This Company Petition is filed under Sections 433 and 434 of the Companies Act, 1956 (for short "the Act") for winding up the respondent for non-payment of the alleged debt.
The respondent was incorporated under the Act on 26-5-1995. Its registered office is situated at Suryachakra House, Jubilee Hills, Hyderabad, within the territorial jurisdiction of this Court. The authorised share capital of the respondent is stated to be Rs.17,50,00,000/- and the paid up share capital is Rs.12,02,05,000/-. The objects of the respondent, as per its Memorandum of Association and to the knowledge of the petitioner, are as under:
'To generate, harness, develop, accumulate, distribute and supply electricity by setting up Bio-mass combustion based power plants by use of rice husk, paddy straw or woody biomass, agricultural waste and thermal power plants by use of liquid, gaseous or solid fuels for the purpose of light, heat, motive power and for all other purposes for which electric energy can be employed. To carry on and generate power supply either by hydro, thermal, gas, air, diesel oil or through renewal energy such as solar, photo voltaic, wind mill or by non-conventional means and or any other team transit, distribute, supply Central/State Governments, or private companies or electricity Boards to industries and to Central/State Governments, other consumers of electricity including for captive consumption or for any industrial projects promoted by this Company or promoter companies, and generally to develop, gene accumulate power at any other place or places and to transmit, distribute, sell and supply such power.
To construct, establish, operate, manage power stations, boiler houses, steam turbines, switch yards, transformer yards, sub-stations, transmission lines, accumulators, work shops and all such works necessary for generating, accumulating, distributing and supply of electricity. To construct, lay down, establish, fix, erect, equip and maintain power generating machinery equipments and cables, computer and control equipments, transmission lines, accumulators, fittings and apparatus in the capacity of principles, contractors or otherwise.'
M/s. Indiabulls Infrastructure Credit Limited (IICL) sanctioned loan facility of Rs.35 crores to the respondent for taking over the existing loans and augmenting working capital requirement. The respondent evidently approached M/s. Indiabulls Financial Services Limited (IFSL) for sanction of loan of Rs.50 crores to facilitate repayment of the loan received from IICL and also for augmenting its working capital. IFSL has issued sanction letter dated 28-3-2012 for the loan of Rs.50 crores to the respondent. On 29-3-2012, the Board of Directors of the respondent passed resolution for availing the loan facility of Rs.50 crores from IFSL. On 30-3-2012, loan agreement was entered into between IFSL on the one side, the respondent as the borrower and M/s. Bhuvana Engineers and Consultants Pvt. Ltd. (BECPL) as co-borrower, on the other. Several documents including pledge/charge agreement by M/s. Suryachakra Power Corporation Limited and also an undertaking for credit of benefits, declaration and acknowledgement concerning deposit of title deeds, deed of hypothecation on the power project at Khajuri village, Baloda Bazar, Raipur District, Chattisgarh, demand promissory note and letter of continuity for demand promissory note executed by the respondent and the co-borrower and deeds of guarantees executed by the Directors of the respondent have been executed by and on behalf of the respondent. In pursuance of the request letters dated 30-3-2012, 7-5-2012, 27-7-2012, 27-9-2012 and 26-12-2012 sent by the respondent to IFSL, an amount of Rs.45,24,63,899/- was disbursed by the latter to the former. The respondent defaulted in payment of instalments to IFSL. It has approached the Board for Industrial and Financial Reconstruction (BIFR) vide reference No.61/2012.
IFSL entered into a scheme of arrangement with the petitioner herein for its amalgamation. By order dated 12-12-2012 in C.P.No.457/2012, the Delhi High Court has sanctioned the scheme of arrangement wherein all the assets and debts, outstanding credits, liabilities, duties and obligations of IFSL stood transferred to the petitioner-company on a going concern basis. The scheme of arrangement became effective from 1-4-2012.
As the respondent continued its defaults in repayment of the loan instalments, the petitioner has caused notice dated 7-6-2013 issued under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (for short 'the SARFAESI Act') calling upon the respondent to pay a sum of Rs.4,07,51,719/- towards 'pending instalments and other overdue amounts' within seven days of the receipt of the notices, failing which the petitioner shall proceed further under the SARFAESI Act. Simultaneously, the petitioner approached the Delhi High Court by filing OMP No.923/2013 under Section 9 of the Arbitration and Conciliation Act, 1996 (for short 'the 1996 Act') for interim measures. By order dated 16-9-2013, the Delhi High Court restrained the respondent and others from creating any third party interests in the power project located at Khajuri village, Baloda Bazar, Raipur District, Chattisgarh, besides directing that the receivables related to the said power project be deposited with the court along with a complete statement of account. By order dated 17-7-2013, the BIFR has dismissed reference No.61/2012.
