Case: Deccan Farms and Distilleries Limited Vs. Velabai Laxmidas Bhanji

by sub-s. (1) of s. 73. The amount received from the applicants is required to be kept in a separate account under sub-s. (3) of s. 73 until the permission is granted or the appeal preferred against the refusal to grant such permission is disposed of under s. 22 of the Securities Contracts (Regulation) Act, 1956. The text of sub-s. (3a) Of s. 73 reads:" (3a) Moneys standing to the credit of the separate bank account referred to in sub-section (3) shall not be utilised for any purpose other than the following purposes, namely: - (a) adjustment against allotment of shares, where the shares have been permitted to be dealt in on the stock exchange or each stock exchange specified in the prospectus; or (b) repayment of moneys received from applicants in pursuance of the prospectus, where shares have not been permitted to be dealt in on the stock exchange or each stock exchange specified in the prospectus, as the case may be, or, where the company is for any other reason unable to make the allotment of shares. "(16) THIS authorises the utilisation of the money for any one of the two purposes and for no other purpose. The language of s. 73 is simple and clear. This section had been amended by the companies (Amendment) Act, 1974, whereby greater protection was sough to be given to the investing public, underwriting institutions and trade than higher to before. It also became necessary for the government to have a second look at some of the provisions of s. 73 in view of the judgment in Union of India v. Allied International Products Ltd. [1971] 41 Comp Case 127 (SC). Looking to the interest of the investing public, the rate of interest was enhanced from six per cent. to twelve per cent. by the 1974 Amendment, so that the investor received the repayment at a higher interest when the allotment became void under s. 73 (1). The 1974 Amendment brought about the substitution of sub-ss. (1) and (5) and insertion of sub-ss. (2a), (2b), (3a), and amendment of some other provisions of s. 73 in order to provide several safeguards, but in real life these provisions can be set at naught as in the present case. Although the allotment has become void, yet the moneys have not been repaid with interest in the manner laid down and, on the other hand, over eight lakhs of rupees, out of fifteen lakhs of rupees, have been utilised for purposes other than those specified under s. 73 (3a) quoted above. This kind of mischief cannot be avoided unless s. 73 is further amended to prohibit operation of such separate bank account until a company produces the permission of the stock exchange concerned as contemplated under s. 73. It is against such permission that the separate bank account should be allowed to be operated. This case illustrates that more safeguards are needed to give real and effective protection to the investing public, underwriting institutions and trade. There is no check, as this case shows, in misapplying the moneys. In fact, the moneys falling into the coffers of a company pursuant to the prospectus cannot be touched or employed to use unless the conditions contemplated under s. 73 are faithfully complied with. (17) IT seems to us that, in using these moneys, the provisions of s. 73 are breached. Such breach is made punishable apart from fixing joint and several liability on the directors. It may be made clear that we are not expressing any opinion on this aspect of the case as the point is not in issue before us. We find that there is no prospect of the company doing any business. There is a complete deadlock among the directors. These directors have filed a winding-up petition on the ground that it is just and equitable that the company be wound up. The majority of the directors do not have confidence and faith in the managing director, Shri I. B. Patil. Large amounts have been paid by them to a concern in which both of them are interested. In these circumstances, it is in the interest of the petitioning creditor and other supporting creditors that the assets of the petitioning creditor and other supporting creditors that the assets of the company should be protected. After all, the object of winding-up by the court is to facilitate the protection and realisation of the assets of a company should be protected. After realisation of the assets of a company with a view to ensure an equitable distribution thereof among those entitled. In our opinion, the winding-up order is in the general interest of all the creditors. However, we make it clear that these observations will not prejudice the scheme, which is presented by the company under s. 391 of the Companies Act. (18) THE last contention was that the petitioning-creditor should have filed a suit. Winding up is no alternative to the ordinary remedy provided for recovery of a debt. No debt, a winding-up petition is not a legitimate means of selling to enforce payment of a debt, but such a debt should be disputed by the company. There should be some bona fide dispute. In the present case, the debt is admitted. It was admitted in reply to the statutory notice. It was no disputed at the time when the company petition came for admission. It was also not disputed in the affidavit opposing the admission of the petition. In the present case, the deeming provisions of s. 431 (1) (a) are clearly attracted as the company has neglected to pay the debt of the petitioner. There is nothing to show that the petitioner has instituted the present proceedings with any ulterior motive. In these circumstances, the petitioner has rightly availed of the cheap and speedy remedy provided under the Companies Act to creditors who are unable to recover debts, and we see no reason why the petitioner should have been refused this cheap remedy.