Translate
Text Highlighter

Bookmark

PDF

Share

Report a problem
AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • K.G.Vakharia
  • C.C.Gandhi
Judges
  • Hon'ble Mr. Justice Batukumar Kantiprasad Mehta
Acts
Are you a practicing lawyer?
Enhance your digital presence and reach by creating a Casemine profile.
Upload pleading to use the new AI search
Click here to upload
Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • K.G.Vakharia
  • C.C.Gandhi
Judges
  • Hon'ble Mr. Justice Batukumar Kantiprasad Mehta
Acts
See more information ...
Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

The Registrar of Companies, Gujarat, filed a petition for winding up Messrs. Kavita Benefit P. Ltd. (a chit-fund company) under clause (e) of section 433 of the Companies Act, 1956, on the ground that the company was unable to pay its debts.

The Registrar relied on the company's balance-sheet as at 31 December 1972, which showed an accumulated loss of Rs. 14,49,169, realisable assets of about Rs. 38,05,914 and liabilities of Rs. 53,53,633. The Registrar also alleged that directors had control over large funds collected as subscriptions, had received substantial remuneration (Rs. 67,500) and had benefited by obtaining loans/advances at low interest, creating apprehension that the company's affairs were managed for directors' personal benefit and that public money was insecure.

The Regional Director served a show-cause notice and, after hearing the company's representative, sanctioned the Registrar's application on 10 March 1975. The Registrar filed the petition in the court on 9 July 1976; the petition was admitted on 27 July 1976 and advertised. Three contractor-creditors appeared in opposition; no other creditors or subscribing members intervened.

The company filed an affidavit-in-reply by its managing director (Mr. L. R. Makhija) denying defaults: it contended subscription repayments fall due only on maturity of various schemes and that 11 groups had matured and been fully funded according to the rules; there were no complaints by members or creditors. The company described the liability shown in the 1972 balance-sheet (approx. Rs. 53.53 lakhs) as contingent, dependent on subscribers fulfilling scheme obligations.

The Registrar filed an affidavit-in-rejoinder arguing that liabilities ascertainable as at a date are liabilities notwithstanding that payment may be due in future; the Registrar also warned that past performance is no guarantee of future solvency. The Registrar did not dispute the company's statement that there had been no defaults in repayment when sums became due.

Legal Issues Presented

  1. Whether the Registrar of Companies is entitled to an order for winding up the company under section 433(e) of the Companies Act, 1956 — i.e., whether the company is "unable to pay its debts".
  2. Whether the liabilities shown in the company's balance-sheet (and liabilities arising under chit-fund schemes that depend on subscribers' continued performance) constitute "debts" in praesenti for the purpose of section 433(e), or are merely contingent liabilities that cannot be treated as present debts until contingencies occur.
  3. Whether, and to what extent, contingent and prospective liabilities (as referred to in section 434(1)(c)) can be taken into account at the stage of deciding an application for compulsory winding up under section 433(e).

Arguments of the Parties

Registrar of Companies' Arguments

  • The company was unable to pay its debts as its liabilities exceeded its realisable assets (balance-sheet figures as on 31 December 1972: liabilities ~ Rs. 53,53,633; assets ~ Rs. 38,05,914; accumulated loss ~ Rs. 14,49,169).
  • Directors had control of large subscriber funds, had taken substantial remuneration (Rs. 67,500) and obtained loans/advances at cheap rates — suggesting mismanagement and risk to public money.
  • Liabilities that are ascertainable as at a date should be treated as liabilities for the purpose of winding up even if payable in the future; contingent and prospective liabilities should be taken into account (invoking clause (c) of section 434(1)).
  • The company had shown profits in the 1975 and 1976 balance-sheets possibly by manipulating results through indiscriminate forfeiture of subscriptions and prizes, suggesting mala fides or manipulation.

Company's Arguments (managing director, affidavit-in-reply)

  • Repayment obligations in the company's chit schemes arise only on completion/maturity of the relevant schemes — subscription liabilities are not presently payable but contingent on subscribers honouring scheme obligations.
  • Eleven groups had already matured and the subscription amounts and dividends payable to their members had been fully funded according to rules; there had been no complaints from any member, group or creditor about non-payment.
  • The liability of approx. Rs. 53.53 lakhs shown in the 1972 balance-sheet was contingent and not a present liability.

