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Bengal Luxmi Cotton Mills Ltd. And Ors. v. Mahaluxmi Cotton Mills Ltd. And Ors.
Factual and Procedural Background
Four creditors (the appellants) applied for a winding-up order against Mahaluxmi Cotton Mills Ltd. (the respondent company) on the ground that the first instalment of their debts, which under a reorganisation scheme had become payable, had not been paid despite notices of demand under section 163 of the Indian Companies Act. The company accepted that the debts existed but asserted that the scheme required payment only out of profits and that it had not made sufficient profits since the scheme to render the instalments payable. The appellants replied that the "payment out of profits" provision was repugnant to clearer provisions of the scheme and should be ignored.
At first instance, Banerjee, J. accepted the company's construction of the scheme: the payment-out-of-profits provision was integral and, because the company had not made sufficient profits, the liability to pay had not arisen; therefore failure to pay could not ground a winding-up order. Two other alleged breaches of the scheme were found to have occurred but were held not to justify a winding-up order as not being "just and equitable" grounds. The petition for winding-up was dismissed and the four creditors appealed.
Before the High Court, the learned Advocate-General (for the appellants) argued that the payment-out-of-profits provision was repugnant and that the debts were immediately payable; he also relied on the Court of Appeal decision in Re Welsh Brick Industries Ltd. A suit (No. 1225 of 1951 — Premraj Dulichand v. Mahaluxmi Cotton Mills Ltd.) for construction of the scheme was stated to be pending on the Original Side of the Court.
Legal Issues Presented
- Whether a winding-up petition is an appropriate remedy where the company raises a bona fide, substantial dispute about the time at which a debt under a scheme became payable (i.e., a dispute as to maturity rather than existence of the debt).
- Whether the winding-up court should itself decide such a dispute on the petition (thereby determining whether a debt is due and payable) or dismiss/keep the petition pending until the creditor establishes the claim in a regular action.
- Whether failure to pay after a statutory notice of demand under section 163 of the Indian Companies Act necessarily entails a winding-up order (i.e., whether such failure conclusively establishes insolvency when the company raises a substantial defence as to liability or timing).
Arguments of the Parties
Appellants' Arguments (as presented by the learned Advocate-General)
- The provision in the scheme that debts were payable only out of profits was repugnant to other, clearer provisions of the scheme and therefore should be disregarded so that the debts (or at least the first instalment) were immediately payable.
- Since the statutory notice under section 163 had been given and the company had not paid, the appellants were entitled to a winding-up order.
- The winding-up court is entitled — and ought — to resolve disputes about payment timing on the petition itself and make a winding-up order if it finds the debt to be due and payable; reliance was placed on Re Welsh Brick Industries Ltd. as supporting this approach.
Company's Arguments
- The debts were to be paid only out of profits as provided by the scheme; the company had made insufficient profits since the scheme and therefore the instalment was not yet payable.
- Because the liability was conditional on profits, the debt had not matured and thus failure to pay could not be a basis for a winding-up order.
Contentions at First Instance (trial judge's findings)
- The learned trial Judge (Banerjee, J.) accepted the company's construction that the payment-out-of-profits provision was integral to the scheme; consequently the debts were not yet payable and no winding-up order could follow on that ground.
