The Karnatak Vegetab... v. The Madras Industria..., Madras High Court, Judgment, Law, casemine.com

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Case Number

O.S.A No. 88 of 1953.

Attorney(S)

Messrs. C. Venugopalachari and M.V Ganapathi for Appt.
Messrs. C.R Pattabhiraman, R. Ramasubbu Ayyar and A.D Sitharaman for Respts.

Judges

Rajamannar, C.J
Rajagopala Ayyangar, J.

Acts

Ss. 162 and 166 of the Indian Companies Act
Indian Companies Act

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Smart Summary

Factual and Procedural Background

This appeal was delivered by the Chief Justice against an order of Panchapakesa Aiyar, J. directing the winding up of Karnataka Vegetable Oils and Refineries Ltd. (the appellant). The company is a public limited company incorporated under the Indian Companies Act with an authorised capital of Rs. 20 lakhs and paid-up capital of Rs. 10,13,519. Its registered office was at Hagari Bommanahalli, Bellary district.

The respondent and petitioning creditor was Madras Industrial Investment Corporation Ltd., to whom the company had borrowed Rs. 6,50,000 secured by a mortgage dated 24 October 1950. The mortgage covered lands at Hospet (Bellary district) and the company's engines, machinery, plant and factories, and allowed for additional security demands. Repayment terms included 16 annual instalments (first due 30 June 1953) and interest at 6½% payable semi‑annually (15 June and 15 December), with a rebate provision for punctual payment and compound interest on default.

The company paid instalments due on 15 December 1950 and 15 June 1951, but defaulted on interest due 15 December 1951. Despite demands, the company did not pay; on 14 June 1952 it sent cheques for Rs. 21,554-15-3 asking to credit that sum towards interest for the half year ending 30 June 1952 (and claimed a rebate), which the respondent refused to apply because an earlier interest instalment remained outstanding. After an inspection of the company's accounts by the respondent's Chief Accountant and a resulting report, the respondent filed a petition under Ss. 162 and 166 of the Indian Companies Act seeking winding up. The petition alleged suspension of business from the end of 1951, inability to pay debts, chaotic affairs, managerial deadlock, improperly kept accounts and inability to operate for profit.

The company opposed the petition: it admitted the interest default but denied mismanagement and deadlock; contended the petitioner had other remedies; asserted its financial difficulties were temporary and beyond its control; argued winding up would not be in the country's best interests; and stated other creditors were not supporting the petition.

At first instance Panchapakesa Aiyar, J. directed winding up, the principal reasons being (1) suspension of production/business since Christmas 1951 with no prospect of resumption, and (2) inability to pay debts. The learned Judge noted irregularities in accounts and recognised the company's unfortunate economic circumstances but held that such circumstances would not prevent an unpaid creditor from obtaining a winding up order. The Official Receiver, Bellary, was appointed Official Liquidator.

Legal Issues Presented

Whether the Court should exercise its discretion to order the winding up of the company at the instance of a secured creditor who has substantial security for the debt.
Whether a winding up order should be made where the probable practical result would be the petitioning secured creditor realising its security, and other creditors are not supporting the petition.
How established principles on a secured creditor's right to present a winding up petition interact with the Court's discretion to refuse such relief when it would not benefit the general body of creditors.

Arguments of the Parties

Appellant's Arguments

The Court should not exercise its discretion to order a winding up at the instance of the respondent in the circumstances of this case.
The respondent (a secured creditor) had ample security for its debt; there was no averment or proof that the security was insufficient.
The respondent did not invoke contractual powers to demand additional security even though the mortgage permitted such a demand.
Except for the respondent, other creditors were not supporting the petition; the winding up would serve no useful purpose other than allowing the respondent to realise its security.
The appellant did not contest the general proposition that a secured creditor has locus standi to present a petition for winding up, nor did it seek to rely on the bankruptcy rule requiring abandonment or valuation of security.