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds](13) IN the case before the Supreme Court, creditors to the extent of Rs. 7,50,000 opposed thepetition, whereas creditors demanding Rs. 44,477. 56 in all supported the same. In the case of Focus Advertising P. Ltd. [1975] 45 Comp Cas 534 (Bom) in this court, at the hearing of the petition, affidavits of the eight supporting creditors showed that their claims were of the aggregate value of Rs. 7,68,000 and those opposing the winding up totalled Rs. 3,03,862. 07. In all these three cases, the courts considered the wishes of the creditors on both sides. These cases provide a guideline for considering the completing interest of the creditors. The rule is that if there is opposition to the making of theorder by the creditors, the court will consider their wishes and may decline to make theorder. This rule finds place in s. 557 of the Companies Act, 1956. The wishes of the creditors are to be examined by the court. The court has to see whether the case of the creditors opposing the winding up is reasonable and whether there are matters, which should be inquired into and investigated if aorder is made. The court can consider the wishes of the creditors "as proved before it by sufficient evidence" as laid down by s. 557. A fact is said to be "proved" when after considering the matters before it, the court either believes it to exist or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists. The creditors who wish that their wishes should be regarded have to place the necessary evidence before the court. They have to point out reasonable grounds in order to enable the court to ascertain whether the grounds are good. Either the material should be on record or the creditors should place it on affidavit or in some other satisfactory manner to enable the court to determine the competing wishes and make a judicial choice at the hearing. If this is not possible to decide at the hearing, the court can direct that a meeting of the creditors be called and held in such manner as laid down in cls. (b) an (c) of s. 557 (1) of the Companies Act, 1956. (14)the present case,there is no evidence that at the time of the passing of theorder, any of the creditors of the company opposed the petition for winding up. On the other hand, at the time of the hearing of the petition for winding up, three creditors to the extent of Rs. 13,000 had supported the petition for winding up. There is nothing to show that any other creditor was present at the hearing to oppose the present petition for winding up. What was urged on behalf of the company by Mr. Poddar was that a scheme has been presented under s. 391 of the Companies Act, and at the meeting called under the directions of the court under that section, 79 creditors had attended, out of whom 50 creditors to the extent of about Rs. 4,47,000 had voted for the scheme and 26 creditors of the value of about Rs. 88,000 in the aggregate had opposed the scheme. The provision for ascertaining the wishes of the creditors under s. 557 is for a different situation than the one, which is contemplated under s. 391. In fact, under s. 391, there is no question of ascertaining the wishes of the creditors by the court. It is a provision for scrutinizing the scheme, which may be put forth either by the company or by any of the class of creditors or members of the company. In the case before us, at the time of the passing of the order for winding up, there was no evidence at all, much less sufficient evidence, to show that the creditors were opposing the winding up, whose wishes could have been ascertained by the court. It is true that it is not an absolute rule of law that the court is bound to make an order for winging up when the conditions required for winding up exist. It is entirely a matter of judicial discretion. Inthe present case,in our opinion, the learned company judge has exercised that discretion in a sound and proper manner and there is no reason to interfere with the same. (15) THE other question which requires to be considered is whether the order for winding up would benefit theor the companys creditors generally. In this connection, mr. Poddar pointed out that the company has liquid cash of nearly Rs. 7 lakhs, but on account of the obstructive and destructive attitude adopted by some of the directors, the amount is not realisable from the banks as the police has instructed the banks not to allow the operation of the bank accounts. In this connection, the provisions of s. 73 of the Companies Act are being overlooked. Mr. Poddar was grossly in error in treating the amount lying in the bank accounts, as an asset available to the company for disbursement at the discretion and sweet will of the companys directors. It is admitted that the Bombay Stock Exchange has withdrawn the permission contemplated under s. 73 since 26th April, 1975, and that no appeal has been filed against that decision.(5) of s. 73 provides that for the purposes of this section, it shall be deemed that permission has not been granted if the application for permission, where made, has not been disposed of within the time specified inon (1), to the extent it is relevant, says that where permission has been applied for before the tenth day after the first issue of the prospectus, or, where such permission has been applied for before that day, if the permission has not been granted by the Stock Exchange before the expiry of ten weeks from the date of the closing of the subscription lists, any allotment made on an application in pursuance of such prospectus shall be void. Inthe present case,the permission was given subject to certain conditions being fulfilled and since those conditions were not complied with, the permission was revoked. The conditional permission did not amount to grant of the application for permission