Case: Focus Advertising Private Limited Vs. S Ahoora Blocks Private Limited

( 4 ) IT is to be noticed that Focus Advertising Private Ltd. (hereinafter called "the company") is, as disclosed by its very name, an advertising company and carries on its business with its registered office at Bombay and a branch office in Madras. TheAhoora Blocks Private ltd. , by their solicitors letter dated the 25th of June, 1973, called upon the company to pay to them a sum of Rs. 17,248. 41 described by them to be a sum now remaining due and payable in relation to the companys orders for preparation of various blocks "at the foot of their account". This letter was also described at the foot thereof as a statutory notice under the provisions of the companies Act. There is no dispute that this notice of demand was received by the company on the 27th of June, 1973, and it is also an admitted position that no written reply was sent by the company within the period5 ) IT has been suggested that there were some discussions between the companys representative and a representative of the petitioners. But the fact remains that no written reply was sent by the company and there appears to have been no compliance with the notice of demand in the manner prescribed, i. e. , either by the payment of the sum or by securing it or compounding for it to the reasonable satisfaction of the6 ) ON the 19th July, i. e. , almost immediately after the expiry of thedays statutory period, thefiled the petition for winding up, which is now before us in appeal.( 7 ) IT is contended by the company that even after the filing of the petition, there were discussion between the parties for an amicable settlement. The contention of the company appears to be that the several bills, on the basis of which theclaimed the sum of Rs. 17,248. 41 were required to be checked and it appears from the correspondence, which has been placed on record, that some of the bills were not available so that duplicates were produced and there was some dispute as to two amounts, that is to say, Rs. 1,337 in relation to 14 bills originally not produced, and Rs. 2,252 in respect of 15 challans. In other words, the utmost that can be said was that there was some necessity for verification of the various bills and vouchers before thedemand, as made, could be met and that there was some dispute as regards part of the claim, i. e. , the aggregate sum of Rs. 3,589 was not admitted. It would follow that so far as the rest of the amount of Rs. 13,658 was concerned, the debt could not be said to be disputed as8 ) IN the events that happened and very shortly after the filing of the petition, theand the company seemed to have arrived at a settlement and the negotiations even reached the stage of formal consent terms being drawn up for filing in court and signed by the respective attorneys of the( 9 ) THESE consent terms show that the company admits the petitioning creditors claim for Rs. 17,248. 41 and that the two directors of the company, who are named in the consent terms, agreed to pay or cause to be paid the said sum of Rs. 17,248. 41 by five monthly installments and the first four monthly installments were to be of Rs. 4,000 each and the last installment to be of Rs. 1,248. 41. The first of such installment was to be paid on or before the 5th of September, 1973. The consent terms having been signed on the 4th of September, 1973. There was also a provision in the consent terms that if the first installment of Rs. 4,000 was not paid on the 5th to september, 1973. Or any installment thereafter the petition forwould stand dismissed.( 10 ) NOW, a curious development appears to have taken place because on the 15th of September, 1973, the consent terms, which had already been signed, were not filed, and, we are told at the bar, that they were not permitted to be filed by the court. But the counsel appearing for the company nevertheless made a statement before the learned company judge (Kania J.) that the company "admits the claim of the petitioners mentioned in the petition", and then the petition was adjourned for one11 ) IT requires to be noticed that at that stage the petition had not yet been admitted; it had only been accepted and a notice issued to the company to show cause why it should not be admitted. Ultimately, however, the matter came up again before the company judge in chambers on the 12th of October, 1973, and this time the petition was admitted and an order advertising the petition was also12 ) IT may be mentioned that in between the above two dates a letter was addressed on the 6th of september, 1973, referring to the negotiations between the parties and it was therein stated that the court had declined to take the consent terms on file and that the company felt that they had been deceived by the petitioners and, therefore, the consent terms were not binding. In fact, the letter contains a request that the consent terms were not returned to the company for cancellation. There was, however, no reference to the fact that counsel for the petitioner had admitted the petitioners claim as recorded by the company judge on the 5th of September, 1973, or how that admission was to be13 ) THERE were certain other developments thereafter in the sense that stay of advertisement was asked for and as ad interim stay was granted. There were also two orders passed by the company judge (Gandhi J. ). By the order dated the 17th of November, 1973, the company was directed to deposit in court the sum of Rs. 17,748. By the second order dated the 19th of November, 1973, the petitioner were permitted to withdraw that amount from the14 ) THERE was an appeal from the order dated the 19th of November, 1973, by the company but ultimately both the order dated the 17th of November, 1973, and the 19th of November, 1973, were set aside by the appellate15 ) THE contentions urged before the company judge, who heard the petition, were three in number. The first contention as raised by Mr. Dhanuka, counsel for the company, as a preliminary objection, was to the effect that the petition did not contain any particulars in respect of the alleged debt and that, therefore, the petition was not in accordance with the form prescribed by the Companies (Court) Rules, 1959, and thus not maintainable. It was then suggested that the petition would be dismissed for that reason. The learned company judge rejected the preliminary objection as he was of the view that in a case where a petition for winding up is based merely on a deemed inability to pay by reason ofwith a statutory notice under section 434 (a) of the Act there was no question of any particulars of the debt having to be given. According to the learned company judge, the cause or basis of any such petition is the failure to comply with the statutory notice. The learned company judge noted that the preliminary objection was taken before him on a demurer but in his opinion the petition could be said to have been properly framed if it merely set out :(a) that the petition was by a creditor for a certain amount; (b) that a statutory notice in respect of that claim had been served on a particular date; and (c) that the company had for three weeks from the date of the service of the notice neglected to comply with the notice in the manner prescribed by section 434 (a ).

