OJA/6/2007 1/16 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD O.J.APPEAL No. 6 of 2007 In COMPANY PETITION No. 240 of 2004 With CIVIL APPLICATION No. 13 of 2007 In O.J.APPEAL No. 6 of 2007 For Approval and Signature: HONOURABLE MR.JUSTICE D.A.MEHTA Sd/- HONOURABLE MR.JUSTICE BANKIM.N.MEHTA Sd/- ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? NO 2 To be referred to the Reporter or not ? NO 3 Whether their Lordships wish to see the fair copy of the judgment ? NO 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? NO 5 Whether it is to be circulated to the civil judge ? NO ========================================================= M/S. GEETA PRINTS LTD. - Appellant(s) Versus M/S. FALCON INDUSTRIES - Opponent(s) ============================================================== = Appearance : MR D.D.VYAS, SENIOR ADVOCATE WITH MR DHAVAL D VYAS for Appellant(s) : 1, MR AL SHAH WITH MR VIMAL M PATEL AND MR PS PURANI for Opponent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MR.JUSTICE BANKIM.N.MEHTA OJA/6/2007 2/16 JUDGMENT Date : 19/09/2008 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE D.A.MEHTA) 1 This Appeal challenges order dated 11.12.2006 made in Company Petition No. 240 of 2004 whereby the petition filed by respondent herein(original petitioner) has been admitted against the Appellant herein (original respondent) and an order made for publication of advertisement. Hereinafter, for sake of convenience, the parties shall be referred to as per their respective description in the petition. 2 The petitioner preferred Company Petition No. 240 of 2004 claiming that an amount of Rs.11,04,332/, comprised of principal sum of Rs.7,62,500/- plus interest to the tune of Rs.3,41,820/- was due and payable by the respondent company to the petitioner. A further sum of Rs.6,61,100/- was also claimed as being recoverable towards 'C' form liabilities. The petitioner made the claim on the basis of invoices available at page Nos. 12 to 46 of the Company Petition. According to the petitioner, on 3.3.2004 the petitioner had confirmed the Accounts and hence OJA/6/2007 3/16 JUDGMENT there was no question of any dispute on this count. 3 It was further submitted on behalf of the petitioner that despite statutory notice the respondent company had failed to make payment within the prescribed period of 21 days, and in fact there was no reply even to the statutory notice. Placing reliance on provisions of Section 433 read with Section 434(1)(a) of the Companies Act, 1956 (the Act) the petitioner prayed for admission of the petition and ultimately an order for winding up of the respondent Company. 4 On behalf of the respondent Company the petition was disputed firstly on the ground that the petition was not maintainable, the statutory notice having been issued to one Geeta Prints Private Limited while the petition was filed against Geeta Prints Limited, a Public Company. That debts of the private company could not be claimed against the public company. That the pubic company had thereafter ceased to exist and hence, in absence of existence of the company there OJA/6/2007 4/16 JUDGMENT was no question of ordering winding up of a non- existent company. It was further submitted that the respondent Company had raised disputes with regard to the debts prior to the point of time the statutory notice was issued and this plea was based on communication dated 24.5.2004. It was further submitted that the remedy available to the petitioner would be to prefer a Civil Suit. Further contention was to the effect that the respondent company was in good financial position and winding up proceedings were not the correct remedy, and even assuming that any amount was due from the respondent company to the petitioner, the same could be recovered by filing a Civil Suit for recovery. It was further submitted that the petition was not in prescribed form being Form No. 46 read with Rule 95 of the Company Court Rules in absence of relevant averments as required by Column No.8 of the Form. 5 The learned Company Judge vide impugned order has not accepted any of the defences raised by the respondent company and ordered admission of the OJA/6/2007 5/16 JUDGMENT petition and publication of advertisement for the reasons stated in the impugned order. At the time of admission of this Appeal, the operation of the order has been stayed. 6 Heard learned Senior Advocate appearing for the Appellant i.e. the respondent company. All the contentions which were raised before the learned Company Judge have been reiterated. In support of the submissions made, reliance has been placed on decision of this Court in case of Tata Iron & Steel Company Ltd. Vs. Micro Forge (India) Ltd.,2002 GLR 1594 with special reference to the observations made in paragraph Nos. 15, 16 and 17 of the said judgment. The next judgment which was cited was Ashok Fashions Ltd. Vs. Meghdoot Acid And Chemicals (1998) 91 Company Cases 655 followed by case of Wimco Ltd. Vs. Sidvink Properties (P) Ltd. (1996)86 Company Cases 610 and the last decision that was cited was in case of IN RE M/s. Rishi Enterprises 1991 (2) GLR 1213. On the basis of the aforesaid case law, it was contended that whether a company should be wound up or not, had to be determined on facts and circumstances of each case OJA/6/2007 6/16 JUDGMENT and the concept of inability to pay debts had to be considered in context of the fact that any order of winding up would result