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

(2) THE petitioner, Velabai Laxmidas Bhanji, had given a loan of Rs. 2,500 to a company named deccan Farms and Distilleries Private Limited on or about 10th September, 1973, for which the said private limited company issued a loan certificate acknowledging the loan of R. 2,500 from the petitioner repayable on 31st August, 1974, being the date of maturity carrying interest thereon at the rate of 15 per cent. per annum. By her attorneys letter dated 26th September 1974, the petitioner demanded the repayment of the said sum of Rs. 2,500 with interest thereon and by the same letter she gave a statutory notice as required under s. 434 of the Companies Act, 1956. The said statutory notice was addressed to private limited company. It appears that, after the said transaction, the private limited company was converted into a public limited company, and certificate of change dated 19th November, 1973, was duly obtained from the Registrar of companies. After the said change was made, the public limited company invited subscription from the public and in this connection issued a prospectus whereby 3,00,000 equity shares of R. 10 each were offered to the public. The subscription was opened on 8th April 1974, and was to close on 22nd April, 1974. A sum of Rs. 2.50 was required to be paid on application and a further sum of Rs. 2.50 on allotment. It appears that the shares weree company, however, received Rs. 15 lakhs on the basis of the money paid on application and on allotment in respect of the said 3,00,000 equity shares. The company applied for permission to list the shares on the Bombay Stock Exchange before the expiry of 10 weeks from 22nd April 1974, as required by s. 73 of the Companies Act, 1956. However, the said permission was withdrawn on 26th April, 1975, on account of the failure on the part of the company to fulfill the various formalities or requirements. Some of the directors of the company filed a complaint with the General Branch, C. I. D. , Bombay, in consequence whereof the bank accounts of the company were frozen. Before the bank accounts were frozen, the company utilised about 8 lakhs of rupees out of 15 lakhs of rupees received pursuant to the prospectus for making payment to Messrs. Tawkly Industrial Corporation for the purchase of machinery. It is an admitted fact that the managing director of the company Shri A. B. Patil and his brother, Shri I. B. Patil, who was also a director of the company, are interested in the said Tawkly Industrial Corporation. Although the hands of Shri A. B. Patil were tied down with the freezing of the companys bank accounts, nevertheless he obtained certain orders from this court for withdrawal of moneys. The said account has been naturally reduced to that extent.(3) REVERTING to the said letter of demand and the statutory notice dated 26th September, 1974, the public limited company by its letter dated 8th October, 1974, did not dispute its liability and, on the other hand, expressed its extreme regret for the inconvenience caused to the petitioner. It was also stated that the company was trying its best to repay as soon as funds were in itsN 28th October 1974, the petitioner presented an under s. 433 (e) of the companies Act, 1956, on the ground that the company was unable to pay its debts. The petition was accepted on 11th December 1974. On 15th January 1975, notice was served upon the company, which was made returnable on 5th February 1975. There was no contest to the admission of the petition and, in the circumstances, the petition was ordered to be admitted and advertised on 14th February 1975. After being advertised in Times of India and in the government Gazette, the petition came up for hearing on 14th April 1975, when the company applied for adjournment on the ground that it wanted to settle the matter with the petitioner. At that hearing, it was pointed out to the learned company judge that the company was making payments to other creditors and had in fact paid a sum of Rs. 8,000 to one Anantrao Jadhav and co. of Kolhapur. In these circumstances, an interim injunction restraining the company and its directors either by themselves or through their employees, servants or agents from disposing of any property or assets of the company as well as from disbursing any amount on behalf of the company until further orders was passed. When the matter came up for hearing on 18th June, 1975, neither the company nor its directors nor the attorneys on record appeared and aorder was passed which was, however, set aside on 3rd July, 1975. The company filed its affidavit dated 22nd July, 1975, opposing thepetition. In para. 5 of the affidavit, the company admitted its liability to the petitioner and submitted that at present the company is having more than Rs. 7,00,000 liquid cash in the companys various bank accounts, and that due to disputes and differences between the two groups of directors, the management of the company is under a deadlock. It was also pointed out that a false complaint was lodged by some of the directors with the police authorities, as a result of which the amount lying in the banks has been frozen, and the company intended to file a writ petition challenging the validity of the police order freezing the bank accounts of the company. It was also stated that the company had given an ultimatum to various banks to the effect that if their bank accounts were not released, necessary legal action would be taken against them. It was also stated that a sugar plant was a very profitable project and it is hoped that in a very short period the company will be able to pay dividends as also about 300 people in the rural area will get employment opportunities in the companys project which is in a backward area. It was submitted that the company had substantial funds and capacity to start their project and it was only due toof the directors and the deadlock in the management that the company had suffered.