Case Laws Companies Act Pradeshiya Industrial and Investment Corp Vs North India Petrochemicals

Case Laws Companies Act

Pradeshiya Industrial and Investment Corp

Vs North India Petrochemicals

PETITIONER:
PRADESHIYA INDUSTRIAL & INVESTMENT CORPN. OF U.P.

Vs.

RESPONDENT:
NORTH INDIA PETROCHEMICALS LTD.

DATE OF JUDGMENT09/02/1994

BENCH:
MOHAN, S. (J)
BENCH:
MOHAN, S. (J)
VENKATACHALLIAH, M.N.(CJ)

CITATION:
1994 SCC (3) 348 JT 1994 (1) 579
1994 SCALE (1)526
ACT:

 

HEADNOTE:

 

JUDGMENT:
The Judgment of the Court was delivered by
MOHAN, J.- Leave granted.
2.The brief facts leading to this appeal are as follows.
The first respondent, North India Petrochemicals Limited
(hereinafter referred to as ‘NIPL’) filed a winding-up
petition (Company Petition No. 1 of 1993) before the High
Court of Allahabad, Lucknow Bench, Lucknow under Sections
433, 434 and 439 of the Companies Act, 1956 (hereinafter
referred to as ‘the Act’).
3.On July 1, 1988 a Shareholders’ Agreement or Promoters
Agreement was entered into. That superseded earlier
agreements which recorded that the grant of a Letter of
Intent for the manufacture of 15,000 tonnes per annum of
Phthalic Anhydride in favour of the appellant-Corporation.
However, the said Letter of Intent was to be used, utilised
and implemented in collaboration with M/s Dalmia Dairy
Industries Limited (Respondent 2 herein). The collaboration
agreement or the promoters agreement contemplated that a new
company would be brought into existence called the Northern
India Petrochemicals Limited. Clause 3 of the agreement
provided that initial authorised capital would be Rs 5 lakhs
which would be issued in equity shares of Rs 10 each while
the subscribed capital of the company would be such as would
be decided by the Board of Directors of the Company from
time to time.
4.Clause 6 of the said agreement contemplated that each
party would ensure that its respective shareholdings in the
paid-up equity capital of the company shall be 26% plus 10
equity shares for PICUP (the appellant herein) and 25% minus
10 equity shares for second respondent, Dalmia Dairy
Industries Limited.
5.Clause 7 of the agreement further provided that the
Board would consist of 13 Directors out of which 4 were to
be nominated by PICUP, the appellant herein and 3 by the
second respondent, Dalmia Dairy Industries and the remaining
6 Directors were to be appointed as per the provisions of
the Act.
6.Clause 13(a) stated that the appellant, Dalmia Dairy
Industries Limited will contribute equal sums as may be
required, from time to time, for the purpose of preliminary
and exploratory and other expenses. These contributions are
to form part of the share capital agreed to be contributed
by each party under the agreement.
7.Northern India Petrochemicals Limited came to be
incorporated on March 12, 1985.
8.Differences arose between the second respondent and the
appellant. The second respondent got the disputes referred
to arbitration as per clause 27 of the promoters agreement
dated July 1, 1988 by letter dated December 19, 1991. The
second respondent nominated the former Chief Justice of
Delhi High Court, Justice Shri Shiv Prakash Narain, as their
arbitrator. Thereafter the appellant nominated Shri D.N.
Jha, former Chief Justice of
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Allahabad High Court. These two arbitrators appointed Shri
Justice M.H. Kania (former Chief Justice of this Court) as
Chairman.
9.On January 6, 1992, the first respondent issued a
notice under Section 434 of the Act to the appellant. It
was stated that an amount of Rs 140.33 lakhs had been spent
on the project. The notice further stated that an amount of
Rs 72.50 lakhs was payable by the appellant under the terms
of the promoters agreement. That amount had not been
forthcoming. On that ground it is alleged that the
appellant was indebted to the tune of Rs 72.50 lakhs as on
November 30, 1991 which the appellant was called upon to pay
as its share contribution of NIPL within three weeks of the
receipt of the notice.
10.On January 29, 1992 the appellant replied to the notice
denying its liability to pay the amount of Rs 72.50 lakhs.
It was stated therein that the disputes raised by second
respondent M/s Dalmia Industries Limited had already been
referred to arbitration and as such is pending adjudication.
Hence, NIPL was not entitled to take any action.
11.In the winding-up petition it is alleged that the sum
of Rs 72.50 lakhs is a debt payable by the appellant to the
first respondent. The debt arose on the basis of the
promoters agreement between the appellant and the second
respondent for promoting the first respondent-company
referred to above.
12.It is further alleged that the appellant is liable to
pay towards certain expenses for exploratory work. Those
expenses will be adjusted and treated as subscription to the
share capital. The appellant has agreed to subscribe by way