in economic death of the company. It was submitted that the statutory presumption which is available under Section 434(1) (a) of the Act was a rebuttable presumption and once the respondent company had raised various disputes, pointed out financial soundness of the company, the Company Court ought to have come to the conclusion that the presumption was rebutted and in exercise of discretion vested in the Company Court ought not to have entertained the petition. It was therefore submitted that merely because statutory notice was not replied by the respondent company, the petition could not be entertained without anything more. For establishing that the company was a going concern various averments made in Affidavit-in-Reply and Further Affidavit-in-Reply were referred to and read extensively. It was therefore urged that the petition was required to be allowed and impugned order dated 11.12.2006 was required to be quashed and set aside. 7 On behalf of the original petitioner - OJA/6/2007 7/16 JUDGMENT respondent herein, it was pointed out that the contention regarding status of the company having undergone change was a dishonest defence considering the provisions of Section 43A(1A) of the Act because the Registration number of the company remained the same and only by virtue of deeming fiction the name of the company underwent change without any change in the personality of the company. In support of the submission, certificate of incorporation which was annexed to the Affidavit-in-Rejoinder was pointed out to emphasise the fact that the word “Private” stood deleted in light of Section 43(1A) of the Act as recorded therein. It was further contended that no dispute as such was raised considering the fact that the petitioner had produced not only the acknowledgment of account but also the fact of having supplied the goods as narrated in Affidavit-in- Rejoinder which remained controverted. That the petitioner had supplied the goods which had been received by the respondent company and utilised in its manufacturing process. That in fact communication dated 24.5.2004 on which reliance was placed by respondent did not raise any dispute as such, but OJA/6/2007 8/16 JUDGMENT only sought reconciliation of accounts as could be seen from the subject matter of the communication. Therefore, subsequent averments made in Affidavit-in- Reply that no order had been placed with the petitioner for supply of goods or that the goods had not been supplied could not be given credence in light of admission of the respondent company itself. In so far as applicability of Sections 433 and 434 of the Act are concerned, it was submitted that under section 433(e) of the Act, the Company Court was entitled to wind up a company if the company was unable to pay debts viz. where that fact was established. Whereas the requirement of Section 434(1)(a) of the Act was based on a deeming fiction; that a company shall be deemed to be unable to pay its debts if the company does not comply with the requirements stipulated in clause (a) of sub- section(1) within the statutory period. That in such an eventuality capability of the company to pay had no role to play and even if a company was financially sound, if there was statutory default envisaged by provisions of Section 434(1)(a) of the Act, the Company Court in exercise of its discretion could OJA/6/2007 9/16 JUDGMENT always proceed ahead in a winding up petition and there was no prohibition in law. That in such a case winding up petition was a mode of recovery. In support of submissions made reliance has been placed on following two decisions : [1] AIR 1966 SC 1707 – Harinagar Sugar Mills Co. Ltd. Vs. M.W.Pradhan (now G.V.Dalvi) Court Receiver. [2] (2006)133 Company Cases 130(AP) Enernorth Industries Inc. Vs. VBC Ferro Alloys Ltd., wherein the Apex Court decision in case of Madhusudan Gordhandas and Co. Vs. Madhu Woolen Industries P. Ltd. [1972] 42 Comp.Cases 125 (SC) has been extracted at page Nos. 143 and 144 of the said reports. Inviting attention to averments made in paragraph Nos. 13, 15 and 16 of the petition it was submitted that even the requirement prescribed by Rules and statutory form stood complied with. The learned Advocate therefore submitted that no interference was warranted in the impugned order made by the Company Court and the Appeal was required to be dismissed. Lastly it was submitted that before the Division Bench could take up the Appeal and Stay Application against the operation of the impugned order, advertisement had already been published as OJA/6/2007 10/16 JUDGMENT directed by the Company Court. 8 The facts are not in dispute. When the petitioner issued notice calling upon the respondent company to make payment, admittedly, the respondent company did not reply to the statutory notice. That gave rise to statutory presumption that respondent company was unable to pay its debts considering the fact that not only no reply was tendered but no arrangement was made by the respondent company to pay the sum or secure the sum to the reasonable satisfaction of the creditor. Albeit the presumption is a rebuttable presumption. Hence, the record will have to be considered as to whether the said presumption is rebutted. Thereafter, it will have to be examined whether the discretion exercised by the learned Company Judge is in accordance with the legal requirements. 