Respondent's Arguments

A creditor who cannot obtain payment has a right to a winding up order, whether secured or unsecured; this is a general rule.
That right is, however, subject to the Court's discretion; the Court may refuse to order winding up in appropriate circumstances (for example, where the majority of creditors oppose it or where only the petitioning creditor would benefit).
The respondent relied on authorities to support the proposition that a secured creditor's petition is maintainable and that, where remedies have been exhausted, a secured creditor may pursue a winding up petition as a further remedy (citing authorities where similar circumstances obtained).
The respondent could not cite an instance in India or England where a creditor with ample security, without exhausting other remedies, was nevertheless held entitled to a winding up order in circumstances like the present.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Moor v. Anglo Italian Bank	Establishes that a secured creditor may present a petition for winding up and that the rules applicable in bankruptcy (requiring a creditor to be unsecured or to abandon/value security) do not apply to winding up; presenting a petition does not amount to giving up the security.	The Court accepted this as the established law showing a secured creditor has a right to present a petition; but emphasised that this right is subject to the Court's discretion in granting the remedy.
In re Great Western (Forest of Dean) Coal Consumers' Co.	Shows that where petitioning creditors hold security sufficient to cover their debt and a winding up would produce no practical good beyond realisation of their security—particularly where other creditors opposed the winding up—the petition can be dismissed.	The Court considered the decision apposite and relied on its reasoning to conclude that in the present case nothing would be gained by winding up save the realisation of the respondent's security; this supported refusal to order winding up.
In re Greenwood and Co.	States the proposition that an unpaid creditor is not entitled to a winding up order unless he can show that the general body of the creditors will derive benefit from the order; it is insufficient to show that only the petitioner will be benefited.	The Court invoked this principle to support the conclusion that, since the likely beneficiary of winding up would be the respondent alone, the petition should be refused.
In re Borough of Portsmouth (Kingston, Fratton and Southsea) Tramways Co.	Illustrates a case where a debenture-holder who had previously brought actions to enforce security and had obtained appointment of a receiver later filed a petition for winding up; the court treated a petition by one who exhausted other remedies similarly to an ordinary creditor.	The Court distinguished that authority from the present case: in Borough of Portsmouth the petitioning creditor had exhausted other remedies (including appointment of a receiver); here the respondent had not shown that it had exhausted other remedies and the circumstances were different.

Court's Reasoning and Analysis

The Court proceeded in the following, textually grounded, steps:

The Court acknowledged the settled legal position (citing Moor v. Anglo Italian Bank and supporting commentary) that a secured creditor may present a petition for winding up and does not, by presenting one, give up the security.
The Court considered the appellant's central discretionary argument: although the petition might be maintainable, the Court should not exercise its discretion to wind up the company where the petitioning creditor has ample security, where there is no averred insufficiency of that security, and where other creditors do not support winding up.
The Court examined the decision in In re Great Western (Forest of Dean) Coal Consumers' Co., noting Fry J.'s reasoning that where petitioners would gain nothing from winding up beyond realisation of securities and where other substantial creditors oppose winding up, no practical good results from making the order. The Court found that these observations applied to the present case.
The Court reviewed the factual positions advanced about creditor support: the respondent claimed unsecured creditors to the extent of Rs. 4,76,628; the company stated nearly Rs. 3 lakhs was due to the managing agents who were not pressing for repayment nor desiring winding up, and that other creditors due about Rs. 1,60,000 were not supporting the petition. The Court noted these company statements were not disproved and therefore treated them as accurate for present purposes.
The Court cited the principle from In re Greenwood and Co. that an unpaid creditor cannot obtain a winding up order unless the general body of creditors will benefit; it concluded that in the present case the likely beneficiary would be the respondent alone.
The Court observed the established general rule that a creditor who cannot get paid has a right to a winding up order, but reiterated that that right is subject to the Court's discretion; citing Halsbury's and Palmer's statements that the Court may refuse where the majority of creditors oppose or where only the petitioning creditor would benefit.
The Court considered but distinguished authority relied on by the respondent (In re Borough of Portsmouth), noting that in that case the debenture-holder had previously enforced security and obtained a receiver, whereas no similar exhaustion of remedies was shown here.
On the basis of the combination of these legal principles and the uncontradicted factual showing that other creditors did not support the petition and that winding up would produce no benefit beyond realisation of the respondent's security, the Court concluded that the discretion to refuse winding up should be exercised in favour of the appellant.

