THE PRADESHIYA INDUSTRIAL & INVESTMENT CORPORATION OF UTTAR PRADESH versus NORTH INDIA PETRO CHEMICAL LTD. AND ANR.

THE PRADESHIYA INDUSTRIAL & INVESTMENT CORPORATION OF UTTAR PRADESH v. NORTH INDIA PETRO CHEMICAL LTD. AND ANR.

FEBRUARY 9, 1994

(M.N. VENKATACHALIAH, CJ., ANDS. MOHAN, J.)

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Companies Act, 1956: Sections 433, 434 and 439--Petition for winding up-When Company unable to pay its debts-Debt must be detennined or a definite sum, not a disputed or doubtful amount-Promoters agreement c entered into between State owned Corporation and a Company for promoting another company-Promoters agreement cancelled subsequently-Claim filed before Arbitrator a/so-Maintainability of winding up petition-Held: Defence raised was substantial-No creditor-debtor relationship-Financial position of Corporation sound-Hence winding up petition not maintainable.

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The appellant corporation had a collaboration/promoters agreement with Respondent No. 2 for manufacture of certain items. This was super- seded by a Shareholders Agreement or Promoters Agreement. The first Respondent Company came to be incorporated in 1985 under the Com- panies Act, 1956, as agreed to in the collaboration agreement.

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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 of 1988 and nominated its ar- bitrator. Appellant also nominated its arbitrator. Both the arbitrators appointed a Chairman for the arbitration. Thereafter the first respondent F issued a notice under section 434 of the Companies Act, to the appellant, stating that an amount of Rs. 140.33 lakhs had been spent in the Project and an amount of Rs. 72.50 lakhs was payable by the appellant under the terms of the promoters agreement. The appellant replied denying its liability to pay the said amount and stated that since the disputes raised G by the second respondent had already been referred to arbitration, Respondent No. 1 was not entitled to take any action .

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Respondent No. 1 filed a winding up petition under Sections 433, 434 and 439 of the Companies Act, before the High Court. It was alleged in the petition that the sum of Rs. 72.50 lakhs was a debt payable by the appellant H

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to the first respondent on the basis of the promoters agreement between the appellant and the second respondent for promoting the first respon dent-Company. It was also alleged that there was a breach of promoters agreement for failure to pay the dues on account of share capital and the expenses of exploratory work, and therefore, the appellant was a creditor.

The appellant denied the liability to pay the amount on various grounds viz. that the amount in question was one of the claims in the statement of claims before the arbitrators; that the promoters agreement stood cancelled; and that the claim itself was doubtful and the matter required adjudication. Therefore the appellant claimed that the Respon dent No. 1 was not a creditor. The preliminary objections were overruled by a Single Judge of the High Court, who took the view that a prima facie case has been made out. An appeal was preferred to the Division Bench and it dismissed the appeal. Hence this appeal by special leave.

Allowing the appeals, this Court

HELD: 1.1. The basis of the claim of the first respondent for Rs. 72.50 lakhs is the promoters agreement dated 1.7.88. This agreement has been cancelled by the appellant by notice dated 31st October, 1992. Though the Single Judge 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. [825-B, CJ

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1.2. The first respondent is not a creditor. The appellant is not a debtor because it is a financial institution which has agreed to subscribe to the share capital. Neither the Single Judge nor the Division Bench F decided this important question whether there is a debt and the Company

has either neglected or is unable to pay it. [825-E, F]

1.3. The claim made in the winding up petition is the subject matter of arbitration wbich is pending adjudication. Therefore, there is no G definiteness about it. There is no prima f acie dispute as to the debt. [825-F]

1.4. The defence raised is a substantial one and not mere moon-shin. It is difficult to appreciate the reasoning of the Single Judge when be 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 H admission of the winding up petition is fraught with serious consequence ..

INVESTMENTCORPN. v. NORTIIINDIAPETRO CHEMICAL[MOHAN,J.] 817

for the appellant, whose financial position is sound. [825-G, HJ

In Re Europe Life Insurance Society, [1869) 0 Eq. 122; Krishna Iyer & Sons. v. New Era Mfg. Co. Ltd., (1965) 2 Comp W 179:(1965) 35 Com Cases 410 (Ker) and Amalgamated Commercial Traders (P) Lta. v. Krish naswami (A. CK) (1965) 35 Com Cases 456 (SC), relied on.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 720 of

1994.

From the Judgment and Order dated 27.8.93 of the Allahabad High

Court in Company Appeal No. 1 of 1993.