Registrar's Rejoinder

  • Liabilities that are ascertained or ascertainable on a given date become liabilities on that date, even if the sums are payable at a future date.
  • Past punctual payments by the company do not conclusively establish future solvency or credibility; past endurance cannot be the basis for creditworthiness.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax [1966] 59 ITR (SC) Used for the meaning of "debt" — a debt is a sum now payable or payable in future by reason of a present obligation; distinguished from a sum payable only on a contingency. Quoted and relied upon to explain that contingent liabilities (payable only on occurrence of contingencies) are not debts in praesenti and so cannot alone ground a winding up under section 433(e).
Banchharam Majumdar v. Adyanath Bhattacharjee [1909] ILR 36 Cal 936 (Full Bench) Jenkins C.J.'s definition: a debt is a sum of money now payable or payable in future by reason of a present obligation; distinguished sums payable on contingencies. Quoted in the Kesoram passage and used to support the proposition that contingent sums are not debts until the contingency happens.
People v. Arguello [1869] 37 Calif 521 (Supreme Court of California) Passage explaining that a sum payable on a contingency is not a debt until the contingency has happened; distinguishes "debt owing" and "debt due". Adopted as illustrative authority (via Kesoram and Union of India v. Raman Iron Foundry) to emphasise that contingent obligations are not debts in praesenti.
Union of India v. Raman Iron Foundry, AIR 1974 SC 1265 Approved the statement of law about the meaning of "debt" and the requirement of an existing obligation to pay now or in future (Webb v. Stenton definition). Relied on to reinforce the classical definition of debt and to support the court's approach that present obligation is prerequisite to treating a liability as a debt for winding up purposes.
Webb v. Stenton [1883] 11 QBD 518 (CA) Classical definition of "debt" by Lindley L.J.: a debt is a sum of money now payable or will become payable in the future by reason of a present obligation. Cited as the classical definition underpinning the court's understanding of "debt" for section 433(e) purposes.
Registrar of Companies, Rajasthan v. S. Sohanmull Golcha Ltd. [1972] 42 Comp Cas 386 (Raj) Held that when a debt becomes absolutely due such that the creditor is entitled to claim payment presently, it is a debt payable within the meaning of section 433(e). Noted by the court as authority for the proposition that only debts presently payable (i.e., where creditor can claim payment) fall within section 433(e); used to counter Registrar's reliance on future contingencies.
Registrar of Companies v. Atlas Transport Pvt. Ltd. [1974] 44 Comp Cas 496 (Punj) Similar proposition: debt payable within section 433(e) must be such that the creditor is entitled to claim payment presently. Referred to for the same proposition as the Rajasthan case to emphasize that contingent liabilities are distinct from present debts under section 433(e).
A. C. K. Krishnaswami v. Stressed Concrete Constructions P. Ltd. [1964] 34 Comp Cas 6 (Mad) Authority for the proposition that mere excess of liabilities over assets does not, in the first instance, justify compulsory winding up. Applied to reject the Registrar's submission that liabilities exceeding assets alone warranted compulsory winding up; court held this ground insufficient without present debt/default.

Court's Reasoning and Analysis

The court began by identifying the threshold legal requirement for a winding-up order under section 433(e): the company must be "unable to pay its debts." To apply that test the court focused on the legal meaning of "debt" and whether liabilities shown in the balance-sheet were debts in praesenti.

Drawing upon authority (Webb v. Stenton; Kesoram; People v. Arguello; Union of India v. Raman Iron Foundry), the court summarized the legal principle that a "debt" involves an existing obligation to pay a sum of money now or in future by reason of a present liability; however, a sum payable only upon a contingency is not a debt until the contingency occurs. The court therefore distinguished between (a) debts in praesenti (including those payable in futuro by reason of present obligation) and (b) contingent liabilities which depend on future events.

The court observed that the Registrar relied on clause (c) of section 434(1) (which instructs the court to take into account contingent and prospective liabilities in determining the extent of debt), but rejected the Registrar's submission that this renders contingent liabilities sufficient, by themselves, to establish inability to pay. The court read clause (c) to require proof to the satisfaction of the court that the company is unable to pay its debts; in determining extent of that debt, contingent and prospective liabilities are to be taken into account, but contingent liabilities do not automatically become present debts unless and until the contingency happens.

Applying these principles to the facts, the court accepted the company's contention that subscription repayment obligations under its chit schemes arose only on maturity and depended on subscribers' performance under the scheme rules — i.e., those liabilities were contingent. The court also noted that the Registrar had not denied the company's statement that no subscriber or creditor had complained of non-payment and that there had been no defaults when sums became due. Given the absence of any established present default or presently payable debt, the court concluded that the condition precedent for compulsory winding up under section 433(e) — inability to pay debts — was not satisfied.