to deal in shares on the Stock Exchange as contemplated under s. 73 (1). The permission intended under thatis an unqualified and wholesome permission. Any qualified permission is as good as not granted and the application should be construed as not disposed of within the time prescribed by(1) of s. 73. The amount received from the applicants is required to be kept in a separate account under(3) of s. 73 until the permission is granted or the appeal preferred against the refusal to grant such permission is disposed of under s. 22 of the Securities Contracts (Regulation) Act, 1956. The text of(3a) Of s. 73 reads:" (3a) Moneys standing to the credit of the separate bank account referred to in(3) shall not be utilised for any purpose other than the following purposes, namely:(a) adjustment against allotment of shares, where the shares have been permitted to be dealt in on the stock exchange or each stock exchange specified in the prospectus; or (b) repayment of moneys received from applicants in pursuance of the prospectus, where shares have not been permitted to be dealt in on the stock exchange or each stock exchange specified in the prospectus, as the case may be, or, where the company is for any other reason unable to make the allotment of shares. "(16) THIS authorises the utilisation of the money for any one of the two purposes and for no other purpose. The language of s. 73 is simple and clear. This section had been amended by the companies (Amendment) Act, 1974, whereby greater protection was sough to be given to the investing public, underwriting institutions and trade than higher to before. It also became necessary for the government to have a second look at some of the provisions of s. 73 in view of the judgment in Union of India v. Allied International Products Ltd. [1971] 41 Comp Case 127 (SC). Looking to the interest of the investing public, the rate of interest was enhanced from six per cent. to twelve per cent. by the 1974 Amendment, so that the investor received the repayment at a higher interest when the allotment became void under s. 73 (1). The 1974 Amendment brought about the substitution of(1) and (5) and insertion of(2a), (2b), (3a), and amendment of some other provisions of s. 73 in order to provide several safeguards, but in real life these provisions can be set at naught as in the present case. Although the allotment has become void, yet the moneys have not been repaid with interest in the manner laid down and, on the other hand, over eight lakhs of rupees, out of fifteen lakhs of rupees, have been utilised for purposes other than those specified under s. 73 (3a) quoted above. This kind of mischief cannot be avoided unless s. 73 is further amended to prohibit operation of such separate bank account until a company produces the permission of the stock exchange concerned as contemplated under s. 73. It is against such permission that the separate bank account should be allowed to be operated. This case illustrates that more safeguards are needed to give real and effective protection to the investing public, underwriting institutions and trade. There is no check, as this case shows, in misapplying the moneys. In fact, the moneys falling into the coffers of a company pursuant to the prospectus cannot be touched or employed to use unless the conditions contemplated under s. 73 are faithfully complied with. (17) IT seems to us that, in using these moneys, the provisions of s. 73 are breached. Such breach is made punishable apart from fixing joint and several liability on the directors. It may be made clear that we are not expressing any opinion on this aspect of the case as the point is not in issue before us. We find that there is no prospect of the company doing any business. There is a complete deadlock among the directors. These directors have filed apetition on the ground that it is just and equitable that the company be wound up. The majority of the directors do not have confidence and faith in the managing director, Shri I. B. Patil. Large amounts have been paid by them to a concern in which both of them are interested. In these circumstances, it is in the interest of the petitioning creditor and other supporting creditors that the assets of the petitioning creditor and other supporting creditors that the assets of the company should be protected. After all, the object ofby the court is to facilitate the protection and realisation of the assets of a company should be protected. After realisation of the assets of a company with a view to ensure an equitable distribution thereof among those entitled. In our opinion, theorder is in the general interest of all the creditors. However, we make it clear that these observations will not prejudice the scheme, which is presented by the company under s. 391 of the Companies Act.up is no alternative to the ordinary remedy provided for recovery of a debt. No debt, apetition is not a legitimate means of selling to enforce payment of a debt, but such a debt should be disputed by the company. There should be some bona fide dispute. Inthe present case,the debt is admitted. It was admitted in reply to the statutory notice. It was no disputed at the time when the company petition came for admission. It was also not disputed in the affidavit opposing the admission of the petition. Inthe present case,the deeming provisions of s. 431 (1) (a) are clearly attracted as the company has neglected to pay the debt of the petitioner. There is nothing to show that the petitioner has instituted the present proceedings with any ulterior motive. In these circumstances, the petitioner has rightly availed of the cheap and speedy remedy provided under the Companies Act to creditors who are unable to recover debts, and we see no reason why the petitioner should have been refused this cheap remedy.