A few days thereafter, i.e., on 23-7-2013, the petitioner caused notice under Section 13(2) of the SARFAESI Act on the respondent whereunder it was informed that the latter failed to repay the instalments along with interest and other charges as stipulated in clause-5 of the loan agreement dated 30-3-2012, Sr.No.4 and Sr.No.17 of the Schedule attached thereto, as a result of which interest and/or instalments of principal have remained overdue for a period of more than 90 days and the debt was reclassified as Non-Performing Asset (NPA) in accordance with the guidelines issued on the Assets Classification by the National Housing Bank (NHB). That as per the statement of account maintained by the petitioner in the ordinary course of business, Rs.55,58,18,414/- by way of outstanding principal, arrears and interest till 22-7-2013 along with future interest @ 17.5% per annum and other charges with effect from 23-7-2013 is still due and payable and that in addition to the said payment, the respondent is also liable to pay interest and penal interest due in future till the entire outstanding dues are paid. By the said notice, the petitioner called upon the respondent to repay the amount outstanding as on 22-7-2013 along with future interest @ 17.5% per annum and other charges w.e.f. 23-7-2013 in terms of the loan documents till actual date of payment within 60 days of receipt of the notice, together with any interest and penal interest which may fall due, failing which the petitioner will exercise its power provided under the SARFAESI Act. The notice also informed the respondent that if it fails to comply with the demand of repayment, it will take the following measures to recover the secured debt :
a) Take possession of the Secured Assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the Secured Assets;
b) Take over the management of the Hypothecated Assets, the Secured Assets of the borrower including the right to transfer by way of lease, assignment or sale and realise the secured asset;
c) Appoint any person, to manage the Secured Assets the possession of which has been taken over by the secured creditor;
d) Require at any time by notice in writing, any person who has acquired any of the Secured Assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the Secured Debt.
The petitioner has also indicated that the said notice is without prejudice to its right to initiate appropriate legal proceedings before the appropriate courts and/or tribunals for recovery of the outstanding amounts and also without prejudice to its right for undertaking prosecution of any complaint filed by it under Section 138 of the Negotiable Instruments Act, 1881 (for short 'the 1881 Act').
As the respondent failed to respond to the said notice issued under the SARFAESI Act, the petitioner has issued the statutory notice under Section 433 and 434 of the Act without prejudice to its right to initiate/institute/continue the requisite recovery proceedings or any other legal proceedings before the court/tribunal in accordance with the law of the land.
On 22-10-2013, the petitioner caused statutory notice under Section 13(4) of the SARFAESI Act issued to the respondent for taking symbolic possession of the properties under mortgage. On 14-11-2013, the petitioner has put the mortgaged property to auction by causing paper publication of the auction notice.
The respondent has challenged the measures taken by the petitioner under the SARFAESI Act by approaching the Debt Recovery Tribunal, Hyderabad (for short 'the DRT') vide S.A.No.759/2013. By order dated 16-12-2013, the DRT directed that auction may go on but the sale shall not be finalised. On 16-12-2013, this Company Petition came to be filed.
On behalf of the respondent-company, Dr. S.M. Manepalli, one of its Directors, filed a counter-affidavit. The gist of the counter-affidavit is as under :
IICL approached the respondent and offered to take over the loans from the consortium of Banks by replacing the existing loan and augmenting the working capital. The said offer was accepted by the respondent and a sum of Rs.35 crores was sanctioned by the IICL vide IICL letter dated 28-6-2010. A substantial portion of the loan was utilised in repaying the existing loan to the consortium of banks. The loan sanctioned by IICL was secured by assets as stated in Annexure-II to sanction letter dated 28-6-2010. The respondent executed the loan agreement on 29-6-2010 in favour of IICL. The generation of power from the power plant stopped due to shortage of raw material in the market coupled with scarcity of working capital created by IICL by not honouring its promise of disbursing the same to the respondent. That IICL made the respondent to pass resolution dated 28-1-2012 for opening of running of bank account with Axis Bank, Pandri, Raipur Branch, Raipur for routing all the receivables directly to IICL. The bank account was authorised to be operated by Mr. Gopal Sharma and Mr. K.V.S. Vamsee Krishna, the officers of IICL. Thus, from 28-1-2012, the operation and maintenance of the power plant and handling of finances of the power plant was completely taken over by IICL and the respondent did not have any say in that regard since then. The taking over of the power plant by IICL was preceded by an understanding arrived at on 9-11-2011 which was reduced to minutes on the same day.
That on IFSL approaching the respondent with an offer to replace the existing loan and augmenting the working capital, the latter agreed for the said proposal leading to sanction of loan of Rs.50 crores vide IFSL’s sanction letter dated 28-3-2012. That a substantial portion of the said loan (approximately Rs.41 crores) was utilised towards repayment of the existing loan with IICL and the entire balance of the loan was utilised by IFSL for servicing the loan towards interest and other charges. That by not making the working capital available to the respondent, IFSL has created severe financial crunch which resulted in the closure of the power plant. That IFSL has made the respondent to pass two more resolutions on 10-9-2012 and 15-3-2013 to continue the management of the power plant by the aforesaid two officers representing IFSL.
That the petitioner who claims to be the successor of IFSL has initiated measures under the SARFAESI Act. The objections raised by the respondent on 10-9-2013 to the notice dated 23-7-2013 issued under Section 13(2) of the SARFAESI Act were rejected by the petitioner vide letter dated 30-9-2013. The petitioner issued possession notice under Rule 8(1) of the Security Interest (Enforcement) Rules 2002 (for short 'the 2002 Rules') on 28-10-2013 and issued sale notice dated 12-11-2013.
