Aggarwal, J.:— The British Burmah Petroleum Co. Ltd. (hereinafter referred to as “the petitioners”) claim to be creditors of Kohinoor Mills Co. Ltd. (hereinafter referred to as “the company”) to the extent of Rs. 11,05,243.05 including interest on Rs. 9,00,000 at the rate of 10 per cent. per annum from 14th June, 1976, to 2nd August, 1978.

2. The foundation of the above debt, as pointed out by Mr. Chagla, learned counsel appearing for the petitioners, is on the basis of averments in para. 7 of the petition. It is averred therein that in respect of certain shares sold by the petitioners through M/s. Sumatilal Jamnalal, Share and Stock Brokers, they had to receive an amount of Rs. 9,09,112.50 from the said M/s. Sumatilal Jamnalal. However, at the request of the company, a sum of Rs. 9,00,000 receivable by the petitioners from M/s. Sumatilal Jamnalal was treated as credited to the account of the petitioners with the company as and by way of an advance. This arrangement, aver the petitioners, was recorded by the petitioners' letter dated 14th June, 1976, addressed to the company and duly confirmed by the company by an endorsement on the letter. By another letter dated 19th June, 1976, addressed to the petitioners, the company has stated that they had credited the petitioners' account with a sum of Rs. 9,00,000. It is further pleaded that in December, 1976, it was agreed between the petitioners and the company that the petitioners will not press the company for the recovery, inter alia, of the said sum of Rs. 9,00,000 and interest thereon for a period of one year. This agreement was placed on record by the petitioners' letter dated 22nd December, 1976.

3. In the light of the above averments, Mr. Chagla urged that the company has confirmed the advance of Rs. 9,00,000 by making an endorsement on the said letter dated 14th June, 1976. Furthermore, the company has also by its letter dated 19th June, 1976, stated that the petitioners' account has been credited with a sum of Rs. 9,00,000. Again, the petitioners had placed on record the conversation and the agreement, whereby the petitioners agreed not to press for payment for a period of one year. Mr. Chagla also referred to the petitioners' letter dated 13th July, 1976, demanding payment of Rs. 9 lakhs together with interest thereon and the letters written on behalf of the petitioners' legal advisers calling upon the company to make payment of the said amount. Relying upon the said correspondence, Mr. Chagla submitted that the amount of Rs. 9,00,000 is credited in the petitioners' favour in the books of the company and the company has failed to pay the same. The statutory notice of demand has not been complied with and, therefore, the company has neglected to pay. In these circumstances, the company is deemed to be unable to pay the aforesaid debt within the meaning of s. 434 of the Companies Act, 1956. Mr. Bhabha, learned counsel for the company, contended that the present petition has been filed mala fide at the instance of and/or in collusion with the Kapadia group consisting of Mohanlal C. Kapadia, Nimjibhai C. Kapadia, Popatlal C. Kapadia, Sudhir Nimjibhai Kapadia, Navinchandra Popatlal, and friends, relatives, nominees and associates of the members of the Kapadia family and their respective concerns including private limited companies, with a view to compel the company to comply with the illegal demands of the said Kapadia group through the petitioners. It is the allegation of the company that this Kapadia group from about 1967 started acquiring control of various public and private companies with a view to utilising their funds and/or manipulating their accounts for the benefit of the said group and/or concerns floated or controlled by the said group. The Kapadia group exercised control on various companies by employing persons in important positions who remained under the exclusive control of the Kapadia group. It is also the allegation of the company that the books of account of the company as well as those of the petitioners and of other concerns controlled by the Kapadia group were, at all relevant times, got written by the said Kapadia group through their own chosen employees. It is further alleged that the Kapadia group used to carry on badla transactions in the stock market in scrips and shares of various companies in which they were interested and for that purpose they had maintained a very close relationship with stock brokers, amongst them being M/s. Sumatilal Jamnalal. It is also alleged that the affairs of the company were being mismanaged by the said Kapadia group. The Central Bank of India had advanced loans to the company running into several crores of rupees and in order to exercise control over the running of the company, the Central Bank of India had nominated two persons as directors from 17th June, 1976, and the said Kapadia group were aware of the decision taken by the Central Bank in this behalf. In anticipation of the control which was to be assumed by the Central Bank, it is contended with great emphasis that various manipulations were made by the Kapadia group in order to enrich themselves and to cause loss to the company liabilities were sought to be foisted on the company by making various entries in the books of account, for which the company was not really liable. It is the case of the company that these manipulations came to light subsequently and the petitioners' claim in the present petition falls in the category of manipulations and that the company is in fact not truly liable to the petitioners.