Dipankar P. Gupta, Solicitor General, S.K. Mehta, Dhruv Mehta and

A. Verma for the Appellant.

Harish N. Salve, Ms. Kumkum Sen, Ms. Anjali Vohra and Khaitan

& Co. for the Respondents.

The Judgment of the Court was delivered by

MOHAN, J. Leave granted.

The brief facts leading to this appeal are as follows:

1. The first respondent, North India Petro Chemicals Limited (hereinafter referred to as 'NIPL') filed a winding up petition (Company Petition No. 1 of 93) before the High Court of Allahabad, Lucknow Bench, Lucknow under Section 433, 434 and 439 of the Companies Act, 1956 (hereinafter referred to as the Act).

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2. On 1st of July, 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-Cor poration. However, the said Letter of Intent was to be used, utilised and G implemented in collaboration with M/s. Dalmia Dairy Industries Limited (respondent No. 2 herein). The collaboration agreement or the promoters agreement contemplated that a new company would be brought into exist ence called the Northern India Petrochemicals Limited. Clause 3 of the agreement provided that initial authorised capital would be Rs. 5 lakhs H

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A 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.

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3. 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 JO equity shares for PICUP (the appellant herein) and 25% minu'\ 10 equity shares for second respondent, Dalmia Dairy Industries Limited.

4. Clause 7 of the agreement further provided that the Board would C 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 In dustries and the remaining 6 Directors were to be appointed as per the provisions of the Act.

5. Clause 13(a) stated that the appellant, Dalmia Dairy Industries D Limited will contribute equal sums dS 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.

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6. Northern India Petrochemicals Limited came to be incorporated

on 12th March, 1985.

7. Differences arose between the second respondent and the appel lant. The second respondent got the disputes referred to arbitration as per clause 27 of the promoters agreement dated 1.7.1988 by letter dated F 19.12.91. 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 Allahabad High Court. These two arbitrators appointed Shri Justice M.H. Kania (former Chief Justice of this Court) as Chairman.

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8. On 6.1.92, 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 in 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 H ground it is alleged that the appellant was indebted to the tune of Rs. 72.50

INVESfMENf CORPN. v. NORTH INDIA PETRO CHEMICAL (MOHAN, J.J 819

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lakhs as on 30th November, 1991 which the appellant was called upon to A pay as its share contribution of N.I.P.L. within 3 weeks of the receipt of the notice.

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9. On 29th of January, 1992 the appellant replied 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 adju<l;ca- tion. Hence, N.l.P.L. was not entitled to take any act '"·

10. In the winding up petition it is alleged that me sum of Rs. 12.50 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.

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11. It is further alleged that the appellant is liable to pay towards certain expenses for exploratory work. Those expenses will be adjusted and D treated as subscription to the ~ are 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, tl dues on account of share capital and the expenses for exploratory work. I' vas alleged that the said sum of Rs. 72.50 E lakhs was due. Therefore, the fir

respondent claimed to be a creditor.

12. It may be noted, as stated above, that the second respondent has already referred the dispute to arbitr~tion 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 F 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 31st of October, 1992.

13. In view of the above, the appellant denied the liability to pay the G

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 No. 1 is not H

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. A - a creditor;

14. Before the learned Single Judge four preliminary objections were

taken:.

1. The petition does not comply with the requirement of the Com B pany Rules in so' far 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

C 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 D spite of it, publicity had been given in the newspapers in order to pres

surise the appellant to yield to the demand.

15. These preliminary objections were overruled by an order dated 28.1.93 Thereafter in dealing with the question whether the petition E 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 over- ruled.

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· 16. 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.

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17. A• 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 amou~t. From the material on record it is seen no specific plea had been taken to show the circumstances under which the amount H had not been paid by the appellant. Accordingly, the appeal came to be

IN\'B'TME:\'T CORPN. v. NORTH INDIA PETRO CHEMICAL [MOHAN. J.] 821

dismissed.

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18. Hence, the present special leave petition.

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 B failed to note that the debt is bona fide disputed. Further it failed to note 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 moon-shine. In support of these submissions reliance is placed on Madhusudan Gordhandas and Co. v. C Madhu Woollen Industries Pvt. Ltd., (1972) Vol. 42 Company Cases Page 125. 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.

19. In opposition to this, learned counsel for the respondents would D

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. In so far as there is a prim a f acie 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.

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20. 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 p promoters agreement was entered into between the appellant and respon dent 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, G 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:

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"31. Neither party to this agreement shall be considered respon· sible 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 case beyond their control."

21. 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.

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22. 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.