That the respondent assailed the legality and validity of the demand notice dated 23-7-2013, possession notice dated 28-10-2013 and sale notice dated 12-11-2013 by filing an application under Section 17(1) of the SARFAESI Act before the DRT, registered as S.A.No.759/2013 on 11-12-2013. The petitioner appeared through its counsel on 11-12-2013 before the DRT and sought time for filing counter-affidavit. The DRT adjourned the case to 16-12-2013 and after seeking adjournment before the DRT, the petitioner filed the Company Petition on 16-12-2013. By order dated 16-12-213, the DRT directed that the sale may go on but the same shall not be confirmed. The interlocutory application is pending for passing of final order.
That the petitioner has raised a preliminary objection before the DRT that it does not have jurisdiction to try the application filed by the respondent as the situs of the property is not situated within the State of Andhra Pradesh, and on the same analogy the respondent is raising a preliminary objection as to the territorial jurisdiction; that the Company Petition is an abuse of process of the Court as same is filed for the purpose of recovery of money which is already the subject matter of proceedings under the provisions of the SARFAESI Act; that it is settled principle of law that Sections 433 and 434 of the Act cannot be resorted to for recovery of money; that the statutory notice dated 8-10-2013 does not fulfil the requirement of law and Mr. B. Venkata Subbaiah who claims to represent the petitioner under Board resolution dated 26-4-2010 has no locus to file the present Company Petition as the alleged authorisation is with reference to his appointment as the Authorised Officer under Rule 2(a) of the 2002 Rules.
That the loan was sanctioned by IFSL and there is no privity of contract between the petitioner and the respondent and that therefore the provisions of Section 433 and 434 of the Act, in the absence of a contract of loan between the petitioner and the respondent, cannot be invoked. That the alleged loan documents were executed in favour of IFSL and not in favour of the petitioner and therefore the latter has no locus to file the present Company Petition.
That the security measures taken by the petitioner are subject matter of challenge before the DRT in S.A.No.759/2013 wherein an order was passed on 16-12-2013 and as the petitioner has already taken possession of the property and also steps to sell the same, the Company Petition is not maintainable.
That the amalgamation of IFSL with the petitioner is of no consequence as the same has been done without notice to the respondent and the loan sanctioned by IFSL is not covered by the scheme of arrangement sanctioned by the Delhi High Court and therefore the petitioner had not stepped into the shoes of IFSL in terms of Section 394 of the Act. The respondent relied upon the Division Bench Judgment dated 4-2-2014 of this Court in M/s. Deccan Chronicles Holdings Limited Vs. The Union of India (W.P.No.37381/2013, dt. 4-2-2014), wherein it was held that the provisions of the SARFAESI Act cannot be invoked by the amalgamated company in respect of the monies due to it and that by the same analogy the provisions of the Act cannot be invoked by the petitioner.
That having taken over the management of the power plant w.e.f. 28-1-2012, IICL has miserably failed in running the same and taken recourse to remedies under law ignoring their inaction in reviving the power plant. IICL cannot therefore be allowed to take advantage of its own mistakes. The proceedings under Section 138 of the 1881 Act are initiated by the petitioner in respect of which the respondent has approached the Punjab and Haryana High Court under Section 482 Cr.P.C. for quashing the criminal proceedings and that the same are pending. That having taken recourse to criminal law and the SARFAESI Act, the petitioner ought not to have filed the present Company Petition under the Act. The petitioner has also approached the Economic Offences Wing-1, Palam Vihar, Guargaon by filing complaint dated 16-7-2013 and the respondent is contesting the same. On this ground also the Company Petition is liable to be dismissed. That having taken recourse to the provisions of the 1996 Act, if the petitioner is permitted to pursue the present remedy, the same would render the action under the 1996 Act, nugatory.
That the respondent and the petitioner agreed on a scheme of reconstruction on 30-7-2012 which contemplates that the petitioner shall infuse capital and do other things to enable the power plant to start functioning and that having not kept up its word, the petitioner cannot be permitted to file this Company Petition.
The averments that the respondent has become commercially insolvent and is unable to pay its debts and meet its commercial commitments are denied. That the averment that balance sheet and Form-A at column No.17 Sr.No.(f) filed before the BIFR reveal that the respondent has admitted the liability of a sum of Rs.43.87 crores, is denied and the respondent does not admit any liability to the petitioner as the latter did not pay any amount to the respondent at any point of time.
The respondent, for the above mentioned grounds, requested for dismissal of the Company Petition.
Sri S. Niranjan Reddy, learned Counsel appearing for the petitioner, advanced the following submissions :
(i) That on the admitted facts of the case, the respondent owes the debt to the petitioner, who succeeded to the interests of IFSL under the scheme of arrangement sanctioned by the Delhi High Court and that as the respondent is unable to pay its debt owed to the petitioner, the former is liable for being wound up under the provisions of Section 433(1)(e) r/w. Section 434(1)(a) of the Act.
(ii) That mere initiation of other statutory proceedings under the SARFAESI Act, Arbitration and Conciliation Act and the 1881 Act for recovery of the debt, does not constitute a ground for rejection of the petition under the Act for winding up of a company for its inability to pay its debts.
(iii) That the balance sheet filed by the respondent as Annexure-I in Form-A before the BIFR would without any doubt show that its accumulated losses are Rs.5296 lakhs as on 31-3-2012, which clearly shows that it is commercially insolvent and unable to pay its debts to its debtors and that therefore this is an eminently fit case for ordering winding up of the respondent.