The court addressed the Registrar's additional arguments: (1) that liabilities exceeded assets and (2) that the company had manipulated accounts in 1975–76 by resort to forfeiture. On the first point the court cited authority (A. C. K. Krishnaswami) and held that an excess of liabilities over assets does not, in itself, justify compulsory winding up in the first instance; the court required a present inability to pay debts. On the second point the court found no material placed before it to substantiate the allegation of manipulation by forfeiture; the Registrar had the opportunity to inspect company records but did not place evidence before the court to satisfy it that forfeiture powers were exercised mala fide or illegally. The court therefore rejected that criticism.

The court also recorded that loans taken by directors and associates had been repaid to the company by order of the court and noted the company's cessation of chit-fund activities and switch to construction and agency business. Overall, the Registrar failed to establish any debt presently due and payable by the company or any default that would ground a compulsory winding-up order.

Holding and Implications

Holding: The petition by the Registrar of Companies for compulsory winding up under section 433(e) is DISMISSED.

Direct consequences and costs: The petition fails; the company is ordered to bear the costs of the Registrar. The advocate's costs for the Registrar are quantified at Rs. 1,250. The company shall bear its own costs.

Broader implications: The opinion applies established authorities on the meaning of "debt" and the distinction between present debts and contingent liabilities. The court emphasised that contingent and prospective liabilities are relevant only in determining the extent of debt once inability to pay actual debts is established; contingent liabilities that depend on subscribers' future performance are not debts in praesenti. The opinion does not set out any new legal principle beyond application of existing authorities and does not purport to establish a fresh precedent.

Show full summary ...

    Registrar Of Companies, Gujarat v. Kavita Benefit Pvt. Ltd.

    1. The Registrar of Companies, Gujrat, has filed this petition for winding up of the Messrs. Kavita Benefit P. Ltd., chit fund company, under clause (e) of section 433 of the Companies, Act, 1956, on the ground that the company is unable to pay its debts. The case of the Registrar is that the financial positions of the company, as per the balance-sheet as on December 31, 1972, filed by the company, was such that it was unable to pay its debts and its liability exceeded the net tangible assets. The balance-sheet as on December 31, 1972, showed an accumulated loss of Rs. 14,49,169 and its realisable assets were only of the order of Rs. 38,05,914 as against the liability of Rs. 53,53,633. The Registrar has also made a grievance that the directors of the company had control over large funds which they have collected in the nature of subscriptions from its members to whom chit fund was sold from time to time and the directors have received a huge remuneration of Rs. 67,500 during all these years and also benefited by obtaining loans and advances at the cheap rate of interest. The Registrar is apprehensive that the affairs of the company were being managed solely of the personal benefit of it directors and there appears to be no security of the public money deposited with the company. In his opinion, it would be worth while to put an end to the uneconomical working of the company. The Regional Director of Companies had, therefore, served a show-cause notice on the company as to way sanction should not be given to the Registrar to Companies to make an appropriate application for winding up as the company was unable to pay its debts. After hearing the representative of the company, the Regional Director has given his sanction on March 10, 1975, to the Registrar to make an appropriate application which has been filed in this court on 9th July, 1976. After notice to the company, this petition was admitted on 27th July, 1976, and usual advertisement has been inserted in two newspapers-one in English and another in vernacular - and the State Government Gazette. Pursuant to this advertisement, three creditors of the company who are contractors and who have entered into contract with the company for construction work have filed in their appearance and opposed the petition. No other creditors or subscribing member has come forward to support or oppose the petition. The company has filled its affidavit-in-reply of its managing directors, one Mr. L. R. Makhija, contending, inter alia, that the business of the company was such that the liability of repayment of subscription received from the members become due only on completion of period under various schemes and that in the course of working of the company, there were a total of 11 group which have matured and the entire subscription amounts along with dividends payable to the members of all the 11 group were founded complete according to rules and regulations. The managing directors further asserted in his affidavit-in-reply that there was absolutely no complaint of whatsoever kind or nature received from any member or any group or any creditor of the company that they have not been paid back the amount or any dues nor any inquiry whatsoever has been pending or made by the petitioner in this respect. I had been further stated in the affidavit in reply that the so called liability of Rs. 53,53,000 shown in the balance-sheet as on December 31, 1972, was not the liability in present but was a contingent liability which is to various schemes provided the subscribers carry our their respective obligations under the rules and regulations of the relevant schemes. The Registrar had affidavit-in-rejoinder and it was contended that the liabilities which are ascertained or are ascertainable on a particular date become liability on that date irrespective of the fact that the same are payable at a future date. The Registrar further asserted in his affidavit-in-rejoinder that the endurance of the past payments do not determine the credibility of the company and cannot form the basis for reputation which is always in such a case good in the beginning and worst in the end. It should be noted that the Registrar of Companies has not denied the statement of the managing directors of the company in his affidavit-in-reply filed on behalf of the company that there was not a single default on the part of the company in repaying the subscription to the members as and when it became due for repayment nor was there any complaint from any of the subscribers nor there was any default in repayment of the debt to the creditors. It is in this context that I have been called upon to decide whether the Registrar is entitled to an order of winding up under section 433(e) of the Companies Act, 1956. Section 433(e) permits the court to wind up a company if the court is satisfied that the company if unable to pay debts. If the court is satisfied that the company is, having regard to the circumstances, unable to pay debts, it will, before making an order of winding up, consider what is the extent of the debt and whether having regard to its assets and uncalled capital, if any, the liabilities exceed so as to warrant an order for winding up. At this stage, of course, the court considers the prospective and contingent liability for determining the extent of the debt as prescribed under clause (c) of section 434(1) of the Act. The crux of the problem in this petition, therefore, in the first instance is whether is has been established that there were any debts of the company. Now, the term "debt" has definite connotation which was come for consideration at the hands of the court on various occasions in different context. In Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax [1966] 59 ITR (SC), a question came up for consideration as to what is the meaning of the words "debt owed" and "debt" in the context of ascertaining the net wealth for the purposes of tax liability under the Wealth-tax Act. Subba Rao. J., delivering the majority judgment, observed at page 779 as under :