- Two other alleged breaches of the scheme were held by the trial Judge to have occurred, but they were not such as to make it just and equitable to wind up the company; accordingly the petition was dismissed.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Re Welsh Brick Industries Ltd. [(1946) 2 All E.R. 197] | Addressed whether a court seised of a winding-up petition can, and should, decide disputed questions of liability — and whether an order giving unconditional leave to defend in separate proceedings is conclusive that a dispute is bona fide and substantial. | The court held that the decision does not support the wider contention that the winding-up court should decide bona fide disputes and then make or refuse winding-up orders based solely on that determination; instead it limits the rule to permitting the winding-up court to examine whether the dispute is bona fide and substantial. Lord Greene, M.R.'s reasoning was examined and distinguished from the Advocate-General's broader submission. |
| Buckley on the Companies Acts (as quoted in the opinion) | Summarises English decisions: generally a winding-up petition is not a legitimate means to enforce a debt bona fide disputed by the company; petitions on disputed debts are usually dismissed or stayed until the debt is established in action; the court may decide the debt if the dispute is not on substantial grounds. | The court interpreted Buckley's summary as stating that where a dispute is bona fide and substantial, the winding-up court will typically forbear from deciding the substantive dispute and will either dismiss the petition or keep it pending until the creditor establishes the claim in ordinary proceedings. The court applied this interpretation to conclude that the present dispute is bona fide and substantial. |
Court's Reasoning and Analysis
The court's analysis proceeds from the central principle that a winding-up order on the ground of inability to pay debts is predicated on insolvency — i.e., commercial inability to meet debts — and that failure to pay after a statutory demand under section 163 gives rise to a presumption of insolvency, although insolvency may also be proved otherwise.
The court carefully examined the English authorities as encapsulated in Buckley's summary and the Court of Appeal decision in Re Welsh Brick. It interpreted Buckley to mean that when a company fails to pay but the failure is shown to rest on a substantial, bona fide dispute as to liability (or in this case, the timing of payment), there is no present proof of insolvency and no sufficient basis for a winding-up order. In such circumstances the winding-up court ordinarily limits itself to testing whether the dispute is bona fide and substantial; if it is, the court will normally either dismiss the petition or keep it pending until the creditor establishes the debt in ordinary proceedings.
The court read Re Welsh Brick as narrower than the Advocate-General contended: that decision permits the winding-up court to inquire into the substantiality of the defence and, if no substantial defence exists, to proceed to decide the debt; but it does not establish that the winding-up court should decide disputes it has found to be bona fide and then proceed to make an order on that basis in every case.
Applying these principles to the facts, the court found that the construction of the scheme raises a substantial problem of construction — the dispute is bona fide and not plainly unsubstantial. The court further noted the particular factual circumstance that the company had made no profits sufficient to pay the debts since the scheme, and if held immediately liable the company could discharge the debts only by selling capital assets. Selling capital assets to meet debts ordinarily indicates lack of commercial solvency (unless those assets are surplus, which had not been shown). Thus, even though the dispute concerns only timing of payment, there is evidence that, if the dispute is decided against the company, the company may not be in a position to pay immediately — a material factor weighing against a straight dismissal in favour of the appellants.
For these reasons — the bona fide, substantial nature of the dispute coupled with the practical consequence that a finding against the company might reveal insolvency — the court concluded it would be more appropriate, on grounds of convenience and practice, to keep the appeal pending until the already-filed suit (No. 1225 of 1951) for construction of the scheme is decided on the Original Side, rather than to decide the matter in winding-up proceedings.
The court expressly refrained from laying down any general rule as to what a winding-up court should do when a debt is disputed; it characterized the matter as one of convenience and practice to be decided on the facts of each case.
Holding and Implications
Holding: The further hearing of the appeal is adjourned until after the decision of suit No. 1225 of 1951 (Premraj Dulichand v. Mahaluxmi Cotton Mills Ltd.) pending on the Original Side.
Immediate implications for the parties:
- The appeal by the four creditors is not decided on the merits now; it is to be resumed only after the Original Side suit determining the construction of the scheme is decided.
- If the construction dispute in the suit is decided against the company, the company will remain free to urge on the resumed appeal any other grounds why a winding-up order should not be made.
- Conversely, the creditors will be free, when the appeal is again heard, to press the two additional grounds (found by the trial Judge to have occurred but insufficient at first instance) that they had previously relied upon for a winding-up order.
Broader legal implications:
- The court did not lay down a new general rule or precedent about how winding-up courts should handle disputed debts; it emphasized that the outcome depends on considerations of convenience and the bona fides/substantiality of the dispute. The opinion therefore does not purport to change existing practice generally.