Opposing the above submissions, Sri P.S. Rajasekhar, learned Counsel for the respondent, made the following submissions :
(i) That having taken recourse to the jurisdiction under the special laws such as SARFAESI Act, the 1996 Act and the 1881 Act, the petitioner is estopped from invoking the discretionary jurisdiction of this Court under the Act.
(ii) That the proceedings under the SARFAESI Act are pending before the DRT and in view of Section 35 of the SARFAESI Act, the provisions of the said Act have overriding effect over all other Acts and therefore the petitioner’s winding up petition is not maintainable in view of the pendency of the proceedings under the SARFAESI Act.
(iii) That the petitioner has contemplated initiation of proceedings under the Arbitration and Conciliation Act and obtained an interim order under Section 9 of the Act from the Delhi High court and as the whole dispute is under reference to arbitration, even before an award is passed, the disputed debt cannot be enforced by taking recourse to the provisions of the Act and no petition for winding up of the company for enforcement of such debt could be filed.
(iv) That the petitioner moved the jurisdiction under the Act with a malafide intention to coerce the respondent into payment of the debt and this Court will not exercise its discretionary jurisdiction to enable the petitioner to further such malicious intentions.
Before considering the respective submissions of the learned Counsel for the parties, let me briefly discuss the legal position with regard to the scope of winding up proceedings under Sections 433 and 434 of the Act.
Section 433 (Section 433 : A company may be wound up by the Tribunal – (a) if the company has, by special resolution, resolved that the company be wound up by the Tribunal; (b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting; (c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year; (d) if the number of members is reduced, in the case of a public company, below seven, and in the case of a private company, below two; (e) if the company is unable to pay its debts; (f) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up; (g) if the company has made a default in filing with the Registrar its balance sheet and profit and loss account or annual return for any five consecutive financial years; (h) if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality; (i) if the Tribunal is of the opinion that the company should be wound up under the circumstances specified in Section 424G;
Provided that the Tribunal shall make an order for winding up of a company under clause (h) on application made by the Central Government or a State Government.) of the Act envisages the grounds for winding up of a company. The present Company Petition is concerned with the ground mentioned in clause (e) of the said provision. Under this clause, a company may be wound up if it is unable to pay its debts. Section 434 (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 be reasonable satisfaction of the creditor; (b) if execution or other process issued on a decree or order of any Court or Tribunal in favour of a creditor of the company is returned unsatisfied in whole or in part; or (c) if it is proved to the satisfaction of the Tribunal that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the tl shall take into account the contingent and prospective liabilities of the company.
(2) The demand referred to in clause (a) of sub-section (1) shall be deemed to have been duly given under the hand of the creditor if it is signed by an agent or legal adviser duly authorised on his behalf, or in the case of a firm, if it is signed by any such agent or legal adviser or by any member of the firm.) of the Act explained as to what constitutes the inability of a company to pay its debts. The main ingredients to be satisfied for ordering winding up of a company for its inability to pay its debts are, (i) if it is shown that the company is indebted in a sum exceeding Rs.500/- (though the amount is enhanced to Rs.1 lakh by Companies (Second Amendment) Act, 2002, the same is not notified) and despite service of notice on it by a creditor by assignment or otherwise, it has neglected to pay the same for more than three weeks after such service or to secure or to compound for it to the reasonable satisfaction of the creditor, and (ii) if the execution or other process issued on a decree or order of any Court or Tribunal in favour of a creditor of the company is returned unsatisfied in whole or in part. The scope of these provisions is well explained in a catena of Judgments of the Apex Court. In M/s. Madhusudan Gordhandas & Co. Vs. Madhu Woollen Industries Pvt. Ltd. ((1971) 3 SCC 632), the Supreme Court held that in the matter of winding up of a company for non-payment of its debts, two rules are well settled for refusing an order of winding up – first, if the debt is bona fide disputed and the defence is a substantial one; second, where the defence is likely to succeed in point of law and that the company adduces prima facie proof of facts on which the defence depends. It was further held that while considering the winding up of a company for its inability to pay its debt, the Court will consider the wishes of its creditors and may decline to make the winding up order by attaching greater weight to their views. The Supreme Court also held that winding up order will not be made on a creditor’s petition if it would not benefit him or the company’s creditors generally. Referring to the Judgment in Tweeds Garages Ltd., Re ((1962) Ch. 406 : 1962 Comp. Cases 795 (Ch.D)), the Court held that where there is no dispute that the company owes the creditor a debt entitling him to a winding-up order but the exact amount of the debt is disputed, the court will make a winding-up order without requiring the creditor to quantify the debt precisely.
In Amalgamated Commercial Traders (P) Ltd. Vs. A.C.K. Krishnaswami and another (1965(35) Comp. Cases 456 (SC)), the Apex Court held that a winding up petition is not a legitimate means to seek enforcement of payment of debt which is bonafide disputed by the company and that a petition presented ostensibly for a winding up order, but really to exercise pressure will be dismissed and under the circumstances may be stigmatised as a scandalous abuse of the process of Court.
In Pradeshiya Industrial & Investment Corporation of U.P. Vs. North India Petrochemicals Ltd. ((1994) 3 SCC 348), following the Judgment in Madhusudan Gordhandas (4-supra) and Amalgamated Commercial Traders (6-supra) the Supreme Court held that the defence of plea of denial of debt must be a substantial one and not a mere moonshine.