    "The decision of a Full Bench of the Calcutta High Court in Banchharam Majumdar v. Adyanath Bhattacharjee [1909] ILR 36 Cal 936, throws considerable light on the connotation of the word 'debt' Jenkins C.J. defined the word thus :

    'I take it to be well established that a debt is a sum of money which is now payable or will become payable in future by reason of a present obligation.' Mookerjee J. quoted the following passage with approval from the judgment of the Supreme Court of California in People v. Arguello [1869] 37 Calif 521 :

    'Standing alone, the word "debt" is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due. In other words, debts are of two kinds : solvendum in present and solvendum in futuro ..... A sum of money which is certainly and in all events payable is a debt, without regard to the fact whether it be payable now or at a future time. A sum payable on a contingency, however, is not a debt, or does not become debt, until the contingency has happened'."

    2. This statement of law is quoted with approval by the Supreme Court in Union Of India v. Raman Iron Foundry ., AIR 1974 SC 1265, 1271. Bhagwati J. speaking for the court, observed as under in para 7 of his judgment :

    "It would be profitable in this connection to refer to the concept of a 'debt' for a sum due is the same thing as a debt due. The classical definition of 'debt' is to be found in Webb v. Stenton [1883] 11 QBD 518 (CA) where Lindley L.J. said '... a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation.' There must be debitum in praesenti : solvendum may be in praesenti or in futuro - that is immaterial. There must be an existing obligation to pay a sum of money now or in future. The following passage from the judgment of the Supreme Court of California in People v. Arguello [1869] 37 Calif 521, which was approved by this court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth Tax [1966 59 ITR 767; AIR 1966 SC 1370. clearly brings out the essential characteristics of a debt :

    'Standing alone, the word "debt" is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due'."

    In the context of this very section, the Rajasthan and Punjab High Court have also held that when the debt becomes absolutely due in the sense that the creditor is entitled to claim its payment presently, it is a debt which is payable by the company within the meaning of section 433(e) [vide Registrar of Companies, Rajasthan v. S. Sohanmull Golcha. Ltd. [1972] 42 Comp Cas 386 (Raj); Registrar of Companies v. Atlas Transport Pvt. Ltd. [1974] 44 Comp Cas 496 (Punj)]. In view of this settled legal position, therefore, when it is not seriously disputed by the Registrar of Companies that there was no default on the part of the company either in repaying the subscription and when it become due or repaying the debt of the creditors as and when it became due, I do not think that it can be successfully urged, much less established, that the condition precedent for exercise of power under section 433 of compulsory winding up, viz, inability to pay the debt is satisfied. It is common ground that the Registrar has proceeded on the basis that the liabilities which may crystalize in future would also be relevant for the purposes of determining whether the company is unable to pay its debts I am afraid, this is too broad a submission which can be sustained. As stated above, in the first instance, the court must be satisfied that there are in fact debts in the sense that there is a liability of the company in praesenti. Unless the liability to pay a sum of money in praesenti is made out, it cannot be said that a person is in debt. The learned advocate for the Registrar of Companies urged that in view of the matter, clause (c) of section 434 would be redundant. Section 434(1)(c) provides as under :

    "A company shall be deemed to be unable to pay its debts - ......