of equity participation in the share capital. That amount
ought to be paid. There is a breach of promoters agreement
for the failure to pay these amounts, namely, the dues on
account of share capital and the expenses for exploratory
work. It was alleged that the said sum of Rs 72.50 lakhs
was due. Therefore, the first respondent claimed to be a
creditor.
13.It may be noted, as stated above, that the second
respondent has already referred the dispute to arbitration
under clause 27 of the promoters agreement for adjudication
claiming specific performance of the promoters agreement and
in the alternative for damages for breach of contract. The
said amount is the basis for the winding-up petition as it
is one of the claims in the statement of claims before the
arbitrators. One further fact requires to be noted; the
promoters agreement had already cancelled as per notice
dated October 31, 1992.
14.In view of the above, the appellant denied the
liability to pay the amount on various grounds not only in
the company petition but also before the arbitrators. Inter
alia it was urged that the winding-up petition was not
maintainable. The claim itself was doubtful. It was a
matter which required adjudication. Therefore, it was not a
debt as contemplated within the meaning of Sections 433 and
434 of the Act. Respondent 1 is not a creditor.
15. Before the learned Single Judge four preliminary
objections were taken:
352
(1)The petition does not comply with the
requirement of the Company Rules insofar as
Rule 21 which is mandatory in character is not
satisfied.
(2)Inasmuch as a creditor is seeking relief
the application has to be accompanied by an
application under Section 439(8) of the Act.
There is also non-compliance of Section 439(8)
and as such Rule 97 of the Company Rules had
been breached.
(3) There was no presentation in accordance
with Rule 95.
(4) When a notice to show cause why the
petition should not be admitted was initially
issued, the notice was not-in the prescribed
form. In spite of it, publicity had been given
in the newspapers in order to pressurise the
appellant to yield to the demand.
16.These preliminary objections were overruled by an order
dated January 28, 1993. ; Thereafter in dealing with the
question whether the petition deserved to be admitted or not
it was concluded that a prima facie case had been made out
for admission. However, the advertisement was suspended
till further orders. Aggrieved by the same, an appeal was
preferred to the Division Bench. The preliminary objections
which were raised before the learned Single Judge were
reiterated. They were overruled.
17.Another objection taken was as to the maintainability
of the appeal. That was overruled on the ground that the
order of the learned Single Judge was likely to require the
respondents to face the winding-up proceedings. Therefore,
an appeal would lie under Section 483 of the Act.
18.As to the admissibility of the winding-up petition, the
Division Bench is of the view that promoters agreement had
in fact been entered into. The company is the beneficiary
of the agreement. As a beneficiary it could claim that
amount. From the material on record it is seen that no
specific plea had been taken to show the circumstances under
which the amount had not been paid by the appellant.
Accordingly, the appeal came to be dismissed.
19. Hence, the present special leave petition.
20. It is urged by the learned Solicitor General that the
learned Single Judge had gone wrong while holding that the
admissibility of winding-up petition would depend upon
arguable issues. Equally, the Division Bench failed to note
that the debt is bona fide disputed. Further it failed to
note that the question of liability is still pending
adjudication before the arbitrator. No winding-up petition
can be admitted unless the court comes to the conclusion
that the defence put up is moonshine. In support of these
submissions reliance is placed on Madhusudan Gordhandas v.
Madhu Woollen Industries Pvt. Ltd.’ In the instant case,
the debt itself is yet to be established. Merely because
the promoters agreement had been signed it does not follow
that the appellant is liable as a debtor.
1 (1971)3SCC632:(1972)42CompCasl25
353
21.In opposition to this, learned counsel for the
respondents would support the impugned orders contending
that both the courts below have carefully analysed the legal
position. They have correctly found that the agreement had
been entered into under which there is an obligation to pay
certain amount. This obligation if not discharged, would
amount to a debt. Insofar as there is a prima facie case of
liability, certainly the petition could be admitted. The
ruling relied on by the appellant has no relevance to the
facts of this case.
22.To determine the correctness of the above submissions
it is necessary, on our part, to find out as to what exactly
is the position in relation to the debt, on facts. As seen
