the Respondent company is contesting in the O.A before DRT which is the appropriate forum to adjudicate the dispute”. 6. Heard Sri E.Madan Mohan Rao, leaned counsel appearing for the petitioner and Sri C.Raghu, learned counsel appearing for the respondent company. 7. Learned counsel appearing for the petitioner submits that the respondent does not dispute its liability to the petitioner company under various credit facilities and despite notice being served on the respondent company under Section 434 of the Companies Act, the respondent company failed to liquidate the liability and that itself is sufficient to infer that the respondent company has become commercially insolvent warranting admission of this company application. 8. Learned counsel appearing for the respondent company submits that the petitioner bank instituted proceedings before the Debt Recovery Tribunal for realization of the amounts and since the dispute is pending between the parties before the Debt Recovery Tribunal, it is impermissible for the petitioner bank to initiate proceedings under the Companies Act and it tantamount to pressurize the respondent company to pay its disputed dues. Learned counsel also contends that the respondent company has carrying on its activities providing source of employment to thousands of workers and in case, the company petition is admitted, it amounts to depriving thousands of employees of their employment. 9. In support of his submissions, reliance has been placed on a decision of this Court in Kitti Steels Limited Vs. Sanghi Industries Limited[1], decision of Gujarat High Court in Kapil N.Mehta, Surat vs. Shreee Laxmi Motors Limited [2] and another decision of Gujarat High Court in American Express Bank Ltd. Vs. Core Health Care Ltd. [3]. 10. In Kitti Steels Limited case (3rd supra), it was held that Proceedings under Section 433 (e) of the act cannot be used for arm-twisting to compel company to pay debts even if there are serious disputes regarding liability. But whenever the company disputes debt, same does not preclude the Court from ordering winding up if it is shown that dispute raised by company regarding debt is not bonafide. If the dispute or defense raised by company has no substance or the dispute or defense is raised as an after- thought before Court, company can be ordered to be wound up. Further, in its discretion, Court may refuse the order of winding up, if it is of opinion that such winding up would not be in the interests of members, employees, workmen and creditors of company. A perusal of Section 443 of the act would show that absolute discretion is vested in the Court to make an order for winding up. Court can refuse to make an order of winding up, if it is of opinion that the person is acting unreasonably in seeking to have the company wound up instead of pursuing with other remedy. 11 In Kapil N.Mehta’s case (4 supra), it has been held that Section 443(2) of the Companies Act, 1956, mandates the Court that if there is other remedy available and if the petitioners are acting unreasonably in seeking to have a company wound up, instead of pursuing that other remedy, the Court may refuse to make that order. Here the word `may’ will have to be read as `shall’. Thus, where these two conditions are satisfied, the court is not expected to make an order of winding up on the ground that it is just and equitable. 12. In American Express Bank Ltd. case (5 supra ), the Gujarat High Court held that in the matter of the petition for winding up on the ground that the company is unable to pay its debt, the Court has to bear in mind that winding up petition is not an alternative to the ordinary procedure for realization of the debts due from the company, and the mechanism of winding up process is not to be used as a pressure tactic for enforcing realization. For that the appropriate remedy is to seek enforcement under the ordinary law through remedies provided there. At the same time, proceeding with the remedy for realization of his debt, a creditor is not precluded from seeking remedy under the Companies Act as well by asking for the winding up of the company and realization of all the assets of the company for the due discharge of all its liabilities. The object of the winding up petition being entirely different, the remedy provided under Section 433 has been held to be discretionary. One well-known rule is that even in a case where indebtedness to the petitioner is not in dispute or doubt, courts do not order winding up where it is satisfied that it would not be in the interest of justice to wind up the company, or where the majority in value of the creditors do not favour the winding up. It is further held that where the court is satisfied that the petitioners are holding security for their debt and that security is sufficient to pay the debt by realization of security, point out that even an order of winding up so far as the petitioner’s debt is concerned remains unaffected or in the case of secured creditors where they have right, even after the winding up order is made, to remain outside the winding up and realize their dues directly, the court may be satisfied that the winding up order is not envisaged in a situation where on principle the order would not benefit the petitioner nor the company’s creditors generally. 13. Learned counsel laid much emphasis on the following paragraphs of the cited judgment and they are : One important test to which Court addresses itself, while considering the petition for winding up, is in the opinion of Sri Willian James V.C., in Europe Life Insurance Society, In re [1869] 9 Eq 122 as reproduced in A.ramaiya’s Guide to the Companies Act. “Whether the company has reached a stage where it is plainly and commercially insolvent-that is to say that its assets are such, and its existing liabilities are such as to make reasonably certain- as to make the court feel satisfied that existing and probable assets would be insufficient to meet the existing liabilities”. The principle found the approval of the Supreme Court in Pradeshiya Industrial and Investment Corporation of U.P’s case [1994]79 Comp Case 835(SC). The opinion of William James V.V was quoted with approval while hold that (page 842): “What then is inability when the section says unable to pay its dues. That should be taken in the commercial sensce, in that it is unable to meet its current demands”. Ordinarily, a creditor who on demand fails to get amounts due paid to him becomes entitled to obtain an order of winding up ex debito justitiae. However, it is to be noticed that what is envisaged under Section 433(1) (e) is not inability to pay a particular debt, but inability to pay its