4. Pausing here, it is evident that as against a simple and pure transaction of advancing money under a tripartite arrangement pleaded on behalf of the petitioners, the company has set up a plea of manipulation of the various goings on and fabrication of books of account and also of wrongful loss and wrongful gain. These are serious questions. They require some close scrutiny. But all the same, I have not to adjudicate upon these issues. I have to take a prima facie view. I have to assure myself that there is substance in the defence. The defence must strike to be genuine and bona fide. I should guard against stratagems on the part of a company faced with a petition for winding up.

5. Mr. Bhabha contended that the alleged confirmation appearing on the copy of the letter dated 14th June, 1976, is a bogus and fraudulent confirmation. Now, the petitioners are not in a position to show as to who has signed the said confirmation. It is rather curious that the petitioners who were seeking to obtain confirmation in respect of a large sum of money would not care to find out if the confirmation came from a person authorised by the company or at least be in a position to know who has confirmed on behalf of the company. The petitioners are unable to establish the identity of the said person even at the hearing. This unnatural circumstance is to be appreciated in the face of the fact that M.C Kapadia was a director at the material time in the petitioners-company as well as the company before me. Another peculiar feature is that an endorsement is made on the copy of the letter, but no endorsement is to be found on the original letter. It is highly improbable that if any responsible and intelligent officer of the company was authorised to make the confirmation, he would not take the ordinary care to make an endorsement on the original for the sake of the record.

6. Mr. Bhabha further pointed out that an important letter like this bears no reference number, whereas some of the other letters do bear a reference number. If it were to be established that the normal practice of the company was to give a reference number to a letter, then a departure from that norm would be a matter throwing light on the transaction.

7. Mr. Bhabha also relied upon the letter dated 19th June, 1976, addressed by the company to the petitioners, wherein it is stated that the amount of Rs. 9,00,000 has been credited to the petitioners' account in accordance with the petitioners' letter of even date. Mr. Bhabha submitted that there is no letter of 19th June, 1976, from the petitioners to the company and there is no entry dated 19th June, 1976, in the books of account of the company showing that a sum of Rs. 9,00,000 had been credited to the petitioners' account. The entry which appears in the books of account of the company is as on 30th June, 1976. These discrepancies are of great importance and have far-reaching consequences more particularly when the defence set up is one of manipulations and also fabrication of books of account. According to Mr. Bhabha, the letter dated 19th June, 1976, is signed by one P.H Shah for the chief accountant. This P.H Shah at all material times was an internal auditor-cum-accountant of the company, a man appointed by the Kapadia group, and who was a stooge of the Kapadias completely under their control and was doing things as directed by the Kapadias. These circumstances indicate that the credibility of the contents of the letters as well as their authenticity are under serious challenge.

8. Mr. Bhabha next pointed out that the petitioners are not sure of the basis on which they are seeking to claim the amount from the company. In the first statutory notice, the petitioners' case was entirely different. Therein it was stated:

“I am further instructed to state that a sum of Rs. 9,00,000 was also advanced by my clients to you through M/s. Sumatilal Jamnalal, Share & Stock Brokers, who paid you the said amount on my clients' behalf and which you have credited to my clients' account as confirmed by your letter dated 19th June, 1976.”

9. Thus, there is a sharp conflict as to the basis of the claim.

10. Mr. Bhabha further pointed out the importance of 17th June, 1976, when the Central Bank of India nominated two of its representatives on the board of directors of the company. In close proximity to this date, submitted Mr. Bhabha, the petitioners have sought to obtain the alleged confirmation of the company's liability to the petitioners under their letter dated 14th June, 1976. There is some force in this submission. If the company were to ultimately succeed in establishing that there were manipulations, this circumstance may be of significance.

11. Another factor which is of some importance is the correspondence, Ex-2 (collectively), disclosed by the company in its affidavit in reply. This correspondence shows that the company was not in possession of full particulars relating to the petitioners and others, whose names appeared in the list of associates of the company who had lent amounts to the company and, therefore, the company requested the petitioners to give the particulars of the loans, etc. It also appears that these particulars were required by the company as their auditors had asked for the same. But the petitioners did not choose to send these particulars and in turn expressed surprise and sought more clarification from the company.

12. In the light of the above discussion, I am of the view that the company has raised a bona fide defence which is of substance and that the issues raised on behalf of the company can be properly determined in a regular suit and not in a petition for winding up. The company is denying its liabilitiy. It is also the case of the company that the entry in the books of account of the company is fabricated by the Kapadia group through the agency of their own persons who were under their control. The matter will have to be thrashed out in a regular trial where parties will have opportunity to lead evidence and cross-examine witnesses. The confirmation on the copy of the letter dated 14th June, 1976, is illegible and one does not know who has signed it. This is also eminently a matter of evidence and cannot be decided on affidavits. In these circumstances, the debt is not clearly established and a bona fide defence to the debt claimed is made out and, therefore, a winding-up order cannot be made upon such a debt. Hence the petition must fail.

