Case: N.L. Mehta Cinema Enterprises Private Limited Vs. Pravinchandra P. Mehta

S.K. DESAI, Ag.C.J. The appellants before us are N.L. Mehta Cinema Enterprises Pvt. Ltd., a Company which was ordered to be wound up by the Company Judge by an order passed on August 25, 1988 in Company Petition No. 204 of 1987. Aggrieved by that order, the Company has preferred the present appeal. 2. In order to appreciate the controversy which lies within a narrow compass, a few facts may be stated. The respondent claims to be the creditor of the Company, the principal amount of the debt being Rs. 6,00,000/-. According to the respondent, in addition to the said principal amount, the Company was liable to pay him interest @ 1.70% per mensem and account of such interest an amount of Rs. 2,29,850/- was claimed till the time the winding up petition was filed. 3. If the petition is pursued, the same proceeds upon the allegation that the Company is unable to pay its debts and the said allegation is based upon fiction contained in section 434 of the Companies Act. According to the petitioner, by his Advocates letter dated January 29,1987, the Company was called upon to pay the said principal amount together with the accrued interest. The Company was informed that it had three weeks time for the purpose and in default a petition for winding up would be preferred in the High Court. It is obvious therefore, by reading the said letter and the averments in paragraph 8 of the petition, that non-compliance with the said notice is the foundation of the petitioners contention that the Company is deemed to be unable to pay its debts. 4. According to the appellants, the said notice was sent to the Companys administrative office at D Block, Office premises, Wankhede Stadium, Churchgate, Bombay-20, whereas the registered office of the Company is situated, as the petitioner himself admits, at 161. Taikalwadi road, Mahim, Bombay 400 016 (see paragraph 2 of the petition). 5. It was accordingly submitted that there was non-compliance with the mandatory provisions of section 434 which require that the demand notice should be delivered at the registered office of the Company. It was further submitted that since the demand notice was not sent to the registered office of the Company, the legal fiction envisaged by section 434 was not available to the petitioner and since the averment in the petition was a limited one entirely based on the aforesaid fiction there was no warrant for holding that the Company was unable to pay its debts. As a matter of fact, we are told that the Company has very large assets. It is clear from a perusal of the petition that the petitioner must sink or swim on the basis of the said legal fiction. 6.The relevant portion of section 434 of the Companies Act reads as under:--- 434 (1) A-A Company shall be deemed to be unable to pay its debts.---(a) If a creditor, by assignment or otherwise, to whom the Company is indebted in a sum exceeding five hundred rupees then due, has served on the Company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor: (b) xxx xxx xxx xxx xxx (c) xxx xxx xxx xxx xxx 7. We may mention that the plea was taken before the learned Company Judge who did not accept the same as in his view the said plea available to the Company in asmuch as it has not challenged the validity of service of notice till the filing of its affidavit-in-reply to the petition for winding up. Alternatively the learned Company Judge, placing reliance on Rule 33 of the Companies (Court) Rules, 1959, held that no substantial injustice has been caused to the Company by the alleged defect or irregularity. Accordingly he was of the opinion that there was no substance in the plea and if the plea was negatived there was no answer to the petition. 8. It has been submitted that on both the points the view of the learned Company Judge is erroneous and the ultimate conclusion therefore requires correction by the Appeal Court. 9. As regards the first plea viz. that the Company had not challenged the validity of the service of the demand notice till the filing of its affidavit-in-reply to the petition, we may, with respect, observe that we are unable to appreciate how the failure to point out an irregularity till that stage would disentitle the Company from relying on the plea or illegality at the stage of the hearing of the petition. The failure to indicate the plea earlier may affect the order of costs, but surely cannot affect the merit, if any of the defence. In order words, such conduct cannot prejudice the defence and thereby there cannot be any estoppel against the Company disentitling it from raising such defence merely because it had failed to indicate the defence earlier. The plea will have to be considered on merits and the important point to be considered therefore is whether the learned Judge was right in the view that he took that Rule 33 of the Companies (Court) Rules was applicable to the present case. Rules 33 reads as under:--- 33, Validity of service and of proceedings.---No service under these Rules shall be deemed invalid by reason of any defect in the name or description of a person in the list of contributories or in the petition, summons, notice or other proceeding, provided that the Court is satisfied that such service is in other respects sufficient; and no proceedings under the Act or these Rules shall be invalidated by reason of any formal defect or irregularity, unless the Judge before whom the objection is taken is of the opinion that substantial injustice has been caused by such defect or irregularity and that the injustice cannot be remedied by an order of the Court. 10. If Rule 33 is properly understood, it will be seen immediately that it is available only as regards the service under the Companies (Court) Rules. The clear language of the said rule will preclude its applicability to a legal fiction contained in and envisaged by other statutory provisions such as the one under sections 434 of the Companies Act. Section 434 contains a legal fiction. It would be available against a Company otherwise solvent who may not respond to a notice of demand made by the creditors. The section however requires that such notice of demand must be sent at the registered office of the Company if that section is again perused it will be seen that as regards the mode of service i.e. whether the notice of demand is to be sent by registered post, an option has been given by adding the words or otherwise after the words by registered post, but no such option has been provided for after the words registered office. The clear wording of the section precludes an argument that service at any administrative office of the Company would be sufficient to raise a presumption or fiction under section 434. Similarly, the clear words of Rule 33 would preclude the application of that rule to any notice of demand made on the Company under section 434. The matter is abundantly clear and requires no authority to justify our view. 11. Even then, reference may be made to a decision of the Calcutta High Court in (Bukhtiarpur Bihar Light Rly. Co. Ltd. v. Union of India)1, (1954)24 Company Cases, 507, where the Division Bench of the Calcutta High Court had the occasion to consider the equivalent provisions of the Indian Companies Act, 1913. Facts of that case are briefly set out hereunder. 