debts. Section 433 only provides rule of evidence by providing circumstances in which it can be presumed that the company is unable to pay its debts. Section 433 only provides rule of evidence by providing circumstances in which it can be presumed that the company is unable to pay its debts. Neglecting to pay in terms of Section 434(1)(a) , the specified demand of a creditor raises such a presumption as to inability to pay its debts. Thus, mere inability to pay a particular debt by itself cannot be held to be sufficient to pass an order of winding up ex debito justitiae. With the aid of the presumption the court may be satisfied that the company is unable to meet the current liabilities in the commercial sense which include the debt due to the petitioner as well as other debts. But the presumption is a rebuttable one. The presumption may be rebutted on existing material. What evidence is sufficient, depends on the facts and circumstances of the case. 14. In response, learned counsel appearing for the petitioner bank submits that the initiation of proceedings before the Debt Recovery Tribunal for realization of the amounts due under various credit facilities allowed to the respondent company is not a bar to maintain an application under the provisions of the Companies Act seeking winding up of the respondent company. In support of his submission, reliance has been placed on the decision of this Court in Fibex Inc. v. A.B.K.Publications Ltd. [4] and a decision of Bombay High Court in Viral Filaments Limited v. Indusind Bank Limited [5]. In Fibex Inc’s case (1 supra) , it has been held that it is not an invariable rule of law that where a suit for the recovery of a debt on the same cause of action is pending in a civil Court, the petition for winding up does not lie. In Viral Filaments Ltd. ( 2 supra), it has been held that there is no provision in the Recovery of Debts due to Banks and Financial Institutions Act, 1993, empowering the Debt Recovery Tribunal [DRT] constituted under the Act to wind up a company which owes the debt to the applicant-financial institution. The jurisdiction of the Tribunal under the RDB Act is only to adjudicate the liability of the respondent before it, ascertain the `debt’ due to the bank/financial institution and issue a certificate of recovery to the Recovery Officer and the Recovery Officer is empowered to execute the same in the manner prescribed under the RDB Act. The jurisdiction to wind up the company is wholly unavailable to the DRT. Hence, what could be done by the Company Court under Section 433(e) of the Companies Act, 1956, could obviously not be done by DRT. The DRT not having been invested with the power to wind up a company, it would not be possible to urge before the Company Judge that the petition should not be heard. Merely because the petitioning creditor before the Company Court is a bank/financial institution or because an application has already been filed before the Debt Recovery Tribunal under the provisions of the Recovery of Debts due to Banks and Financial Institutions Act, 1993, it cannot be held that the petition for winding up would not be maintainable. Section 434(1)(a) of the Companies Act, 1956, prescribes a statutory presumption of inability on the part of the company to pay its debt if the conditions prescribed therein are fulfilled. Thus, if the statute says that the company must be deemed to be unable to pay its debts, the logical result would be to admit the petition for winding up to investigate it. 15. It is well settled that the procedure under Section 433 of the Indian Companies Act is summary. When the company produces prima facie proof of facts on which the defence depends and which is probable and there is likelihood to succeed in point of law, it cannot be said that the company has neglected to pay within the meaning of Section 434(1)(a) of the Companies Act. Bona fide dispute implies substantial ground for the dispute raised. 16. Indisputably, the petitioner bank filed O.A on the file of the Debt Recovery Tribunal for recovery of the amounts due from the respondent company. Filing of this O.A is not mentioned in the petition. It is the respondent company, which stated in the counter resisting the petition with regard to filing of the O.A by the petitioner bank and its pendency. It is also not in dispute that the petitioner bank is a secured creditor. It is nowhere stated in the petition that the securities offered by the respondent company do not match with its liabilities. In the absence of such particulars, it cannot be said prima facie, that the respondent company has become commercially insolvent. The respondent company is a running industry with thousands of employees, vide para 18 of the counter. This factual aspect has not been contradicted by way of reply affidavit by the petitioner bank. The petition does not deserve to be admitted for the following reasons:- (i) Suppression of material fact of filing of O.A before the Debt Recovery Tribunal for realization of the amounts due from the respondent company; (ii) The petition averments are silent as to the worth of the property offered as a security for the facilities availed by the respondent company. 17. The material distinction between the bankruptcy proceedings and winding up proceedings should always be kept in mind, for the winding up proceedings cannot be heard and decided without issuing a public advertisement under the rules. Such a public advertisement would have very serious repercussions especially when the concern is a solvent, flourishing, running concern and the harm which would be done to such a concern by issuing the public advertisement would be almost irreparable and irreversible. That is why, the petitioners, who seek to get the winding up petition admitted must exercise scrupulous care and caution to come with absolute altogether candour by disclosing to the Court why they are pursuing the alternative remedies they have or which they may have availed of before filing such a petition. 18. The petitioner bank having initiated proceedings before the Debt Recovery Tribunal for realization of its debt, has not stated anything in the petition as to why winding up of the respondent company is opted. 19. Therefore, this Company Petition does not deserve for admission and accordingly, the same is hereby dismissed at the stage of admission. No costs. ______________________ B.SESHASAYANA REDDY, J Dt. 26-04-2010 RAR THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Company Petition No.24 of 2008 (Dated : 26-04-2010) [1] 2009-LAP-0-235 [2] (1999)2 Comp L J 267 (Guj) [3] 1999 (Vol.96) Company Cases 841 [4] 1999 Company Cases 947 [5] (2001) 4 Comp. LJ 44 (Bom)