Holding and Implications

Holding: The appeal is allowed; the order of Panchapakesa Aiyar, J. directing the appellant company to be wound up is set aside.

Implications (direct effects on the parties):

The winding up order previously made is vacated; the company will not be wound up pursuant to that order.
The Court directed that the Official Liquidator (Official Receiver, Bellary) shall not hand back possession of the company's properties in his possession to the company until the expiry of three months from the date of this judgment.
There is no order as to costs.
The opinion does not purport to lay down any new general precedent beyond applying existing authorities and principles; the decision rests on the application of established principles concerning a secured creditor's right to petition and the Court's discretionary power to refuse winding up where it would not benefit the general body of creditors.

Delivered by the Chief Justice. (Signed: V.C.S)

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The Karnatak Vegetable Oils And Refineries Ltd. v. The Madras Industrial Investment Corportion Ltd., By Its Secretary And Another.

(Delivered by the Chief Justice)

This is an appeal against the judgment and order of Panchapakesa Aiyar, J. directing the winding up of a company called the Karnataka Vegetable Oils and Refineries Ltd. The company is the appellant. It was incorporated under the Indian Companies Act as a public limited company. Its authorised capital is Rs. 20 lakhs, out of which a capital of Rs. 10,13,519 was paid up. The registered office of the company is at Hagari Bommanahalli, Bellary district. The respondent who was the petitioning creditor is the Madras Industrial Investment Corporation Ltd. The company borrowed from the respondent a sum of Rs. 6,50,000 and secured the said sum by a mortgage dated 24th October, 1950. The hypotheca included lands situated at Hospet in the Bellary district and the engines, machinery, plant and factories belonging to the company and which might be erected at any time during the continuance of the mortgage. The principal amount was repayable in 16 equal annual instalments, the first of such instalments to be paid on 30th June, 1953. Interest was payable at the rate of 6½ per cent twice each year on the 15th June and 15th December. If the interest was paid regularly, there was provision for a rebate of 1 percent and in case of default, there was provision for compound interest with half yearly rests. It is common ground that the instalments due on 15th December, 1950 and 15th June, 1951 were duly paid. But the company defaulted in payment of interest due on 15th December, 1951. Though there were several demands by the respondent, the company failed to pay the same. On 14th June 1952, the company sent cheques for Rs. 21,554-15-3 and asked that the said amount may be credited towards the interest due for the half year ending 30th June, 1952 and also claimed a rebate. The respondent refused to adjust the said sum towards interest for a subsequent instalment when interest due for a previous instalment was in arrear. Meanwhile the Chief Accountant of the respondent Corporation inspected the accounts of the company and submitted a report. Thereupon, the respondent filed an application under Ss. 162 and 166 of the Indian Companies Act praying that the company may be wound up. The grounds on which the winding up was sought fell within one or other of the following clauses of S. 162, viz, Cls. (iii),(v) and (vi). The respondent alleged that the company had suspended its business from the end of the year 1951, that it was unable to pay its debts, that the affairs of the company were in a chaotic condition, that there was a dead-lock in its management, that the accounts of the company had not been properly kept, and that the financial position of the company was such that it was not possible any longer to work the concern for a profit. The petition was opposed by the company. Though the default in payment of interest was admitted, the allegations of mismanagement and deadlock were denied. The company inter alia stated that the petitioning creditor had other rights and remedies which could be pursued to enforce its rights that the financial embarrassment of the company was only temporary and due to causes beyond their control, and that a winding up of an industrial concern like the company would not be in the best interests of the country. The company also stated that the creditors of the company other than the petitioner were riot in support of the petition and were not pressing for their debts.