23. 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 D organisation and is not incurring losses. It is paying dividends on annual

profits. Therefore, there is no relationship of debtor and creditor.

24. 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) ....... ..

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( 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 (a) is discretionary.

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25. A debt under this section must be a determined or a definik sum

H of money payable immediately or at a future date.

INVESThiE~"T CORPN. I'. '.'JORTH INDIA PETRO CHEMICAL (MOHAN, J.) 823

26. What then is inability when the sectipn says "unable to pay its A

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 re Eurpoe Life Insurance Society, [1869] 0 EQ 122 2 & 2A, Krishna Iyer & Sons v. New Era Manufacturing Co. Ltd., (1965) 1 Comp LJ 179: (1965) 35 Com Cases 410 (Ker)].

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27. While dealing with the scope of Section 433(e) this Court had C

occasion to hold the following: [at page 131 in Madhusudan Gordhandas and Co. (supra)] : (the case relied on by learned Solicitor General):

"Two rules are well settled. First, if the bona fide disputed and the defence is a substantial one, the court will not wind up the D company. The court has dismissed a petition for winding up where the creditor claimed a sum for goods sold to the company con tended that no price had been agreed upon and the sum demanded by the creditor was unreasonable. (See In re London and Paris Banking Corporation, [1874] L.R. 19 Eq. 444). Again, a petition for winding up by a creditor who claimed payment· of an agreed E sum for work done for the company when the company contended that the work had not been done properly was not allowed. (See In re Brighton Club and Norfold Hotel Co. Ltd. [1865] 35 Beav. 204.).

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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 In re A Company, (1834) 94 S.J. 369; (1894) 2 Ch. 349 (Ch. D.). Where, however, there is no doubt that the company owes the creditor a debt entitling hjm to a winding up order but the exact amount of G the debt is disputed the court will make a winding up order without requiring the creditor to quantify the debt precisely. (See In re Tweeds Garages Ltd., (1962) Ch. 406; (1962) Comp. Cas. 795 (Ch.D.). The princ:iples on which the court acts are first that the defence of the company is in good faith and one of substance, H

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secondly, the defence is likely to succeed in point of law, and, thirdly, the company adduces plima f acie proof of the facts on which the defence depends.

Another rule which the court follows is that if there is opposi tion to the making of the winding-up order by the creditors the co_urt 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 edition, 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 winding-up is reasonable; secondly, whether there are matter 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 bearing on the reasonableness of the case. (See in re P. & J. Macrage Ltd. [1961) 1 All E.R. 302; 31 Comp. Cas. 424 (C.A.)."

28. 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 G a company. Jn Amalgamated Commercial Traders (P) Ltd. v. Krishnaswsami (A.CK.), (1965) 35 Com Cases 456 (SC) this Court quoted with approval the following passage from Buckley on the Companies Acts, 13th Edn. p. 451):

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"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

INVESTMEl'ff CORPN. v. NORTH INDIA PETRO CHEMICAL (MOHAN. J.] 825

fide disputed by the company. A petition presented ostensibly for A a winding-up order but really to exercise pressure will be dis missed, and under circumstances may be stigmatised as a scan dalous abuse of the process of the Court."

29. Examined in the light of the above, we are unable to uphold the judgments of the court below on the facts narrated above. Our reasons are B as under:

(1) The basis of the claim of the first respondent for Rs. 72.50 lakhs is the promoters agreement dated 1.7.88. This agreement has been can celled by the appellant by notice dated 31st October, 1992. Though the C 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 conse quence. Unfortunately, the Division Bench has overlooked this aspect when it held thus:

"In the present case, there is an allegation in the petition that D

there was an agreement between the Company and Dalmia Dairy Industries for promoting the petitioner company and· that under the terms of that agreemeot 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 agieed 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 1s

pending adjudication. Therefore, there is no definiteness about it.

( 4) In view .of all these, there is no prima f acie dispute as to the debt.

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(5) The defence raised is a substantial one and not mere moon- G

shine. We find it difficult to appreciate the reasoning of the learned Single Judge when he bolds that there are arguable issues and, therefore, the winding up petitioti has to be admitted. On this aspect the courts below failed to note that t~e admission of the winding up petition is fraught with serious consequence as far as the appellant is concerned.

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30. 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 projecL>. 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 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. 278 crores.

31. Thus, we find no justification whatever for admitting the winding

up petition.

32. Accordingly the impugned judgments are hereby set aside. Civil Appeal will stand allowed with costs to be borne equally by resp~ndents 1 and 2.

G.N.

.1-.ppeal allowed.

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