In Mediquip Systems (P) Ltd. Vs. Proxima Medical System GmbH ((2005) 7 SCC 42), and also in Vijay Industries Vs. NATL Technologies Ltd. ((2009) 3 SCC 527), the Supreme Court reiterated the principle that the plea of denial of debt must be a substantial one and not a mere cloak or moonshine.
In IBA Health (India) Pvt. Ltd. Vs. Info-Drive Systems SDN.BHD. ((2010) 10 SCC 553), the Supreme Court, at para-20, held
'….A dispute would be substantial and genuine if it is bonafide and not spurious, speculative, illusory or misconceived. The Company Court at that stage of a winding-up petition is not expected to hold a full trial of the matter. It must decide whether the grounds appear to be substantial. The grounds of dispute must not consist of some ingenious mask invented to deprive a creditor of a just and honest entitlement and must not be a mere wrangle.'
It was further held :
'…It is settled law that if the creditor’s debt is bona fide disputed on substantial grounds, the court should dismiss the winding-up petition and leave the creditor to first establish his claim in an action, lest there is danger of abuse of winding-up procedure. The Company Court always retains its discretion, but a party to a dispute should not be allowed to use the threat of winding-up petition as a means of forcing the company to pay a bona fide disputed debt.'
While repelling the contention that as the debtor company was commercially solvent, the said ground is sufficient to reject the petition for winding up, the Supreme Court held that a determination of examination of the company’s insolvency may be an useful aid in deciding whether the refusal to pay is a result of the bona fide dispute as to liability or whether it reflects an inability to pay; that in such a situation, solvency is relevant not as a separate ground; that if there is no dispute as to the company’s liability, solvency of the company might not constitute a stand alone ground for setting aside a notice under Section 434(1)(a), meaning thereby, if a debt is undisputedly owing, then it has to be paid; that if the company refuses to pay on no genuine and substantial grounds, it should not be able to avoid the statutory demand; that law should be allowed to proceed and if demand is not met and an application for liquidation is filed under Section 439 in reliance of the presumption under Section 434(1)(a) that the company is unable to pay its debts, the law should take its own course and the company, of course, will have an opportunity on the liquidation application to rebut that presumption.
A slew of Judgments have been rendered by the Apex Court and various other High Courts on these legal principles. In his pains taking Judgment in Krishna Kilaru and another Vs. Maytas Properties Limited ((2013) 176 Comp. Cases 483 (A.P.)), Ramesh Ranganathan.,J delved into various facets of the law relating to winding up of a company for non-payment of debt. This Court does not intend to burden this Judgment by referring to all of them. From the various judicial pronouncements, some of which are referred to above, the following legal principles are deducible :
1. If the debt is bona fide disputed and the defence is a substantial one, the Court will not wind up the company. Conversely, if the plea of denial of debt is a moonshine or a cloak, spurious, speculative, illusory or misconceived, the Court can exercise the discretion to order the company to be wound up.
2. A petition presented ostensibly for winding up order, but in reality to exert pressure to pay the bona fide disputed debt is liable to be dismissed.
3. Solvency is not a stand alone ground. It is relevant to test whether denial of debt is bonafide.
4. Where the debt is undisputed and the company does not choose to pay the particular debt, its defence that it has the ability to pay the debt will not be acted upon by the Court.
5. Where there is no dispute regarding the liability, but the dispute is confined only to the exact amount of the debt, the Court will make the winding up order.
6. An order to wind up a company is discretionary. Even in a case where the company’s inability to pay the debt was proved, order to wind up the company is not automatic. The Court will consider the wishes of shareholders and creditors and it may attach greater weight to the views of the creditors.
7. A winding up order will not be made on a creditor’s petition if it would not benefit him or the company’s creditors generally and the grounds furnished by the creditors opposing winding up will have an impact on the reasonableness of the case.
Let me now consider whether in the light of the above noted settled legal principles, the petitioner has made out a case for admission. Before proceeding further, it needs to be noted that for the present, this Court is concerned with the question whether the Company Petitions deserve to be admitted or not. Unlike other cases, admission of a Company Petition will have serious adverse effects on stakeholders such as shareholders, customers and creditors of the company concerned. Therefore, this Court needs to consider whether the petitioner has not only made out a prima facie case of the respondent’s inability to pay the debt, but also whether it is desirable on the facts of the case that the Company Petition is admitted.
The fact that the respondent owes money to the petitioner is not in dispute. One of the objections raised by the respondent is that there is no privity of contract of loan between it and the petitioner. It is the pleaded case of the respondent that it is the IFSL which has advanced the loan which has become outstanding and that the petitioner not being a privy to the loan transaction, cannot seek enforcement of the debt and consequently it cannot maintain the present Company Petition. To buttress this plea, the learned Counsel placed reliance on the Judgment of Division Bench of this court in M/s. Deccan Chronicle Holdings (1-supra). Opposing this submission, Sri S. Niranjan Reddy, learned Counsel for the petitioner has drawn this Court’s attention to the order of the Delhi High Court dated 12-12-2012 in C.P.No.457/2012 and contended that with the approval of the scheme of arrangement by the Delhi High court, the whole of the undertaking, properties, rights and powers of IFSL (amalgamating company) stand transferred to and vest in the petitioner (amalgamated company) without any further act or deed. Therefore, contends the learned counsel, the petitioner has stepped into the shoes of IFSL under the approved scheme of amalgamation.