Court's reasoning:
( 18 ) TURNING now to Form No. 46, which appears to be the appropriate form for a petition based on the failure of the company to comply with the statutory notice, we find that paragraph 6 of the form reads as follows :"the company is indebted to the petitioner in the sum of Rs. . . . for [state consideration for the debt, with particulars, showing that the debt claimed is due]. "( 19 ) THERE is an asterisk mark which refers to a note in the case of a debt which is due on an assignment, but we are not concerned with that aspect in this22 ) THE rules, which we have noticed, in our view, predicate that the petition itself must disclose the basis on which it is filed. If the basis iswith the statutory notice delivered to the company, then it must be set out in the petition, as mentioned in paragraph 7 of From No. 46. But it is implicit that a statutory notice can only proceed when there is a debt in existence. It would follow that the petition must contain the necessary particulars from which the court can ascertain that there was in fact a debt (for which there was a consideration and that the debt was presently due); that a statutory notice of demand was served; and that there had been a24 ) MR. Dhanuka has argued, and in our view there is some substance in the argument, that the petition must itself disclose a cause of action in the sense that there is a debt and notwithstanding a statutory notice the debt has not been paid or secured or compounded for to the satisfaction of the25 ) IT is true that paragraph 7 of Form No. 46 indicates that there will be some information as to wen the statutory notice was issued and served on the company. But it is to be noticed that paragraph 7 is not required to indicate the nature of the debt or even the amounts of the debt. All that is required is that the petitioner must say that a notice was served on the company and that the company has failed and neglected to pay the amount or any part thereof. It is possible to contend that it may not be necessary to give the particulars in paragraph 6 of Form No. 46 itself if it could be shown that the statutory notice of demand which is invariably annexed contains the necessary28 ) IN our view, it is necessary that particulars of the debt must be given either in paragraph 6 of form No. 46 or in the notice itself or at any other place in the petition so that in the event of the petition being heard ex parte, the court would have before it sufficient material to make a proper order. In the case before us it is not disputed that there was no reply although there was suggestion of some oral representation having been made. Although in the present case the company has appeared, it is clear that if the company had not appeared, then the court would have been faced with a petition from which it could not be prima facie ascertained that there was a valid debt which could be claimed. The relevant paragraph of the petition as well as the notice, exhibit A, is couched in vague words and speaks of certain bills having been sent, some payment having been received in respect of certain bills and a balance of Rs. 17,248. 41 being found due and, therefore, claimed. As we have noticed, there was some dispute as to some of the bills which were not said to have been received by the company at29 ) THE notice, exhibit A, also speaks of the sum of Rs. 17,248. 41 being "payable by you at the foot of your account", but there is no statement of account annexed. We doubt if the company judge would have been able to make a valid order on this petition if the company judge would have been able to make a valid order on this petition if the company had not appeared. However, in the case before us, the fact that the petition does not contain this information has no longer any relevance because, as we have mentioned, on the 5th of September, 1973, counsel for the company made statement before the company judge that the company admitted the claim of the petitioner as mentioned in the31 ) NOW, assuming that some of the bills had not been received or that there was a dispute in respect of two sums of Rs. 1,337 and Rs. 2,352, the company has clearly failed to explain how it can be maintained that there was any dispute, far from being a bona fide dispute, with regard to the balance amount which is, in any event, in excess of the statutory figure of Rs. 500. We have already stated that when the petition came up for admission before the company judge on the 5th of September, 1973, an express and unqualified admission of the petitioners claim was made by the company through its counsel and this admission was duly recorded by the company judge. We have also mentioned that certain consent terms were arrived at between the parties and were signed by the concerned attorneys but were not taken on record. Whatever may have been the reason for this clear admission of the liability which followed, we find it difficult to entertain any argument that there was any dispute, much less a bona fide dispute, so as to affect the ground on which the petition for winding up was filed. In these circumstances, we must hold that thehas proved its case against the company for a winding up order. But whether an order for winding up should be made or not is another40 ) THE affidavit does not disclose a debt, it merely talks of a claim for excess payments said to have been made and forof certain articles and things. There is a further claim forof art works, blocks, film prints, etc. , and, they are stated to be of the value as mentioned. We have not understood how on these averments and on the basis of this single affidavit, without any details and without any particulars, it can be argued that Estrella Batteries ltd. are the creditors of the company and, therefore, entitled to support the petition for winding up. It requires to be noticed that as a matter of fact a petition for winding up of Estrella Batteries ltd. itself has been filed