13. The matter does not rest here because Mr. Chagla urged that the company is in fact insolvent and also commercially insolvent as it is unable to pay its debts as and when they become due. The financial picture of the company is a dismal one and the mere fact that a bona fide dispute has been raised cannot come in the way of winding up of the company on the ground that it is insolvent. Mr. Chagla also contended that the substratum of the company is gone. Learned counsel pointed out that the entire capital and reserves of the company have been wiped out by large losses incurred by the company. The accumulated losses as per the audited balance-sheet for the year ending 31st March, 1977, were to the extent of Rs. 13,66,12,385 as against the paid-up capital of Rs. 1,13,40,000 and reserves of Rs. 39,83,806.

14. Mr. Bhabha contended that since the petitioners' claim is disputed on substantial grounds, the petitioners are not entitled to ask for winding up of the company. In support of his contention, he relies upon a passage from Palmer's Company Law, vol. I, 22nd Edn., at p. 969, to which reference will be made while dealing with this submission. Mr. Bhabha further submitted that out of the total debts of the company, both secured and unsecured, to the tune of Rs. 29.20 crores as on 31st March, 1978, the Central Bank of India is a creditor to the tune of about Rs. 19.75 crores as on March 31, 1978. The Central Bank of India has appointed two persons on the board of directors with a view to regulate the affairs of the company and the Central Bank of India has put in further funds into the company to the tune of about Rs. 10.25 crores. The company is one of the largest textile mills in Bombay and has about 8,400 labourers and other employees. Its total fixed assets are about Rs. 2.21 crores and current assets of Rs. 8.59 crores as on 31st March, 1978. The daily production of the company is about 1,30,000 metres of cloth. If the company is ordered to be wound up, it would result in irreparable harm, injury and hardship to a large majority of its creditors, shareholders, labourers and employees of the company and would also prejudicially affect public interest and the need of the community.

15. As I have taken the view that there is a bona fide defence to the debt claimed by the petitioners and I was to dismiss the petition on that ground, it is, therefore, proper to first consider the contention of Mr. Bhabha that in such a situation, the petitioners are not entitled to ask for winding up of the company on some other ground as the petitioners are not “creditors of the company”. Mr. Bhabha has relied upon the following passage from Palmer's Company Law, vol. I, 22nd edn, p. 969:

“A winding-up petition is not the proper means of enforcing a debt which is disputed, and accordingly it is a good answer for the company to show that there is a bona fide defence to the debt claimed. In such circumstances the petitioner is not a ‘creditor’ of the company.”

16. This statement is based on the opinion expressed in Mann v. Goldstein, [1968] 1 WLR 1091 : [1969] 39 Comp Cas 353 (Ch D). In that case, the plaintiffs and the first defendant and his wife were equal shareholders in two companies, J. Co. Ltd. and C. Co. Ltd. The first plaintiff managed J. Co. and the first defendant C. Co. Proposals were made to buy each other out but no agreement could be reached. The first defendant presented a creditors' petition to wind up J. Co., alleging a debt of £1,869 for director's fees. The second defendant presented a petition to wind up C. Co. as a creditor for goods sold and delivered to that company. The plaintiffs sought an injunction to restrain the defendants from advertising or taking any further steps in the prosecution of their respective petitions on the grounds that the defendants were not creditors at all, or, alternatively, that their debts were disputed on substantial grounds, that the petitions were not bona fide but an abuse of the process of the court and that the companies were solvent. The learned judge, while granting the injunctions, held that a creditors' winding-up petition could only be presented by a creditor and since the debts upon which both the defendants founded their petitions were substantially disputed, neither of the petitioners were established as “creditors” of either of the two companies, and that accordingly neither was entitled to present a petition as neither had any locus standi in the company court; and that even though it appeared from the evidence that the companies were insolvent, as the debts were substantially disputed, the defendants ought to be restrained from proceeding on their respective petitions; and that to invoke the winding-up jurisdiction when a debt was disputed on substantial grounds after it had become clear that it was so disputed was an abuse of the process of the court.

17. Another case on the point is In re Lympne Investments Ltd., [1972] 1 WLR 523 (Ch D), which, following the above case of Mann v. Goldstein, [1968] 1 WLR 1091 : [1969] 39 Comp Cas 353 (Ch D), reaffirms the view that when a petition was based on a debt which was disputed, as in that case, the petitioner was not held to be a creditor who had the locus standi requisite for the presentation of a petition even if the company was in fact insolvent.