    (c) if it is proved to the satisfaction of the court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company."

    3. I am of the opinion that the apprehension of the learned advocate is not well founded for the obvious reason that clause (c) also postulates that it must be proved to the satisfaction of the court that the company is unable to pay its debts and in determining whether it is so unable, the court shall take into account the contingent and prospective liabilities. In other words, in order to determine the extent of the debt, the court shall take into account the contingent and prospective liabilities. But if the liability o which the petition is based is contingent liability as i the present case, it cannot be said that it would amount to a debt which is payable in praesenti. The rules and regulations of the scheme high have been undertaken by the company from time to time in the course of its working in the past have been placed on record. According to the rules and regulations of the scheme, the subscriber will be entitled to repayment of his subscription provided that he does not make any default in making his subscription during the period of the scheme. In other words, he would be entitled to repayment of his subscription provided he ones through the scheme. He would be entitled to benefit of the prizes and gifts provided he dies not commit by default in complying with the obligations prescribed in the scheme. The liability of the company to repay the he subscription is clearly, therefore, contingent liability and that liability will not be a debt in praesenti. It is no doubt true that in the very nature of the business of the company, large funds have been placed at the disposal of the directors. It is equally that the directors and their friends have obtained loans from the company. By the order of this court, all these loans have been repaid to the company. It is also an admitted position now that the company has stopped its chit fund business and has switched over to the construction activates and agency business. Under the circumstances, therefore, I am of the opinion that the petitioner has not been able to establish that there is any debt which has become due and payable by the company either to its creditors or to subscribers.

    4. The learned advocate for the Registrar of Companies attempted to persuade me that the liabilities of the company have far exceeded the assets thereof. I do not think that this will justify, in the first instance, for any compulsory winding up order. [vide A. C. K. Krishnaswami v. Stressed Concrete Constructions P. Ltd. [1964] 34 Comp Cas 6 (Mad)]. The learned advocate for the Registrar, therefore, urged that, apart for this excess of liabilities over the assets, the company has no profit to sufficient income to meet with its liabilities as and when they become due. In this connection, he has drawn my attention to the balance-sheet filed on beheld of the company for the years ending on December 31, 1975, and December 31, 1976, where the company has, according to the learned advocate, manipulated to show profits by in discriminately resorting to their power of forfeiture of subscription in gifts. I do not think that this criticism would be justified merely on the stray circumstance that is was only during these last two years that the company has shown profits. It is no doubt true that before this petition was filed, the company was consistently showing losses in their financial working. It is also true that it was only in the last two years that some profits have been show. However, it would be risky for the courts to jump to the conclusion from this stray circumstance that the are manipulated. The Registrar has not placed any material on record to show and to satisfy the court that the power of forfeiture had been indiscriminately and illegally exercise by the company. It cannot be said that the Registrar has no opportunity to verify the position by having an inspection of the records of the company. As a matter of fact, during the tendency of the petition, the Registrar could have availed of that opportunity and made criticism good. In the absence of canvassing material, therefore, it would not be possible for me to agree with this criticism of the learned advocate for the Registrar that the profits were manipulated. If the company had power to forfeit subscription of a default being committed by the subscriber or to forfeit prizes of benefit in case of default by the subscriber, I do not think that it can be presumed from that mere existence of power that the same had been exercised mala fide and/or illegally. This criticism of the learned advocate for the Registrar is, therefore, not justified.

    5. In that view of the matter, therefore, the result is that this petition fails and should be dismissed. The company shall bear the costs of the Registrar and the advocate's costs have been quantified at Rs. 1,250. The company shall bear its own cots.

    Use AI to get other relevant cases.
    Try AI Pro free for 7 days Upgrade to AI Pro

    Comments

    Registrar Of Companies, Gujarat v. Kavita Benefit Pvt. Ltd.
    (Apr 12, 1977)