by the company and which is pending, wherein a sum of Rs. 3,00,000 has been shown as a debut due to the company from Estrella Batteries Ltd. In these circumstances, it is not possible to consider Estrella Batteries Ltd. as the creditors entitled in these proceedings to support thepetition and we shall, therefore, ignore48 ) IT is in the light of these figures that we will have to consider the wishes of the creditors as proved before us by sufficient evidence and how far regard should be paid to those wishes for the purpose of deciding whether aorder should or should not be49 ) THERE can be no doubt that the discretion granted to the court is unfettered, although it must be exercised on judicial50 ) IT is for the court to take into consideration the relevant factors and then decide whether the right of the(after it has proved its debt) to aorder must give way to the wishes of the creditors who are opposing the petition, due regard being had to the interests of the companys creditors51 ) IT is important to notice that, if the wishes of those creditors who are opposing the petition for winding up is based on grounds which the court considers reasonable, then due regard must be given to those wishes. In In re A. B. C. Coupler and Engineering Co. Ltd. , it was observed that :". . . . . . if it is thought right to take account of the wishes of them majority of the creditors, and if those wishes are reasonable, then the court can properly refuse at their request to make a>( 55 ) IT is true that each of the affidavits filed by the eight creditors is in similar language, but we are unable to see how they can be brushed off as "stereotyped affidavits" in the manner done by the learned company judge even if they are couched in the same language. There is no logic in saying that every creditor in order to express a similar wish and give similar reasons should have used different language. In out view, it is the substance that will sound and not the56 ) THE learned company judge seems to have been of the view that the reasons which we have set out on the basis of which the eight supporting creditors have expressed their wish that the company should not be wound up are mere statements and cannot be of any avail for the purpose of overriding the petitioners right to an order for57 ) NOW, the words of section 557 of the Companies Act, 1956, are to out mind very clear. The court has to have regard to the wishes of the creditors and those wishes must be proved to the court by any sufficient evidence. We have before us affidavits of these eight creditors who have indicated in no uncertain terms that their wish is that the company should not be wound up. It is, therefore, now for the court to determine if the wishes of the creditors are based on grounds which may be considered to be58 ) THERE can be no dispute that the court must have regard to these wishes if they are based on good and valid grounds. It is not as if there has to be a head count. The number of such creditors and value of the debts do not by themselves matter. But, before the views of the minority of creditors can claim to override the wishes of the majority, they must at least show some good reasons for the attitude they have adopted.( 59 ) IT has been argued that mere statements made by the supporting creditors are not sufficient but in addition to expressing their wishes they must give adequate reasons for justification of these wishes. This would be true in a sense, but the real question is not whether the creditors themselves provide the reasons but whether such reasons exist and can be ascertained from the material on60 ) NOW, we have seen that the creditors have given three reasons in their affidavits and the first and foremost reason given by them is that, according to them, the company is commercially solvent and this fact they have ascertained from theand other statements of accounts of the company. The learned company judge found this statement insufficient and he has in his judgment said that such a statement can be of no avail. But we have on record sufficient material to come to a finding that the company appears to be commercially solvent. It does not matter whether this material has been placed on record by the creditors or by the company. What is important is that the material is there. Now, the relevant material is to be found in the affidavit of Derek Freitus, managing director of the company, in reply to the petition dated the 21st of January, 1974. In exhibit C annexed to the affidavit the assets of the company in the form of book debts amounting to about Rs. 13,00,000 have been set out and a list of the persons from whom the debts are due have been set out. There is nothing to show that these outstanding will not in due course be realised. Then, there is a reference to payments made during the period from April, 1973, to December, 1973, and these show that a sum of Rs. 8,43,761 was paid to the press; Rs. 4,75,623 was paid to various suppliers; and Rs. 5,65,807 were expended for salaries and other61 ) EXHIBIT S to the affidavit shows that a sum of nearly Rs. 19,00,000 were received as payments from the companys clients during the period from April to December, 1973, and exhibit P to the affidavit shows that the billing of the company was nearly Rs.62 ) WE have also now before us theof the company for the period ending 31st march, 1973, which has been filed along with an affidavit as directed by this court on the 14th of march, 1974. The trial balance for the year ended 31st March, 1974, has, however, not been filed.