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Case Number

Company Petition No. 62 of 1994

Advocates

Mr. Dulip Singh, Advocate for M/s. King and Partridge for Petitioner.
M/s. T. Raghavan and Mr. T.K Seshadri, Advocates for Respondents.

Judges

Jayasimha Babu, J.

Acts

Section 433(e) & (f) read with Section 434(a) and 439(i)(b) of the Companies Act.
Section 433(e) of the Companies Act
SECTION 19 LIMITATION ACT
SECTION 3 LIMITATION ACT

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

This is a petition for winding up of the respondent company filed on 8.4.1994 by Sri Vijayalakshmi Art Productions (a registered partnership firm) under Section 433(e) & (f) read with Sections 434(a) and 439(1)(b) of the Companies Act. The petitioner alleged that it advanced sums to the respondent between 2.7.1985 and 8.3.1990 aggregating Rs. 71,00,000 and claimed interest so that as on 28.2.1994 the petitioner asserted a total claim of Rs. 2,12,25,771 (principal Rs. 71,00,000 plus interest Rs. 1,41,25,771).

Documents filed with the petition included a registration certificate, a legal notice dated 28.2.1994, the respondent's reply of 23.3.1994, a 21.1.1994 letter from the respondent's chartered accountant, and a 24.1.1994 letter from the respondent. Additional documents were produced on 9.8.1994 (correspondence between 24.6.1985 and 2.4.1990, alleged receipts, balance sheets for 1990–1992, an Income Tax assessment order dated 30.3.1992, schedules of sundry creditors, and further correspondence between the parties' counsel).

The petitioner relied on a statement of account annexed to a letter dated 2.4.1990 from the respondent which purportedly showed Rs. 71 lakhs due as on 31.3.1990. However, company records for 31.3.1991 and 31.3.1992 showed only Rs. 18,02,495 due; the respondent's correspondence of 21.1.1994 and 24.1.1994 acknowledged Rs. 19,03,500, and that sum was subsequently paid to the petitioner by cheques (reported to the court on 14.9.1994).

The question of limitation loomed large: the petitioner had not acted to enforce the alleged Rs. 71 lakhs within three years from 2.4.1990 and there was no acknowledgment of the larger sum after that date. During proceedings the petitioner sought (by C.A. 153/95 on 23.3.1995) a subpoena to produce a letter said to have been written on 25.4.1990; the Court found that application lacking in bona fides and rejected it. The petition was ultimately dismissed and there was no order as to costs.

Legal Issues Presented

Whether the petitioner's claim (in whole or in part) is barred by limitation and therefore not legally enforceable for the purpose of a winding up petition under the Companies Act.
Whether the petitioner, having been acknowledged only for a lesser sum (Rs. 19,03,500) which was subsequently paid, remains a creditor entitled to maintain a winding up petition.
Whether a winding up petition can be maintained on just and equitable grounds (Section 433(f)) when the petitioner has other adequate remedies and when a substantial part of its claim is time-barred or disputed.
At the admission stage under Section 434, whether the court should admit a winding up petition where the creditor's claim is apparently barred by limitation or is not legally enforceable on its face.

Arguments of the Parties

Petitioner's Arguments

The petitioner asserted it advanced Rs. 71,00,000 between 1985 and 1990 and claimed interest, resulting in a total alleged debt of Rs. 2,12,25,771 as on 28.2.1994.
The petitioner relied on acknowledgments and documents (including a statement of account dated 2.4.1990) showing Rs. 71 lakhs due as of 31.3.1990.
The petitioner sought to maintain the winding up petition on the basis that it was a creditor on the date of filing and also invoked Section 433(f) to argue that it was just and equitable to wind up the company.
The petitioner later applied (C.A. 153/95) for issuance of a subpoena to its own auditor to produce a letter said to show the claim was within limitation (letter alleged written 25.4.1990 and undertaking repayment by 31.3.1992).