The application was heard and disposed of by Panchapakesa Aiyar J. who considered that the company deserved to be wound up mainly for two reasons. (1) that the company had suspended production and business since Christmas 1951 and there was no prospect of resumption of business [or production, and (2) that the company was unable to pay its debts. The learned Judge recognised that it was an unfortunate case where the company had erected a building costing more than the loan advanced by the petitioning creditor but where due to the world conditions and world depression in general the company had fallen on evil days. But he thought that it was not a circumstance which would prevent a creditor who had not been paid his debt from obtaining a winding up order. The learned Judge also referred to certain irregularities in the accounts. He, therefore, directed that the company be wound up and appointed the Official Receiver, Bellary, as the Official Liquidator.

The learned Counsel for the appellant company rested his case entirely on the position that this Court should not exercise its discretion to order a winding up at the instance of a creditor like the respondent in the circumstances of this case. He did not, and indeed he could not, contend that a secured creditor had no locus standi to present a petition for winding up. Nor did he invoke the rule in bankruptcy that before a secured creditor could file a petition for winding up he had to abandon his security or to value the security and aver that after giving credit to such value there would be a balance due and payable to him. It it well established that a secured creditor is as much entitled as of right to file a petition for winding up as an unsecured creditor. Moor v. Anglo Italian Bank(1) is the leading decision on the point. Jessel M.R observed thus:

“What the plaintiffs say is this: they say that a petitioning creditor in bankruptcy, in order to obtain adjudication, must be an unsecured creditor. That is quite correct in this sense, that he must be a creditor who either never had security, or, if he has one, has given it up or valued it, asserting it to be less in value than the debt, and who presents his petition as being well founded on the balance of the debt after setting off the value of the security, and that balance must amount to a certain sum. That is quite true in bankruptcy to obtain adjudication, but there are no such rules in winding up………The winding up is equally good whether it is obtained by a secured creditor or an unsecured creditor.”

On the authority of the above and other cases, Buckley (12th Edn.) states the law thus:

“A secured creditor may present a petition and he does not, presenting one, elect to give up his security or in any way lose his right to it.”

But Mr. C. Venugopalachari, learned Counsel for the appellant, contended that though the petition as such may be maintainable, this Court would not grant the prayer for winding up at the instance of a creditor like the respondent in this case. He relied upon the following facts, namely, that the respondent has ample security for his debt, that there is no averment that his security is insufficient, that he never demand additional security of the company on the ground that the security had become insufficient, though the mortgage deed contained provision enabling the respondent to demand such additional security, that except for the respondent no other creditor desired that the company should be wound up and that no useful purpose will be served by the winding up except the realisation by the respondent of his security. He relied on the decision in In re Great Western (Forest of Dean) Coal Consumers' Co.(2). There is considerable force in this argument of the appellant's Counsel, and the decision in In re, Great Western (Forest of Dean) Coal Consumers' Co. appears to be apposite to this case. In that case, there was a creditors' petition for the winding up of a company. The petitioners represented a moiety of the first mortgage debt and debentures for a large sum of money. It was contended that the company was admittedly and clearly insolvent and therefore a winding up order was to be made. For the company, it was contended that the petitioners held security for their debt, that if their security was sufficient, they had no interest in a winding up, as they could realise their security; but if their security was insufficient, then the winding up could do no good to anyone except to the petitioners and it would prevent the company from continuing. The petition was dismissed. Fry J. gave two reasons for his order. One was that creditors whose debts amounted to a much larger sum than the sum due to the petitioning creditors were opposed to the winding up, and the other that as matters stood, nothing would be gained by a winding up. The learned Judge said:

“I come to the same conclusion on another ground, viz., that, as matters now stand, it appears to me the petitioners would gain nothing if the company were wound up,—I mean, nothing beyond the realisation of their securities. In the winding up I should have to administer only the equity of redemption of the company's property after satisfying the securities. Now, so far as I can learn from the evidence before me, all the substantial property of the company is included either in the first or the second mortgage, or in the further charge, and whatever is not included in them is swept up by the debentures. The debentures are largely held by the petitioners themselves, or rather by the estate which they represent. I think, therefore, that at the present time, no practical good can result from a winding up order. And this is the second reason why I decline at the present moment to grant the prayer of the petition.”