In M/s. Deccan Chronicle Holdings (1-supra), IBFSL advanced the loan to the petitioner therein. Later, IBFSL got merged with M/s. Indiabulls Housing Finance Limited (the petitioner herein) in C.P.No.457/2012 referred to supra, w.e.f. 8-3-2013. Respondent No.4 therein has got itself registered under the SARFAESI Act and soon after the merger of IBFSL, the petitioner herein has initiated proceedings under the SARFAESI Act against the petitioner therein in respect of the loans that were borrowed from IBFSL. It was contended on behalf of the petitioner therein that IBFSL from which the loan was obtained was not registered as a financial company under Section 3 of the SARFAESI Act and that the mere fact that the said agency has merged with its sister concern, the petitioner therein cannot bring about any change in the relations between themselves and IBFSL. The Division Bench held that the petitioner therein having chosen to obtain loan from IBFSL which did not register itself as a financial company under the SARFAESI Act, its interest cannot be jeopardised by invoking the provisions of the SARFAESI Act by the petitioner herein in which IBFSL after advancing the loan has got itself amalgamated. It has come out at the hearing that this Judgment is questioned in S.L.P. Be that as it may, the said Judgment has no relevance to the case on hand as this case does not arise under the SARFAESI Act.
While approving the scheme of amalgamation, the Delhi High Court in its order dated 12-12-2012 in C.P.No.457/2012 inter alia ordered, at para-19, as under :
'In view of the approval accorded by the equity shareholders, secured creditors and unsecured creditors of the petitioner Companies, Representation Affidavit filed by the Regional Director, Northern Region, to the proposed Scheme, there appears to be no impediments to the grant of sanction to the Scheme. Consequently, sanction is hereby granted to the Scheme under Section 391-394 of the Companies Act, 1956. The petitioner companies will comply with the statutory requirements in accordance with law. Certified copy of the order be filed with the Registrar of Companies within 30 days from the date of receipt of the same. In terms of the provisions of Sections 391-394 of the Companies Act, 1956 and in terms of the Scheme, the whole of the undertaking, properties, rights and powers of the petitioner/Amalgamating Company be transferred and vest in the petitioner/Amalgamated without any further act or deed. Similarly, in terms of the Scheme, all liabilities and duties of the petitioner/Amalgamating Company can be transferred to the petitioner/Amalgamated Company without any further act or deed. Upon the Scheme coming into effect, the Petitioner/Amalgamating Company shall stand dissolved without winding up. It is however clarified that this order will not be construed as an order granting exemption from payment of stamp duty or taxes or any other charges, if payable, in accordance with any law or permission/compliance with any other requirement which may be specifically required under any law.'
The remedy under the Act under Sections 433 and 434 was very much available to IFSL even if it had not been amalgamated. Therefore, the respondent has not suffered any additional disadvantage on account of amalgamation by being subject to winding up proceedings by the amalgamated company i.e., the petitioner herein. On the contrary, the petitioner having stepped into the shoes of IFSL under the statutory scheme sanctioned by the Delhi High Court, is legally entitled to maintain the present winding up petition. This submission is accordingly rejected.
The sheet anchor of the case of the respondent is that having availed the remedies under the SARFAESI Act and the 1996 Act, the petitioner is not entitled to invoke the jurisdiction of this Court under the provisions of the Act for winding up of the respondent. In support of his plea, the learned Counsel placed heavy reliance on the Judgment of a learned single Judge of this Court in Maharashtra Apex Corporation Ltd. Vs. Spartex Ceramics India Ltd. (2004(5) ALD 316), and a Judgment of another learned single Judge of this Court in Shapoorji Pallonji Finance Ltd. Vs. Shree Rayalaseema Alkalies and Allied Chemicals Ltd. (2005(4) ALD 403). Taking the second referred case first, in that case, the creditor which filed the application for winding up before this Court has also initiated arbitration proceedings. One of the defences of the respondent therein was that in the absence of admitted liability, initiation of winding up proceedings under the Act is not sustainable as the dispute is already referred for arbitration. Relying upon a Division Bench Judgment of this Court in Vijayalakshmi Vs. Hari Hara Ginning and Pressing ((1999) 96 Company Cases 723), the learned Judge observed:
' … But a perusal of those decisions clearly provides that if there is no dispute as to the liability and if there is an admitted debt, then a proceeding under Section 433 of the Act would lie seeking for an order of winding up. But, on the other hand, if the debt is disputed and if it requires adjudication, then a proceeding under Section 433 would not lie. This view is supported by the decision of a Division Bench of this Court in Vijayalakshmi Vs.Hari Hara Ginning and Pressing (supra), wherein it was held that if a matter requires adjudication of the disputed facts, where, in fact, a civil suit was filed by the alleged creditor, it was held that a petition under Section 433 of the Companies Act, 1956 would not lie. In the present case, admittedly, the matter was referred for arbitration for adjudication. Though the petitioner contended that there is an admitted liability, but nowhere the respondent admitted such liability. It was not the case of the petitioner that the respondent had admitted its liability to the petitioner in its books of accounts or was there any communication by the respondent to the petitioner admitting the liability….' (Emphasis added)
The above extract of the Judgment would reveal that the winding up petition was rejected by this Court on the ground that the liability was not admitted and that the dispute was the subject matter of arbitration. The learned Judge, however, observed, in line with the settled legal principle, that if there is a dispute as to the liability or if there is an admitted debt, then a proceeding under Section 433 of the Act would lie for an order of winding up of the debtor company.