from the earlier narration, the promoters agreement was
entered into between the appellant and Respondent 2, Dalmia
Industries Limited. Only under that agreement the first
respondent, North India Petrochemicals Limited, was floated.
As per clauses 6 and 13(a) the appellant will have to pay
its share of contribution to the first respondent. It is
the case of the first respondent that already an amount of
Rs 140.33 lakhs has been spent on this project. Therefore,
towards each share the appellant is liable to contribute a
sum of Rs 72.50 lakhs which, according to it, is a debt. It
is important to note that by virtue of clause 31 of the
agreement the appellant was not obliged to proceed with the
obligation cast upon it under the terms of the agreement.
Clause 31 of the agreement reads as follows:
“31. Neither party to this agreement shall be
considered responsible for any breach of
failure of this agreement or any terms hereof
arising from the imposition of restriction or
onerous regulations by any Government agency
or local authority or by acts of civil or
military authority or other cause beyond their
control.”
Since the agreement has been cancelled the appellant is not
liable to discharge any of its obligations under the
agreement. If really, the cancellation is to be challenged
there are other ways of doing it.
23.The second respondent, Dalmia Industries Limited has
resorted to arbitration proceedings and has claimed this
money. Hence, there is a substantial dispute inasmuch as
the second respondent claims the said payment of Rs 72.50
lakhs on the ground that they should be reimbursed.
24.The appellant is a financial corporation which is fully
owned by the State of Uttar Pradesh. It cannot be denied
that it is a profit-making organisation and is not incurring
losses. It is paying dividends on annual profits.
Therefore, there is no relationship of debtor and creditor.
25.The defence of the appellant in relation to non-payment
is a bona fide defence. Whatever it may be, the liability
of the appellant is yet to be determined. It is in this
factual background we will deal with legal aspect of the
matter. Section 433 of the Act says:
“A company may be wound-up by the Court,(a) to
(d)
354
(e) if the company is unable to pay its debts;
(f)
From the above it follows:
(1) There must be a debt; and
(2) the company must be unable to pay the
same.
An order under clause (e) is discretionary.
26.A debt under this section must be a determined or a
definite sum of money payable immediately or at a future
date.
27.What then is inability when the section says “unable to
pay its dues”? That should be taken in the commercial
sense. In that, it is unable to meet current demands. As
stated by William James, V.C. it is “plainly and
commercially insolvent that is to say, that its assets are
such, and its existing liabilities are such, as to make it
reasonably certain as to make the Court feel satisfied
that the existing and probable assets would be insufficient
to meet the existing liabilities”. (In European Life
Assurance Society, Re2; V. V. Krishna Iyer & Sons v. New Era
Mfg. Co. Ltd. 3)
28.While dealing with the scope of Section 433(e) this
Court had occasion to hold the following [at page 131 in
Madhusudan Gordhandas1 [the case relied on by learned
Solicitor General)]: (SCC pp. 638-39, paras 20-22)
“Two rules are well settled. First, if the
debt is bona fide disputed and the defence is
a substantial one, the court will not wind up
the company. The court has dismissed a
petition for winding-up where the creditor
claimed a sum for goods sold to the company
and the company contended that no price
had been agreed upon and the sum demanded by
the creditor was unreasonable. (See London and
Paris Banking Corpn., Re4. Again, a petition
for winding-up by a creditor who claimed
payment of an agreed sum for work done for the
company when the company contended that the
work had not been done properly was not
allowed. (See Brighton Club and Horfold Hotel
Co. Ltd., Re5.)
Where the debt is undisputed the court will
not act upon a defence that the company has
the ability to pay the debt but the company
chooses not to pay that particular debt. (See
A Company, Re6.) Where, however, there is no
doubt 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. (See Tweeds Garages Ltd., Re7.) The
principles on which the court acts are first
that the defence of the
2 LR (1869) 9 Eq 122
3 (1965) 35 Comp Cas 410: (1965) 1 Comp LJ
179 (Ker)
4 LR (1874) 19 Eq 444
5 (1865) 35 Beav 204
6 (1894) 94 SJ 369: (1894) 2 Ch 349 (Ch D)
7. (1962) Ch 406: 1962 Comp Cas 795 (Ch D)
355
company is in good faith and one of substance,
secondly, the defence is likely to succeed in
point of law, and, thirdly, the company
adduces prima facie proof of the facts on
which the defence depends.
Another rule which the court follows is that
if there is opposition to the making of the