9 But before that one may consider the scope of section 434(1)(a) of the Act. Under the section before a company shall be deemed to be unable to pay its debts two conditions must be satisfied, namely, (i) the creditor shall have delivered a demand in the OJA/6/2007 11/16 JUDGMENT prescribed manner on the company to pay the sum due to him; and (ii) the company has for three weeks thereafter neglected to pay the same, or to secure or compound for it to the reasonable satisfaction of the creditor. After the statutory notice the Company could pay the sum demanded or secure or compound for it to the reasonable satisfaction of the creditor. The section does not confer a right on a debtor but only gives him an opportunity to discharge the debt in one or other of the ways mentioned therein. The debtor could secure or compound for a debt only where the circumstances under which the demand is made permit such a mode of discharge. In the present case all the requirements of the provision stand satisfied. Operation of this section has nothing to do with ability to pay. Once the neglect to pay stands established statutory presumption arises. 10 For ascertainment of the fact as to whether the statutory presumption stands rebutted or not one can take clue from clause (c) of sub-section (1) of Section 434 of the Act, which indicates that for OJA/6/2007 12/16 JUDGMENT determining whether a company is unable to pay its debts or not, the Company Court shall take into account the contingent and prospective liabilities of the company. In the facts of the present case, even if one accepts the averments made in the Affidavit- in-Reply and the Further Affidavit-in-Reply to be correct, there is nothing on record to show as to what were the contingent and prospective liabilities of the respondent company, apart from the existing liabilities. Therefore, prima facie, it is not possible to accept the submission on behalf of the respondent company that the company is in a sound financial position and is in a position to discharge its existing liabilities. Merely from the figures of turnover, various expenses incurred by the company, the amount of Income tax refund received by the company, it is not possible to ascertain the financial health of the company in absence of any corroborative evidence in this regard. The submission that the same is not disputed cannot be considered for the simple reason that the financial soundness of the company has to be considered by the Court while exercising discretion and when the company OJA/6/2007 13/16 JUDGMENT makes a positive averment it is the respondent company who has to establish such averment. Factually also, paragraph No.11 of the Affidavit-in-Rejoinder categorically calls upon the respondent company to prove the averments made in paragraph Nos. 5 to 9 of the Affidavit-in-Reply originally filed, despite which except the further Affidavit no evidence has come on record. 11 The factum of so called dispute as pleaded by the respondent company also does not merit acceptance because as can be seen from communication dated 24.5.2004, the subject matter pertained to reconciliation of accounts and the first sentence of the said communication is in relation to various invoices issued by the petitioner. The said letter further goes on to state that the rates stated in the invoices are exaggerated and not commensurate with the items and the quality of the items. Thereafter, the respondent company informs upon the petitioner that the respondent shall do the needful upon final verification of the contents of the invoices and consider the same for payment. There is not a single sentence in the said communication to the effect that OJA/6/2007 14/16 JUDGMENT no orders were placed with the petitioner or that no goods were received by the respondent company from the petitioner. Therefore, the averments made in Affidavit-in-Reply to the said effect are not borne out by records and do not inspire confidence and cannot be taken at face value. This is more so in light of the fact that no such defence was raised in response to the statutory notice. 12 The contention regarding non compliance with statutory rules and the prescribed form also does not merit acceptance considering what is stated in the petition. Similarly the change in status of the company would not make any material difference and the finding of the Company Court on this count does not warrant any interference. 13 In light of the various principles enunciated by the decisions cited by both the sides, it becomes apparent that the present is not a case where prima facie one can say that a frivolous petition has been presented and entertained. In fact, on facts the OJA/6/2007 15/16 JUDGMENT impugned order made by the Company Court is in consonance with requirements of law and does not require to be interfered with. 14 In the result, the Appeal is dismissed. Interim relief granted in Civil Application No.13 of 2007 vide order dated 17.1.2007 shall stand vacated. The Company Court shall proceed with hearing of the Company Petition from the stage at which the impugned order was under challenge. 15 At this stage, learned Counsel for respondent company prays for extension of interim relief. In light of the facts which have come on record the request is rejected. O.J. Civil Application No. 13 of 2007. In light of the order made today in main Appeal this Civil Application is rejected. Rule discharged. Sd/- Sd/- (D.A.Mehta, J.) (B.N. Mehta, J.) OJA/6/2007 16/16 JUDGMENT M.M.BHATT