In Maharashtra Apex Corporation Ltd. (12-supra), another learned Judge has however held that where once arbitration proceedings are initiated or the arbitration award is under challenge and/or where the arbitration award has not attained enforceability, it cannot be said that the debt is admitted and the company failed to discharge its debts. The learned Judge further held that when the creditor has taken up the proceedings under the 1996 Act, a company petition for winding up would not be maintainable. With due respect to the learned Judge, the legal proposition is too broadly stated in that Judgment.
Mere reference of a dispute to arbitration does not always pre-suppose that the debt is disputed by the debtor. Even non-payment of the admitted debt may also be the subject matter of arbitration dispute, for, by mere admission of the liability by the debtor, a creditor cannot recover the money unless there is a decree or award of the Court or arbitrator, as the case may be. Therefore, for recovery of even an admitted debt, a creditor may have to seek reference of the dispute for arbitration. Whether the reference of a dispute is in relation to a disputed debt or not needs to be ascertained from the pleadings of the parties to the arbitration.
The Supreme Court, in Haryana Telecom Ltd. Vs. Sterlite Industries (India) Ltd. ((1999) 5 SCC 688), while rejecting an application filed under Section 8 of the 1996 Act by the debtor-company in a winding up petition held that the power to order winding up of a company is inhered in the High Court only and that a dispute raised in a company petition cannot be referred for arbitration. Para-5 of the Judgment is worthy to be noted:
'The claim in a petition for winding up is not for money. The petition filed under the Companies Act would be to the effect, in a matter like this, that the company has become commercially insolvent, and, therefore, should be wound up. The power to order winding up of a company is contained under the Companies Act and is conferred on the court. An arbitrator, notwithstanding any agreement between the parties, would have no jurisdiction to order winding up of a company. The matter which is pending before the High Court in which the application was filed by the petitioner herein was relating to winding up of the Company. That could obviously not be referred to arbitration and, therefore, the High Court, in our opinion was right in rejecting the application.'
In Booz Allen and Hamilton Inc. Vs. SBI Home Finance Limited and others ((2011) 5 SCC 532), while holding that a suit for sale, foreclosure or redemption of a mortgaged property is an action in rem or for enforcement of a right in rem, the Supreme Court held that though such dispute is covered by arbitral clause, it is not arbitrable. In that context, the Supreme held as under :
'The Arbitral Tribunals are private fora chosen voluntarily by the parties to the dispute, to adjudicate their disputes in place of Courts and tribunals which are public for a constituted under the laws of the country. Every civil or commercial dispute, either contractual or non-contractual, which can be decided by a Court, is in principle capable of being adjudicated and resolved by arbitration unless the jurisdiction of the Arbitral Tribunals is excluded either expressly or by necessary implication. Adjudication of certain categories of proceedings are reserved by the legislature exclusively for public fora as a matter of public policy. Certain other categories of cases, though not expressly reserved for adjudication by public fora (courts and tribunals), may by necessary implication stand excluded from the purview of private fora. Consequently where the cause/dispute is inarbitrable, the Court where a suit is pending, will refuse to refer the parties to arbitration under Section 8 of the Act, even if the parties might have agreed upon arbitration as the forum for settlement of such disputes.
The well-recognised examples of non-arbitrable disputes are, (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.'
I had an occasion to deal with a similar issue in M/s. Empee Sugars & Chemicals Limited Vs. M/s. Paharpur Cooling Towers Limited (Company Application No.1190/2013 in C.P.No.180/2013, dt. 4-2-2014), wherein while rejecting an application for reference of the dispute to arbitration filed in a winding up petition, following the Judgments in Haryana Telecom Ltd. (15-supra) and Honeywell Automation India Ltd. Vs. DLF Universal Ltd. ((2008) 152 PLR 616), I have held as under:
'The Arbitration Act has been conceived with a view to facilitate parties to an agreement to settle their disputes through alternative dispute resolution mechanism. Therefore, when an agreement for resolution of the disputes through arbitration exists between the parties, if any dispute arising or in connection with the agreement is raised by a party before a Court bypassing the arbitral forum, the other party to the dispute is entitled to make an application under Section 8 of the Arbitration Act for reference of the dispute to the arbitral forum. The sine qua non for maintainability of an application under Section 8 of the Arbitration Act is that the dispute raised by one party before a forum other than the arbitral forum must be comprehended by arbitration agreement and the arbitral forum must have been conferred with the power and jurisdiction to decide such dispute.
It is indubitable that under the scheme of the Companies Act, 1956, as it now stands, the only forum which is conferred with the jurisdiction to order winding up of a company is the High Court. Therefore, the Company Petition filed under Chapter-II of the Companies Act, 1956 for winding up of the Company has to be exclusively adjudicated by the High Court and no other forum has such jurisdiction.'