windi Dg-Up order by the creditors the court
will consider their wishes and may decline to
make the winding-up order. Under Section 557
of the Companies Act, 1956, in all matters
relating to the winding-up of the company the
court may ascertain the wishes of the
creditors. The wishes of the shareholders are
also considered, though, perhaps, the court
may attach greater weight to the views of the
creditors. The law on this point is stated in
Palmer’s Company Law, 21st Edn., page 742, as
follows:
‘This right to a winding-up order is, however,
qualified by another rule, viz., that the
court will regard the wishes of the majority
in value of the creditors, and if, for some
good reason, they object to a winding-up
order, the court in its discretion may refuse
the order.’
The wishes of the creditors will however be
tested by the court on the grounds as to
whether the case of the persons opposing the
windingup is reasonable; secondly, whether
there are matters which should be inquired
into and investigated if a winding-up order is
made. It is also well-settled that 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. The grounds
furnished by the creditors opposing the
winding-up will have an important bearing on
the reasonableness of the case. (See P. & J.
Macrae Ltd., Re8)”
29.It is beyond dispute that the machinery for winding-up
will not be allowed to be utilized merely as a means for
realising its debts due from a company. In Amalgamated
Commercial Traders (P) Ltd. v. A.C.K. rishnaswami9 this
Court quoted with approval the following passage from
luckley on the Companies Acts, (1 3th Edn., p. 45 1):
“It is well-settled that ‘a winding-up petition is not a
legitimate means of seeking to enforce payment of the debt
which is bona fide disputed by the company. A petition
presented ostensibly for a windingup order but really to
exercise pressure will be dismissed, and under circumstances
may be stigmatised as a scandalous abuse of the process of
the court’.”
30. Examined in the light of the above, we are unable to
uphold the judgments of the courts below on the facts
narrated above. Our reasons are as under:
(1961) 1 All ER 302: 31 Comp Cas 424 (CA)
(1965) 35 Comp Cas 456 (SC)
356
(1)The basis of the claim of the first respondent for Rs
72.50 lakhs is the promoters agreement dated July 1, 1988.
This agreement has been cancelled by the appellant by notice
dated October 31, 1992. Though the learned Single Judge of
the High Court referred to this aspect he had not pursued it
further. He has not considered as to what would be the
consequence. Unfortunately, the Division Bench has
overlooked this aspect when it held thus:
“In the present case, there is an allegation in the petition
that there was an agreement between the Company and Dalmia
Dairy Industries for promoting the petitioner Company and
that under the terms of that agreement the Company had to
pay certain amounts. There is nothing on record to suggest
that such an agreement was not entered into.”
(2)The first respondent is not a creditor. The appellant
is not a debtor because it is a financial institution for an
amount which is agreed to be subscribed. Neither the
learned Single Judge nor the Division Bench has decided this
important question whether there is a debt and the company
has either neglected or is unable to pay.
(3)The same claim is the subject-matter of arbitration
which is pending adjudication. Therefore, there is no
definiteness about it.
(4) In view of all these, there is no prima facie dispute
as to the debt.
(5) The defence raised is a substantial one and not mere
moonshine. We find it difficult to appreciate the reasoning
of the learned Single Judge when he holds that there are
arguable issues and, therefore, the winding-up petition has
to be admitted. On this aspect the courts below failed to
note that the admission of the winding-up petition is
fraught with serious consequence as far as the appellant is
concerned.
31.We are informed that the financial position of the
appellant is sound. It is the largest financial corporation
of the State of Uttar Pradesh. It has rendered financial
assistance of Rs 1024.83 crores till March 1992 to more than
100 industrial units and has also promoted joint sector
projects. It is profit-making financial corporation and is
paying dividend as seen from the balance sheet for the year
1991-92, (filed along with special leave petition). The
assets of the appellant-corporation are Rs 5,26,35,36,568.
The reserves are Rs 17,60,15,222. The profits earned by the
appellant before payment of tax is Rs 7.40 crores and after
meeting its financial liabilities, Rs 2.78 crores.
32.Thus, we find no justification whatever for admitting
the winding-up petition. Accordingly the impugned judgments
are hereby set aside. Civil Appeal will stand allowed with
costs to be borne equally by Respondents 1 and 2.
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