18. In In re Bryant Investment Co., [1974] 1 WLR 826 (Ch D), also, the above view is endorsed.

19. In the case before me, I have come to the conclusion that the petitioner's debt is disputed on grounds which are not without substance and, therefore, the petition must fail. The petitioners are not, therefore, further entitled to have the company wound up on any other ground as they are no longer creditors of the company in the eyes of the company court, or, in other words, the right conferred on them by s. 439(1)(b) of the Companies Act, 1956, to make an application for winding up of the company on the grounds or circumstances available under s. 434 is lost. Hence when the petitioners' right as a creditor to have the company wound up has come to an end, they have no further locus standi to continue the prosecution of the winding-up application. To permit the petitioners to further prosecute the application would be an abuse of the process of the court which was issued to prosecute a winding-up petition on the basis that the petitioners were the creditors. The petitioners as creditors having failed to clearly establish the debt, it would follow that they are no longer creditors and hence have no locus standi to further prosecute the petition. Further pursuit of the petition would be an abuse of the process of the court. Reverting to Mr. Chagla's submission that the company is insolvent or commercially insolvent or its substratum is gone, he relies on two circumstances: (1) The company is unable to pay its debts as and when they become due, and (2) the entire capital and reserves of the company have been wiped out by the losses incurred by the company as seen in the audited balance-sheet ended 31st March, 1977. Now, regarding the first circumstance, there is no material in support. Mere indebtedness of the company is not sufficient. The question whether the company is unable to pay its debts would depend on the facts of each transaction. In paying the claims of creditors, many options are open to the company under the Companies Act, 1956, and, therefore, it is not possible to judge the commercial insolvency of the company on the basis of its liabilities. The second circumstance about the wiping out of the capital and reserves by the losses cannot be considered in isolation. The accumulated losses, to which Mr. Chagla has referred, go to show that the company has been making losses for some years, but that by itself would not justify the passing of a winding-up order. The overall picture of the company is to be taken into consideration. The facts and figures pointed out by Mr. Bhabha, to which a reference is made above, show that the company's substratum is intact.

20. I have perused the audited balance-sheet ended 31st March, 1978. The company is in its 83rd year of existence. Financial institutions like the IDBI, IFCI, ICICI and the Central Bank of India have lent and advanced/agreed to lend and advance large sums of money to the company. Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI) and the Industrial Credit and Investment Corporation of India Ltd. (ICICI) have approved a total rehabilitation-cum-rationalisation programme of Rs. 11 crores after a very detailed study of the viability of the company. The said financial institutions have conveyed their sanctions to grant rupee term loans aggregating to Rs. 4 crores under the soft loan scheme. The company is making efforts to obtain further loans amounting to Rs. 7 crores on soft terms. As a part of rehabilitation-cum-rationali-sation programme, the Central Bank of India has agreed to convert a substantial portion of the outstanding balance as on 31st March, 1978, into term loans/debentures on soft terms. The directors' report shows that during the year ended 31st March, 1978, the company achieved sales amounting to Rs. 25 crores showing an increase of 36% over the previous year. The directors in their last report had referred to the high costs incurred during the year ending March 31, 1978. All costs were kept under adequate control despite inflationary pressures. Substantial increases were experienced in respect of excise duty (Rs. 42 lakhs) and salaries and wages (Rs. 85 lakhs). The company sufferred heavily under debt burden which went up by 28% (Rs. 72 lakhs). The total operating loss before interest and depreciation came to Rs. 299 lakhs as against Rs. 470 lakhs last year. During the operating year, major setbacks were suffered in production on account of breakdowns. Working shifts were lost in all departments of spinning, weaving, processing and finishing due to equipment breakdowns. To give some idea, there was a loom shift loss of 49,000 during the year leading to a cloth production loss of 11.70 lakhs metres. Similar losses were suffered in all other departments. To meet the market need and keep the machines working, which were out of balance due to breakdowns, the company had to buy capacities outside. A total payment of Rs. 223 lakhs involving a value added of Rs. 45 lakhs which could have been saved was made to outside parties for buying yarn and cloth, and for processing and finishing charges. Total payment on this account last year was Rs. 82 lakhs only. During the half year April-September 1978, sales had reached a level of Rs. 14.25 crores. With the rehabilitation programme already under way, the directors felt that on completion of the programme around March, 1980, the company would be able to earn normal profits.

21. I, therefore, do not find any substance in the contention on behalf of the petitioners that the company should be wound up on the grounds urged.

22. In the result, the petition is dismissed with costs.