These observations equally apply to the present case. Here too, we think that nothing would be gained by a winding up beyond the realisation of the respondent's security. Fry J. while conceding that prima facie a person having an unsatisfied debt due from a company had a right ex debito justitiae to a winding up order, pointed out that nevertheless the Court would not make an order for the winding up if there was a large mass of other creditors opposed to the winding up. In the present case, too, we are of opinion that it must be held that except the respondent creditor the other creditors are opposed to the winding up. According to the respondent, there are unsecured creditors to the extent of Rs. 4,76,628. The company stated that out of the total amount due to creditors a sum of nearly Rs. 3 lakhs was due to the managing agents and they were neither pressing for the repayment of their debt, nor were they anxious that the company should be wound up. The company also stated definitely that the other creditors to whom a sum of about Rs. 1,60,000 was due were not supporting the petition for winding up. These statements of the company have not been proved to be wrong or inaccurate. We must, therefore, take it that excepting the respondent, no other creditor is in support of the petition for winding up. Before us, two creditors have sought to be impleaded to oppose the petition for winding up.

Mr. Venugopalachari referred us also to the decision in In re Greenwood and Co. where the following proposition was laid down:

“An unpaid creditor of a company is not entitled to a winding up order unless he can show that the general body of the creditors will derive benefit from the order being made; it is not enough for him to show that he himself will be benefited by it.”

In the present case, too, it looks as if the only person to be benefited by the winding up order would be the respondent.

Mr. C.R Pattabhiraman for the respondent urged upon us strongly the general rule that a creditor who cannot get paid has a right to a winding up order, whether he be a secured or an unsecured creditor. Undoubtedly, this is the general rule. But this right of the creditor is always subject to the discretion of the Court, The Court may, nevertheless refuse to make a winding lip Order having regard to the wishes of the majority of the creditors. (Hals bury's Laws of England, Vol. V, 2nd Edn. para 889). The order will also be refused if it would not benefit the creditors generally but only the petitioning creditor (Palmer's Company law 19th Edn. page 381). Both these circumstances are present in this case, and the Court will, therefore, be Justified in refusing to make the order.

Mr. Pattabhiraman, learned Counsel for the respondent, was unable to cite any instance in India or in England in which in a case like the present, at the instance of a creditor holding ample security, he has been held to be entitled to an order of winding up without having had recourse to the other remedies open to him at law. He cited the decision in In re Borough of Portsmouth (Kingston, Fratton and Southsea) Tramways Co.. But there, the debenture-holder who eventually filed a petition for winding up had previously brought an action to enforce his security and had obtained the appointment of a receiver. Sterling, J. in repelling the contention that the petition was not maintainable, said:

“It is admitted that an ordinary creditor of a company might present a petition to wind up the company and obtain an order upon it. I fail to see why a debenture holder, whose debt is payable and who has exhausted all his remedies except a winding up petition without obtaining payment of his debt, should be in a worse position than an ordinary creditor who has got no security upon the undertaking. It seems to me that the remedy given to him to enforce his security upon the undertaking as a going concern, does not deprive him of his remedy as a creditor who has obtained a judgment for his debt, but cannot obtain payment.”

So that was a case in which the petitioning creditor could not enforce payment of his debt in any way other than by a winding up order. That is not the case here.

For the reasons above mentioned, we allow the appeal and set aside the order of Panchapakesa Aiyar, J. directing the appellant company to be wound up. We, however, think it just and necessary that we should direct the Official Liquidator not to hand over possession of the properties of the company in his possession to the company till the expiry of a period of three months from to-day. There will be no order as to costs.

V.C.S

The Karnatak Vegetab... v. The Madras Industria...