Respondent's Arguments

The respondent contended the petitioner's claim is barred by limitation; no enforceable claim existed beyond the acknowledged amount of Rs. 19,03,500.
On merits, the respondent disputed the petitioner's claim for amounts in excess of Rs. 19,03,500 as collusive, alleging dealings in benami and that documents signed by an erstwhile Managing Director (B.N. Suresh Reddy) were not binding on the company.
The respondent asserted the company was solvent and capable of meeting its debts; it produced financial information (assets, land holdings, turnover, profits) to show financial soundness.
The respondent argued that the petition appeared to be an attempt to pressure the company to pay a disputed debt and that the debt (except the admitted part) was a bona fide disputed debt for which the company had a prima facie defence.
The respondent noted that the acknowledgment and subsequent payment of Rs. 19,03,500 in January–September 1994 did not extend limitation for the remaining claim.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
K.M Muhammad Sultan Rowther v. K.M Muhamed Nurdin, 1963 (1) MLJ 301	That an acknowledgment of liability will be construed in each case from facts and intention of debtor; where a debtor acknowledges a smaller amount it cannot save limitation for the entire larger claimed sum — acknowledgment can save limitation only for the amount acknowledged (within meaning of Section 19, Limitation Act).	The court applied this principle to hold that the respondent's acknowledgment of Rs. 19,03,500 (and its subsequent payment) could not be used to save limitation for the petitioner's larger claim. Accordingly, the petitioner could not rely on the January 1994 acknowledgment to revive or save limitation for the whole claim.

Court's Reasoning and Analysis

The Court conducted a summary inquiry under Section 434 at the admission stage and proceeded on the following legal and factual bases set out in the opinion:

Applicable legal duty at summary stage: The Court emphasised that at the stage of admission it must ascertain whether the creditor's claim is barred by limitation or is legally enforceable; if a claim is on its face barred by time, the court is to dismiss it without adjudicating the merits (reference to Section 3 of the Limitation Act).
Limitation facts and documentary record: The petitioner alleged the principal indebtedness as shown in a statement dated 2.4.1990 (claiming Rs. 71 lakhs due as of 31.3.1990), but there was no acknowledgment of that larger liability after 2.4.1990. Company books for 31.3.1991 and 31.3.1992 showed a far smaller balance (Rs. 18,02,495). The only acknowledgment thereafter (21.1.1994 / 24.1.1994) related to Rs. 19,03,500.
Effect of the admitted sum: The Rs. 19,03,500 that the respondent acknowledged in January 1994 was paid to the petitioner in September 1994. Once that acknowledged amount was paid, the petitioner ceased to be a creditor in respect of that admitted debt; therefore the petitioner lacked the status of creditor necessary to maintain the winding up petition on the ground of inability to pay debts.
On attempted late evidence: The petitioner, after addressing arguments, sought nearly a year later (C.A. 153/95) to subpoena its own auditor for a letter said to be dated 25.4.1990 that supposedly showed an undertaking to repay by 31.3.1992. The Court found this application lacked bona fides, noting the document was allegedly in the custody of the petitioner's own auditor and not referred to in earlier pleadings or notices; the Court inferred the letter was not in existence when the petition was filed and that the application was an attempt to get around limitation. The subpoena application was rejected.
On 'just and equitable' ground (Section 433(f)): The Court observed that a petition on just and equitable grounds will not be entertained when an adequate alternative remedy is available and a petitioner must not invoke winding up merely to press a disputed claim barred by limitation. The petitioner had not established a just-and-equitable case in the petition; moreover, if the petitioner had a legally enforceable claim it could pursue ordinary civil remedies.
On disputed debt and prima facie defence: The Court accepted respondent contentions that the claim (except the admitted amount) appeared to be a disputed, potentially collusive or benami accounting of loans; the respondent had a prima facie defence and the debt (except admitted part) was doubtful and, in any event, time-barred. The income-tax treatment of alleged loans as income was noted as a factor undermining the petitioner's assertion that those amounts were its loans to the company.
Application of precedent: The Court relied on the cited precedent (K.M Muhammad Sultan Rowther) to conclude that an acknowledgment for a smaller amount cannot revive limitation for a larger claim; thus the January 1994 acknowledgment did not save the larger claim.
Resulting legal conclusion: Because the claim, to the extent not admitted, was barred by limitation or was a disputed debt with a prima facie defence available to the company, and because the petitioner had ceased to be a creditor for the admitted amount (having been paid), there was no enforceable claim at the admission stage to justify winding up.