12. The Union of India representing the East Indian Railway claimed a sum of Rs 5,22,313 from the appellant before the Calcutta High Court but the said notice of demand was sent to the Patna office of the Company and not to the registered office. Another notice subsequently sent on June 30, 1950 to the registered office, but the Company Petition for winding up was filed on July 18, 1950. In other words there was period of less than three weeks between the notice sent to the registered office and the filing of the winding up petition. Accordingly the Court was required to consider only the previous notice of June 6, 1950 which was addressed, as indicated earlier, to the Patna Office and not to the registered office. The plea that such notice would not raise the fiction under section 163 of the Indian Companies Act, 1913 was considered by the Division Bench at pages 511 and 512 of the report. According to the Division Bench of the Calcutta High Court the point was one to which there was no answer possible and the appellant was held entitled to succeed on that plea. The Division Bench of the Calcutta High Court Considered the averments in the petition and found that the petitioners could only obtain the winding up order on the basis of the said legal fiction and the said legal fiction begin not available to them, since the notice had not been sent to the registered office of the Company, the petition was ordered to be dismissed. 13. It is undoubtedly true that a rule similar to Rule 33 of the Companies (Court) Rules was not under consideration by the Calcutta High Court. In our opinion, the said rule is of no assistance to the petitioner as it has no application to a notice of demand to be served under section 434. The requirement contained in section 434 has to be strictly complied with in order to raise the legal fiction. It was certainly open to the petitioner to make a claim in the alternative viz. that the Company is not only deemed to be unable to pay its debts but that in fact also it is unable to pay its debts. For the latter allegation, however, sufficient particulars must be given in the petition for winding up. These are not found in the present petition and, in our view, the petitioner has rested his case only on the fiction which was not available to the petitioner because he did not address the notice of demand to the registered office of the Company, the petition is liable to be dismissed.

Decision reasoning: 1[ds]As a matter of fact, we are told that the Company has very large assets. It is clear from a perusal of the petition that the petitioner must sink or swim on the basis of the said legal fiction9. As regards the first plea viz. that the Company had not challenged the validity of the service of the demand notice till the filing of itsy to the petition, we may, with respect, observe that we are unable to appreciate how the failure to point out an irregularity till that stage would disentitle the Company from relying on the plea or illegality at the stage of the hearing of the petition. The failure to indicate the plea earlier may affect the order of costs, but surely cannot affect the merit, if any of the defence. In order words, such conduct cannot prejudice the defence and thereby there cannot be any estoppel against the Company disentitling it from raising such defence merely because it had failed to indicate the defence earlier10. If Rule 33 is properly understood, it will be seen immediately that it is available only as regards the service under the Companies (Court) Rules. The clear language of the said rule will preclude its applicability to a legal fiction contained in and envisaged by other statutory provisions such as the one under sections 434 of the Companies Act. Section 434 contains a legal fiction. It would be available against a Company otherwise solvent who may not respond to a notice of demand made by the creditors. The section however requires that such notice of demand must be sent at the registered office of the Company if that section is again perused it will be seen that as regards the mode of service i.e. whether the notice of demand is to be sent by registered post, an option has been given by adding the words or otherwise after the words by registered post, but no such option has been provided for after the words registered office. The clear wording of the section precludes an argument that service at any administrative office of the Company would be sufficient to raise a presumption or fiction under section 434. Similarly, the clear words of Rule 33 would preclude the application of that rule to any notice of demand made on the Company under section 434. The matter is abundantly clear and requires no authority to justify our view13. It is undoubtedly true that a rule similar to Rule 33 of the Companies (Court) Rules was not under consideration by the Calcutta High Court. In our opinion, the said rule is of no assistance to the petitioner as it has no application to a notice of demand to be served under section 434. The requirement contained in section 434 has to be strictly complied with in order to raise the legal fiction. It was certainly open to the petitioner to make a claim in the alternative viz. that the Company is not only deemed to be unable to pay its debts but that in fact also it is unable to pay its debts. For the latter allegation, however, sufficient particulars must be given in the petition for winding up. These are not found in the present petition and, in our view, the petitioner has rested his case only on the fiction which was not available to the petitioner because he did not address the notice of demand to the registered office of the Company, the petition is liable to be dismissed.