( 63 ) MR. Korde, appearing for Turner Hoare and Company Ltd. , made a brave attempt to show to us that thisitself demonstrated that the company was commercially insolvent. We have gone through the various items which were shown to us, but we find ourselves unable to agree with such a view. In fact, what Mr. Korde wanted to show to us was not that the company was insolvent but that the company assets fell short of the companys liabilities. Now, the fact that the companys liabilities exceed the assets does not necessarily show that the company is unable to pay it debts. It may still be in a position to meet the demands of the creditors as and when64 ) MR. Korde was attempting to show that the company was in such a bad financial situation that the wishes of the creditors that the company should not be wound up is not reasonable. We are unable to agree. On our reading of the companys financial position and on consideration of the material on record, we find that it is not unreasonable for the creditors who have nearly Rs. 7,60,000 at stake to say that the company should not be wound65 ) IT requires to be stated that our discussion as to the financial condition is not for the purpose of ascertaining whether the company is liable to pay its debts. Where a petition is based onwith a statutory notice such a question does not arise. But if, as we have found, the company is commercially solvent, then if furnishes a ground, among others, for the wishes of the creditors that such a company should not be wound66 ) AN analysis of the wishes of the creditors who include the Indian and Eastern Newspaper society Ltd. really shows that what these creditors wish is that the company should continue because it is still in a viable position and these creditors have full faith and confidence in the management of the company and because of that they expect that, if the company is allowed to continue and do its normal business, there is a reasonable expectation that, in the near future, the creditors will receive full payment of the amounts now due to67 ) IN this view of the matter we find not only that the wishes of these creditors who have a sufficiently large stake in the company appear to be reasonable but that their wishes are supported by evidence on68 ) THE learned company judge ought not, on the facts of this case, to have made aorder. He was, in our view, in error when he considered the reasons given in the affidavits of these creditors as mere statements without any69 ) IF the reason given by the creditors that the company is commercially solvent is borne out by the record, then we are unable to agree that it is a bare statement.( 70 ) AS to the question of "full faith and confidence in the management of the company", it requires to be noticed that in a conceivable case where the shareholders and creditors of the company lose faith in the management and it is shown to the court that there is a lack of probity, then it would furnish a ground for the winding up of the company under the just and equitable clause. (See Rajhamundry Electric Supply Corporation Ltd. v. Nageswara Rao71 ) WE do not see why an expression of faith in the management should not be a reason and a justifiable reason for a creditor to say that the court should allow the company to continue its business and not wind it up. A mere wish of this type may not always be enough, but it is a factor which must be considered by the court in the light of the facts and evidence placed on72 ) IT is also to be remembered that the Supreme Court has laid down in Madhusudan gordhandas and Co. v. Madhu Woollen Industries Pvt. Ltd. that one of the consideration before the court is the interest of all concerned and if the court comes to the conclusion, on the circumstances of each case, that it would not benefit theor the companys creditors generally if the company is ordered to be wound up, the court can refuse to order a winding up. The learned company judge was also in error in not taking this factor into consideration at73 ) WE are satisfied that the wishes of the eight creditors to whom the company is indebted in the sum of Rs. 7,80,000 have been proved to the court by sufficient evidence on record. They are based on valid grounds and clearly enable the court to come to the conclusion that due regard be given to thesewe do not think that the material on record is really sufficient to prove mala fides of theor Turner Hoare and Company Ltd. , even though there is some litigation between the parties which is being fought out. In any event, as held by this court in bachharaj Factories Ltd. v. Hirjee Mills Ltd. , the motive of the petitioners in presenting the application for winding up of the company is irrelevant, provided the necessary materials have been placed before the court which would satisfy the court that the petitioners have made out a case. In the matter before us the petitioning creditors had given a notice under section 434 (a) of the Companies Act, 1956, which was not even replied to. In these circumstances, the petitioning creditors were at least entitled in law to approach the court by filing a petition for winding up. Even if thehave the support of Turner Hoare and Company Ltd. , for the reasons alleged or otherwise, it would not later the77 ) NOW, we have already held that the wishes of the eight creditors that the company should not be wound up are based on good and reasonable grounds in the circumstances of the case and we are also of the opinion that it would not be to the benefit of either theor the companys creditors generally that the company should be wound up. This is particularly so because each of the supporting creditors is to be immediately paid off or provided80 ) APART from the fact that this also shows that the company cannot be said to be commercially insolvent as the creditors supporting thewould have us hold, this sum of money is immediately available for paying the debts of all the creditors who have either filed their own petitions or have supported this petition.( 81 ) THERE can be few arguments more persuasive to show that it is not in the interests of theand those supporting the petition to wind up the company than the argument that theand the supporting creditors are to be paid their debts in full immediately, which can never be the situation if a winding up order was to be made.