Holding and Implications

Holding: THE COMPANY PETITION IS DISMISSED.

Implications and immediate consequences:

The petitioner cannot maintain the winding up petition because (a) as to the bulk of the claimed debt the claim is either time-barred or a disputed debt for which the company has a prima facie defence and (b) the only amount acknowledged (Rs. 19,03,500) was paid, so the petitioner no longer had creditor status to found a winding up petition on that ground.
The Court rejected the petitioner's late attempt to introduce additional documentary evidence by subpoena to its own auditor (C.A. 153/95) as lacking bona fides; that evidence could not be used to overcome the limitation bar.
The Court held that a petition for winding up on just and equitable grounds is not appropriate where an adequate alternative remedy exists and the petitioner has not made out such a case in the petition.
No order as to costs was made in the circumstances of this case.
There is no indication in the opinion that a broader or novel precedent was laid down; the decision applied established limitation principles and Companies Act procedure to the facts before the Court.

(End of summary based exclusively on the provided opinion.)

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Sri Vijayalakshmi Art Productions Rep., By Its Partners C. Venkataraju, G. Sivaraju And Smt. C. Ramalakshmi Petitioner v. Vijaya Productions Pvt. Ltd. Vadapalani, Ms. 26 S

1. This is a petition for winding up of the respondent company under Section 433(e) & (f) read with Section 434(a) and 439(i)(b) of the Companies Act. This petition was filed on 8.4.1994 The question of limitation loomslarge in this petition.

2. The petitioner, Sri Vijayalakshmi Art Productions, a registered partnership firm claims to have advanced to the respondent company between 2.7.85 and 8.3.90 large sums of money aggregating to Rs. 71,00,000. Petitioner has stated that the said sums were advanced at the request of the respondent and was to carry interest at mutually agreed rates. Petitioner has at para 5 of the petition stated: “The receipt of the above loan was acknowledged by the respondent under various was acknowledged by the respondent under various correspondences, the last of which is dated 21.1.1994 by the respondent's chartered accountant of behalf of the respondent company, and by one of the Directors of the respondent company on 24.1.1994 Curiously in letter dated 24.1.1994, the respondent company confirmed only a sum of Rs. 19,03,500 stands to the credit of the petitioner in the respondents' books of accounts. Needless to state that this is in contravention of the earlier admission made by the respondent company and it is clearly an act of after-thought”

3. According to the petitioner”…. as on 28th February 1994, a sum of Rs. 71 lakhs by way of principal and Rs. 1,41,25,771 is due by way of interest”. Petitioner thus claims to be a creditor of the company for a sum of Rs. 2,12,25,771.

4. The documents filed along with the petition were, apart from the copy of its registration certificate, copies of the legal notice sent by petitioner's counsel on 28.2.1994, reply there to on 23.3.1994 by respondent's counsel, the letter dated 21.1.1994 from the respondent's chartered accounted, and of the letter dated 24.1.1994 from the respondent. During the pendency of the petition, the petitioner produced certain further documents on 9.8.1994 The documents so produced are copies of letters exchanged between one of the partners of the petitioner firm, and the respondent between 24.6.1985, and 2.4.1990; receipts said to have been issued by respondent between 2.7.1985 and 8.3.1990 in favour of Venkataraju (5), Damu (5), Damu Productions (32) and the petitioner (22). Petitioner also produced copies of the balance sheet of respondent for the years 1990,1991 and 1992. Copy of the assessment order under the Income Tax Act, made by the Assistant Commissioner of Income Tax made on 30.3.1992 regarding the respondent's income for the assessment years 1988-89, schedule of respondent's sundry creditors for the years ended 31.3.1991 and 31.3.1992 as also copies of letters from petitioner's counsel to respondent's counsel between 9.4.1994 and 14.9.1994