(5) DURING the pendency of the present, the companys then attorneys, M/s. Manilal Kher Ambalal and Co. , took out a judges summons dated 29th August, 1975, asking for permission to withdraw and to pay to themselves a sum of Rs. 15,000 from the account of the company with the Bank of India, Fort Branch, to enable them to defend the present Company petition No. 22 of 1974 and three other Company petitions Nos. 17 of 1974, 4 of 1975 and 6 of 1975, all for winding up of the company, and another Company Application No. 16 of 1975 for issue of share certificate, and a criminal case pending before the Metropolitan Magistrate. Another reason advanced for the said payment of Rs. 15,000 was that the company desired to prepare a petition for sanctioning a scheme including preparation of and printing of the scheme; thirdly, petition against police authorities for release of books, etc. ; fourthly, petition against the stock Exchange challenging their arbitrary decision of delisting the company; fifthly, petition for convening an annual general meeting; and, lastly, a suit against B. B. Consulting and Engineering pvt. Ltd. to recover Rs. 51,000, being advance paid by the company towards machineries. It is not necessary to refer to the other prayers of the said judges summons as they are not relevant for the purposes of thisE also may be taken of another Company Petition No. 14 of 1975 filed by Dhunji H. Dhunjibhoy, one of the directors of the company. This was also a petition for winding up of the company on the ground that it is just and equitable that the company should be wound up. In support of this, six circumstances were alleged: (1) that the managing director of the company is carrying on business of the said company in a fraudulent manner and/or in a manner detrimental to the interest of the company. (2) That the managing director does not command the confidence of the petitioner and the other directors named, Dr. R. R. Hattiangadi, Mr. V. J. Ghatge, Mr. P. R. Kibe and Mr. K. R. Moorthy, and that there is a complete lack of probity on the part of the said managing director. (3) That on account of failure to hold the annual general meeting, there is no properly constituted board of directors to control the management of the said company. (4) That the object for which the said company was incorporated has substantially failed and it is impossible to carry on business in the said company in the near future, and there is no reasonable hope that the said company will carry on any business in the near future. (5)That the auditor of the company has given a report which given the assets and liabilities position of the company as at 31st March 1973, and 30th September 1973. Since then the companys books have been audited up to 30th April 1974, and a balance sheet has been prepared but with qualified remarks; a profit and loss account of the company has been submitted directly by the auditors to the Registrar of Companies without the signature of the petitioner and/or the said four directors. (6) That the prospectus states that an application will be made to the Bombay Stock exchange for permission to deal in and for an official quotation of the equity shares of the company. The Stock Exchange has refused permission and/or has not granted permission, and, in the circumstances, by reason of the provisions of s. 73 of the Companies Act, the allotment of shares made by the company has become void and the company has become liable to to pay all moneys received from applicants in pursuance of the saidN the presentn reached hearing on 26th November, 1975, before the learned single judge the companys present attorneys, M/s. Poddar and Co. , made an application for adjournment on the grounds as stated by Mr. Poddar before us that his firm had been engaged on 24th November, 1975, and that he wanted time to go through the papers and was also considering the question of presenting a scheme. The learned company judge refused the application for adjournment and proceeded to hear the petition on merits. At the hearing, the petitioners in Company Petitions Nos. 17 of 1974, 4 of 1975 and 6 of 1975 appeared and supported the petitioner in the present petition. These three other petitioners were also the creditors of the company in the sums of Rs. 3,000, Rs. 5,000 and Rs. 5,000. According to Mr. Chinai, he had also appeared in support of the Company Petition No. 14 of 1975 and had supported the present petition for winding up. However, neither his appearance nor of his attorneys in Company Petition No. 14 of 1975 is shown. Nonetheless, we have no reason to disbelieve the statement of the learned counsel that he in fact appeared in the said petition and supported the winding up of theE learned company judge passed an order winding up the company and appointed the official liquidator to take charge of the assets, properties and all the records of the company. In view of ther passed in the present company petition, rightly by virtue of s. 447 of the Companies Act, 1956, no separate order for winding up was passed in the other company petitions except as regards costs.

Reasoning: (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.