I have further held :
'It is one thing to dismiss the Company Petition on its own merits if the Court feels that there is a bona fide dispute, while it is quite another thing to refer the parties to arbitration on an application made under Section 8 of the Arbitration Act merely because the debt is disputed.'
The ratio that could be culled out from these Judgments is that the High Court is conferred with the special jurisdiction to order winding up of a company for its inability to pay the admitted or undisputed debt and such a dispute cannot be decided by any other fora, such as, Civil Court Debt Recovery Tribunal under the provisions of the Recovery of Debts Due to Banks and other Financial Institutions Act, 1993 or an Arbitrator under the 1996 Act.
No Judgment was cited either before the learned Judge in Shapoorji Pallonji Finance Ltd. (13-supra) or before this Court in which it was held in absolute terms as a proposition of law that invocation of other remedies such as arbitration and the SARFAESI Act for recovery of the debt due as a ground to dismiss a petition for winding up of a debtor-company. Following the legal propositions deducible from the various authoritative pronouncements referred to above, a petition filed for winding up can be dismissed on one or more of the following grounds, namely, (a) where the debt is bona fide disputed and the defence is a substantial one; (b) where the winding up petition is presented ostensibly
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for winding up order but really to exert pressure to pay the bona fide disputed debt; and (c) where even the company’s inability to pay the debt is proved, but such winding up is not in the interests of its shareholders and creditors. In the instant cases, the debt is not disputed, nay, admitted. Therefore, mere reference of the dispute to arbitration or initiation of proceedings under the SARFAESI Act do not mean that the debt is disputed. Thus, where the debt is not disputed, the present company petitions for winding of the principal borrower and the co-borrower are very much maintainable and the same cannot be thrown out merely on the ground of the petitioner invoking other remedies for recovery of the debt. There is another angle from which this issue needs to be examined. Though, the cause for a creditor to file a winding up petition arises due to default of the debtor company, the winding up proceedings are not exclusively in the nature of recovery proceedings. The object behind the Legislature providing for a remedy under Sections 433 and 434 of the Act is not to allow a company which is in debts to carry on its activities to the detriment of the creditors and shareholders. As rightly pointed out by Sri S. Niranjan Reddy, these proceedings are akin to insolvency proceedings where the assets of the insolvent are distributed equitably among all his creditors. To hold that a winding up petition cannot be maintained or be continued if the creditor has availed other remedies for recovery of money is to frustrate the legislative object in envisaging the proceedings for winding up and to re-write the provisions of Sections 433 and 434 of the Act. With due respect, the Judgment in Shapoorji Pallonji Finance Ltd. (13-supra) does not reflect the settled legal position and therefore the same will be of no help to the respondent. With regard to the submission of the learned Counsel for the respondent that in view of Section 35 of the SARFAESI Act, the Company Petitions are liable to be dismissed, in my opinion, the said submission is wholly meritless. Section 35 of the SARFAESI Act reads as follows: 'The provisions of this Act to override other laws.- The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.' The above reproduced provision gives overriding effect to the provisions of the SARFAESI Act qua any other law in force or instrument having the effect by virtue of such law. The learned Counsel for the respondent is unable to point out any inconsistency between the provisions of Sections 433 and 434 of the Act and any of the provisions of the SARFAESI Act. The provisions of these two enactments operate in their designated fields, in that, while the SARFAESI Act enables the borrowers and other financial institutions registered under the said Act to initiate various measures for recovery of the loans advanced to the debtors, as noted above, Sections 433 r/w. Section 434 of the Act, vested a right in a creditor to seek winding up of a company for non-payment of an undisputed debt. Therefore, there is no scope for any inconsistency between the provisions of these two enactments. Indeed, no such inconsistency exists, as a fact. The only occasion on which such inconsistency may arise is when the property is sought to be liquidated by way of sale. Such a situation would not arise till the measures for sale of the property are initiated either by the Official Liquidator or by the creditor under the SARFAESI Act. I therefore hold that Section 35 of the SARFAESI Act does not bar the petitioner to institute and pursue the present winding up petitions. Lastly, the learned Counsel for the respondent submitted that due to various circumstances beyond its control, it is unable to pay its debt and that on the order passed by the Delhi High Court, all the receivables are being deposited before that Court. The learned Counsel for the petitioner stated that despite several measures undertaken by his client, it is unable to recover any part of the monies advanced to the respondent. He has invited this Court’s attention to Annexure-I in Form-A filed by the respondent before the BIFR wherein it has mentioned under column No.5(ii) that the accumulated losses of the respondent-company are Rs.5296.00 lakhs as on 31-3-2012. This document alone is enough for this Court to conclude that the respondent is running on huge losses and is caught in the vortex of legal litigation and its prospects of reviving itself appear very remote. It is premature for this Court to conclude whether the respondent may be wound up, for, such a decision will be taken only after considering the pleas and objections of the shareholders and other creditors. However, this Court of the firm opinion that the Company Petition is liable to be admitted and winding up process need to be commenced. For the above mentioned reasons, the Company Petition is admitted. The petitioner is permitted to issue advertisement in 'The Hindu' and 'Saakshi', the English and Telugu Daily Newspapers, respectively, of Hyderabad edition. Post on 28-7-2014 for filing proof of publication.