5. Between 2.4.1990 and 24.1.1994, there is no document to show the extent of the respondent's indebtedness to the petitioner. It is not the case of the petitioner that any sums were paid to the petitioner at any point of time prior to the institution of this petition by way of repayment of any part of the loan or the amount of interest thereon, although according to the petitioner, it commenced advancing substantial sums to respondent in June 1985 and for 5 years kept on advancing amounts till March 1990, without receiving any interest on any part of the sum so advanced. The agreement to pay interest at 24% is said to be contained in a letter dated 24th June 1985 from the respondent. Petitioner relies on the statement of account annexed to the letter dated 2.4.1990 from the respondent wherein it is stated that a sum of Rs. 71 lakhs is due to petitioner as on 31.3.1990

6. The acknowledgment of liability to petitioner thereafter is nowhere shown, in that sum of Rs. 71 lakhs. In the list of sundry debtors of the company as on 31.3.1991, as also as on 31.3.1992, the amount due to the respondent is shown as Rs. 18,02,495 only. The amount acknowledged by the respondent in the letter dated 24.1.1994 as also in the letter dated 21.1.1994 sent by its chartered accountant is Rs. 19,03,500.

That sum of Rs. 19,03,500 was paid by the respondent to the petitioner by cheques the receipt of which was reported to the court, in these proceedings, by the petitioner's counsel on 14.9.1994

7. The petitioner has not taken any action within a period of three years from 2.4.1990 for enforcing its claim for Rs. 71 lakhs with interest thereon against the respondent and mere is no acknowledgment of liability of the amount claimed by the petitioner, at any time subsequent to 2.4.1990 The only amount that was acknowledged by the respondent in January 1994 as due and payable to the petitioner was a sum of Rs. 19.03.500

8. The petitioner would be entitled to maintain a petition for winding up the respondent company on the ground that it is not in a position to pay the debts due to the petitioner, only so long as amounts in excess of Rs. 500 are legally due and payable to it by the respondent company. The petitioner can claim the status as creditor of the respondent company only in respect of legally enforceable claims of the petitioner cannot be regarded as a creditor in respect of sums, the recovery of which is barred by limitation. As at the time of hearing of the petition for admission after notice, there is no enforceable claim of the petitioner which needs to be taken into account in determining the ability of the respondent company to pay its debts.

9. In the summary enquiry under Section 434 at the stage of admission before deciding as to whether winding up proceedings should be the Court has to ascertain whether, inter alia, the claim made by the creditor is barred by limitation or whether it is legally enforceable. If the claim made by the creditor is on the face of it not one which cannot be enforced, it is unnecessary to examine as to whether the claim is the genuine claim, and as to whether the respondent has a bonafide and reasonable defense on merits to the claim. The right to apply for winding up under Section 439(b) is a right conferred on the creditor and not on any person, however anxious that person may be, to have the company wound up.

10. It is the duty of the Court to dismiss claims made beyond the prescribed period of limitation, as provided in Section 3 of the Limitation Act. If on the basis of the case set up and the documents relied upon by the petitioner, the claim is barred in whole or in part, to the extent such claim is barred by time, the Court is not required to adjudicate on the merits of the same.

11. The respondent has in its counter at para 5, stated that the claim as made by the petitioner is barred by limitation. It is also stated that the amount standing to the credit of the petitioner in the books of account of the respondent was only Rs. 19,03,500. On merits also the petitioner's claim for any amount in excess of Rs. 19,03,500 has been disputed by the respondent as being collusive. The respondent has contended that the petitioner has been colluding with the erstwhile Managing Director of the company one B.N Suresh Reddy, who has been removed from that petition, and that the documents signed by the said Suresh Reddy purporting to acknowledge liability to petitioner as on 2.4.1990 is not binding on the company, and that the present petition is an abuse of the process of the Court.

