Case: Lanyard Foods Limited Vs. China Shipping Development Company Limited &amp; Another

3. For recovery of certain sums, the respondent instituted a legal proceeding against the appellant in June 2003 in the High Court of Justice, Queens Bench Division, Commercial Court, U.K. As the appellant failed to appear in the proceeding by a judgment and order dated 13th January 2004, the English Court granted a summary judgment in the sums of US$ 44,65,890.26, US$ 2,69,324.47, UK Pounds 1,10,502.32, HK Dollars 1,85,000, SG Dollars 44,694.64 and RMB 2,41,524.00. The appellant was also directed to pay interest on those amounts at the rate of 9% p.a. A certificate dated 24th March 2004 was issued by the Master of the English Court that no appeal had been brought against the judgment and the judgment was enforceable.4. As the appellant failed to pay the amount due under the judgment of the English Court, a notice dated 11th October 2005 was issued by the respondent to the appellant under section 434 of the Companies Act 1956 (for short "the Act") calling upon it to pay the amount due and outstanding under the judgment of the English Court. The appellant neither paid the money nor sent any reply to the notice. Thereupon petition for winding up was filed by the respondent against the appellant interalia on the ground that (i) that the appellant was liable to pay to the respondent a sum of Rs.26,99,67,511/due under the order of the English Court which it had failed to pay and appellant was therefore deemed to be unable to pay its debts and (ii) even otherwise the appellant was unable to pay its debts in as much as the accumulated losses of the company aggregated to Rs.225.94 crores, the net assets were negative at minus Rs.153.76 crores, the liabilities of the appellant to its customers were to the extent of Rs.166 crores and to its bankers and other secured creditors were 49.07 crores and the appellant was commercially insolvent.5. The appellant appeared before the learned Company Judge and contested admission of the winding up petition as well as the prayer for appointment of the Official Liquidator as the provisional liquidator. By the impugned judgment, the learned Single Judge accepted the contention of the respondent that the respondent was unable to pay its debts. He also held that the amount due and payable by the appellant to the respondent under the judgment of the English Court was not paid despite the notice of demand served on the appellant and therefore appellant was deemed to be unable to pay its debts as provided under clause (a) of(1) of section 434 of the Act. He therefore admitted the Company Petition and also appointed Official Liquidator as the provisional liquidator for the appellant company.

Court's reasoning:
8. In our view, in the facts and circumstances of the case in hand, it is not necessary to consider whether a creditor whose claim has culminated into a decree and who has become a decree holder is entitled to file a petition for winding up under clause (a) of(1) of section 434 on failure of the company to pay the decretal amount within the statutory period on service of a demand notice or is required to resort to and file the petition only under clause (b) of(1) of section 434 of the Act on execution or any process issued on a decree being returned unsatisfied. In paragraph no.21 and 22 of the Company Petition, the respondent has averred the facts which disclose that the appellant company is clearly commercially insolvent and is unable to pay its debts. Contents of paragraph nos.21 and 22 of the petition has been extracted in detail in paragraph no.10 of the impugned judgment. The learned Judge has also noted that in its affidavit in reply, the appellant has not denied the averments made in paragraph nos.21 and 22 of the Company Petition and therefore they are deemed to be admitted. In paragraph no.22 of the Company Petition, the respondent has clearly averred theThe appellant company has accumulated losses aggregated to Rs.225.94 crores.(b) Sales income of the appellant has come down drastically to Rs.11.83 crores from 123.78 crores in the previous year.(c) No provision is made by the appellant for interest liability on loans and dues of foreign creditors due to which loss for the year is understated in the profit and loss account.(d) Losses have resulted in the net worth of the appellant being completely eroded. A reference was filed by the appellant to the BIFR under the provisions of Sick Industrial Companies Act, 1985 2985.(g) Appellants cash flow was negligible and effectivelyAppellants current assets were negative at Rs.153.76 crores.(i) Appellants foreign creditor, Shweta International Pvt.Ltd. had filed a suit against the appellant for recovery of Rs.140 crores.(j) The liability of appellant to the creditors/customers alone (excluding bankers and others) was Rs.166 crores.(k) Appellants liabilities to its bankers and other creditors was Rs.49.07 crores.(l) Appellants bankers viz. State Bank of Saurashtra and Punjab National Bank had recalled the loan facilities and had filed proceedings before Debt Recovery Tribunal, Mumbai.9. None of the allegations made above were denied by the appellant in the affidavit in reply and must therefore be deemed to have been admitted. They disclose that the company has negative the net worth, the cash flow is negligible and effectively negative. Its business has practically come to a stand still. They also disclose that the creditors are to the extent of several hundreds of crores of rupees and that the substratum of the company has disappeared. Nothing was brought on record to show that the financial difficulties were only temporary and given some time. The appellant had the means of repaying the debts. No scheme for rehabilitation was sanctioned by the BIFR under the Sick Industrial Companies Act. In the circumstances, even without even resorting to the deeming provision about the inability of a company to pay its debts made under section 434 of the Companies Act, it must be held that the respondent had established that appellant is unable to pay its debts. Clause (e) of section 433 of the Act provides that the company may be wound up if it is unable to pay its debts. Section 434 of the Act only provides a few circumstances under which a presumption is drawn about the inability of a company to pay its debts. If the circumstances enumerated in section 434 of the Act exist it would be deemed that the company is unable to pay its debts. In our opinion, it is open for the creditor to prove without resorting to the fiction under section 434 of the Act that a company is unable to pay its debts. Of course in the absence of presumption under section 434 of the Act the burden of proving that the company is unable to pay its debts would be heavy when the company contests the claim of the creditor that the company is unable to pay its debts. The court would be slow to infer and hold that the company is unable to pay its debt and would ask for a strict proof. However in the present case, in the light of the averments made in paragraph no.21 and 22 of the petition which have not been denied by the appellant company, we are satisfied that the respondent has discharged the burden and proved appellant company is commercially insolvent and is unable to pay its debts.