12. When this matter was taken up for hearing, after the learned counsel for the petitioner had addressed arguments, he was asked in the Court, to show as to how the claim made by the petitioner was within the prescribed period of limitation. He sought time to examine the issue, and the matter was thereafter adjourned on several occasions at the request of the petitioner. Learned counsel for the petitioner has been unable to point out from the record as to how the claim made by the petitioner in respect of the amount not acknowledged by the respondent, is within the period of limitation. After taking several adjournments on various grounds, the petitioner came with an application C.A 153/95, on 23.3.1995, nearly an year after the petition was filed, to issue subpoena to its own Auditor for production of a letter said to have been addressed to the petitioner's auditor by the erstwhile director of the respondent company, in which he is said to have undertaken to repay the debts due to the petitioner, on the ground that letter would indicate that the claim is within the period of limitation. The letter sought to be summoned is not referred to in any of the pleadings filed by the petitioner.

13. The application is wholly lacking in bonafides. The document sought to be now introduced is allegedly in the custody of the petitioner's own auditor, and was always available to the petitioner, if that document was in existence at the time, the petition was filed. It is not the petitioner's case that there are any differences between the petitioner and its auditor and that the auditor has acted in an unprofessional manner and refused to give to this petitioner a document which pertains to the petitioner's business. That letter is said to have been given by the former director of respondent company who had been removed from that post long prior to the filing of this petition. That letter is not referred to in, the notice sent by counsel, before the institution of this petition. In the application now filed, it is claimed that a letter was written on 25.4.1990 by which respondent undertook to pay the amount by 31.3.1992 It is obvious that such a document could only have been got for the purpose of getting over the bar of limitation. That such a document was not existence at the time the petition was filed is evident, from the petition and other documents produced by petitioner none of which refers to such a letter. The affidavit filed in support of the application does not set out anywhere as to why this document was not disclosed earlier. The reason can only be that it was not in existence when the petition was filed.

14. When a person claiming to be a creditor files a petition for winding up, the petitioner must place the requisite materials to establish his right as a creditor, and cannot one year after filing the petition and after having addressed arguments, realising that a substantial portion of the claim, as made is barred by limitation apply to court to gather evidence for him. C.A No. 153 of 1995 for issue of subpoena is rejected.

15. Learned counsel for the petitioner contended as the petitioner was a creditor as on the date of the filing of the winding up petition, atleast in respect of the amount, which had been acknowledged by the respondent as payable to petitioner, the petitioner has a right to maintain this petition, and prosecute the same further, even though the amount acknowledged as payable to the petitioner has been paid subsequently.

16. For the respondent company, it has been stated that the financial position of the company is sound and that the company is fully capable of repaying all its debts; the value of the assets owned by it is said to be not less than Rs. 23 crores; the company owns over 10 acres of valuable land and buildings there on at Vadapalani in the City of Madras; the company is profitably engaged in the business of making movies, and processing of films, the annual receipts from the processing of the films as shown in the profit and loss account exceeding Rs. 3,00,00,000; and the cash profit for the year ended 31.3.1994 is over Rs. 26 lakhs. The fact that the paid up share capital is only Rs. 6,00,000 by itself does not indicate mat the company is incapable of meeting its debts. Counsel for the respondent rightly pointed out that no other person has come forward with a petition for winding up on the ground if inability on the part of the respondent to pay its debts.

17. The right given to a creditor under Section 433(e) of the Companies Act to seek winding up of the company is to enable such creditor to realise the amounts due to the creditor along with all other creditors of the company. Such action by a creditor is for the benefit of all the creditors. After the petitioner ceased to be a creditor by reason of the amount lawfully due to the petitioner having been paid, the petitioner has no further right in relation to the affairs of the company, and no enquiry need be made into the company's finances or its conduct in other matters for the purpose of deciding as to whether the winding up order is warranted. A winding up order cannot be made at the instance of the person who himself is not a creditor at the time when the winding up order is to be made, by reason of the acknowledged debt having been paid to such a creditor. The scheme of the Companies Act is to provide for continued operation of the company except in the circumstances indicated in the Act. The Company is not to be wound up unless it is essential to do so.

18. Learned counsel for the petitioner then contended that as the petitioner has also invoked Section 433(f), and having regard to the financial position of the Company it is just and equitable to wind up the company.

19. After the petitioner had ceased to be a creditor, the winding up petition at the instance of such person either on the ground of inability to pay its debts, or on the ground that it is just and equitable to wind up, will not lie. Moreover, a petition on just and equitable grounds will not be entertained when an adequate alternative remedy is available to the petitioner. If the petitioner has a legally enforceable claim against the respondent, it is open to the petitioner to resort remedies in Civil Courts which he is entitled to do. The petitioner cannot merely by asserting that it has a claim, even though the claim is barred by limitation, further asset that it is just and equitable to wind up the company. A case for winding upon on the grounds that of just and equitable to do so has also not been made not in the petition. In any event, the petitioner cannot be heard at this stage to contend that the company should be wound up on that ground.

20. Learned counsel for the respondent submitted that the petitioner has failed to furnish any of its documents such as its accounts and ledger books etc. even though respondent and called upon the petitioner to do so. Such failure to produce its books, considered along with the alleged accounting of die loans in benami and fictious names, and the admitted inaction in enforcing, its claim for any part of the alleged advances, or interest thereon during the period of nine years between 1985 and 1994, would indicate, as rightly contended by the respondent, that the claim now made for a sum of over Rs.two crores is a speculative claim. The conduct of the respondent in railing to disclose the true' extract of its income for purposes of taxation, though condemnable does not create a right in the petitioner to claim that the amounts which had been shown by the respondent at loans received from fictitious persons, are amounts belonging to the petitioner and lent by it to the respondent. The petitioners have not made any such claim before the Income Tax authorities. The alleged loans have been treated by the Income Tax Department as income of the petitioner and tax has been levied thereon. Having regard to the nature of the claim, and the objections thereto raised by the respondent and the conduct of the parties, the debt claimed, except to the extent admitted, being barred by limitation must be held to be a bonafide disputed debt for which the company has a prime facie defense. Petitioner in the circumstances is only seeking to exert pressures the company to pay a disputed debt. A winding up petition for such a purpose will notice.

21. The fact that respondent has acknowledged liability of 24.1.1994 for a sum of Rs. 19,03,500 and paid the same in September 1994, does not extend the period of limitation for the remaining part of the petitioners' claim. This acknowledgment as also the payment was after the expiry of a period of three years from 2.4.1990 - date of the acknowledgment relied on by the petitioners.

22. Counsel for the respondent in this context referred to and relied on the decision of this Court in the case of K.M Muhammad Sultan Rowther v. K.M Muhamed Nurdin, (1963 (1) MLJ 301), wherein it was held that “whether a particular acknowledgment amounts to an acknowledgment of liability in law so far as to save limitation within the meaning of Section 19 of the Limitation Act is no doubt to be decided in each case from a proper inference from the facts and circumstances and the intention of the debtor. But even in cases of acknowledgments where a claim was for a particular amount but the debtor acknowledges his liability for a smaller amount such acknowledgment cannot enable the creditor to claim the entire amounts. The acknowledgment can be used to save limitation only with respect to the amount acknowledged”.

23. Petitioner having been paid the amount of the acknowledged liability, petitioner cannot claim to be a creditor in respect of a claim which is barred by limitation. The claim so made to the interest not admitted, considered in the light of the conduct of the parties, the documents produced and the objections raised by the company, is also such that petitioner should first establish that claim in a civil court.

24. This company petition is therefore dismissed. In the circumstances of this case, there will be no order as to costs.

ALS\VP

Sri Vijayalakshmi Ar... v. Vijaya Productions P...