Other Formal Information Recorded in the Opinion
The lead judgment was delivered by Chakravartti, C.J.; S.R. Das Gupta, J. agreed. The solicitors appearing were S.C. Ray Chaudhuri for the appellants; P.C. Ghosh & Co. for the creditor supporting the appellants; A. Das Gupta for the respondents; and P.C. Basu for the creditor supporting the respondents.
Chakravartti, C.J:— We have heard the learned Advocate-General for the appellants in this appeal at some length and having done so, we are of opinion that the proper course for us to adopt will be to adjourn the hearing of the appeal till after the decision of suit No. 1225 of 1951 (Premraj Dulichand v. Mahaluxmi) Cotton Mills Ltd.) pending on the Original Side.
2. The appeal has arisen in the following way. The four appellants, who are creditors of the respondent company, applied for a winding-up order against it on the ground that the first instalment of their debts, which had already become payable under the provisions of a certain scheme, had not been paid in spite of notices of demand under section 163 of the Indian Companies Act. The company's reply was that the debts claimed by the appellants were undoubtedly due to them, but the scheme provided that the debts were to be paid out of the profits and inasmuch as the company had not made sufficient profits since the date of the scheme, the debts had not yet become payable. To that plea the appellants' rejoinder was that the provision as to payment out of profits was repugnant to other and clearer provisions of the scheme and ought, therefore, to be disregarded. The learned trial Judge, Banerjee, J., accepted the contention of the company and held that the provision as to payment out of profits was an integral part of the scheme which could, not be ignored. Necessarily, he held further that since the company had yet made no sufficient profits, its liability to pay the debts had not yet arisen and therefore the company's failure to pay the first instalment of the appellants' debts could not be a ground for making a winding-up order. Two other breaches of the scheme were also urged by the appellants as entitling them to a winding-up order. With respect to them, the learned Judge held that although the breaches alleged had occurred, they were not such as to make it just and equitable for him to make a winding-up order because of them. He accordingly dismissed the petition for winding-up and thereupon the four creditors preferred the present appeal. Before us, the learned Advocate-General repeated the argument that the provision as to payment out of profits was repugnant to the whole tenor of the scheme and inconsistent with certain specific provisions and that, therefore, it ought to be held that the liability to pay had arisen although no profits had been made and that the failure of the company to pay the first instalment of the appellants' debts in compliance with the statutory notice of demand entitled the appellants to a winding-up order. We put it to the learned Advocate-General whether this was not a case of a bona fide dispute as to the debts and whether the petition for winding-up should not for that reason be dismissed or, at least, kept pending till the appellants established their claim in a regular suit. We had in mind a passage in “Buckley on the Companies Acts” in which the effect of English decisions on the subject has been summarised. The learned Advocate-General pointed out that there was no dispute in the present case as to the existence of the debts, but only a dispute as to the time of payment. He contended that, in such a case, the winding-up Court was entitled to and indeed ought to go into the dispute itself and proceed to dispose of the petition for winding-up according to its finding. In aid of his contention, the learned Advocate-General referred to the decision of the Court of Appeal in Re. Welsh Brick Industries Ltd. (1) [(1946) 2 All E.R 197].
3. The case cited does not support the whole contention of the learned Advocate-General. As the decision was relied on as having modified the statement of law, as contained in Buckley, it will be convenient to read the statement at the present stage. It runs as follows:—
“A winding-up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the company A petition presented ostensibly for a winding-up order but really to exercise pressure will be dismissed, and under circumstances may be stigmatized as a scandalous abuse of the process of the Court. Some years ago petitions founded on disputed debt were directed to stand over till the debt was established by action If, however, there was no reason to believe that the debt, if established, would not be paid, the petition was dismissed. The modern practice has been to dismiss such petition. But, of course, if the debt is not disputed on some substantial ground, the Court may decide it on the petition and make the order.” (See “Buckley on the Companies Acts”, Twelfth Edition, page 452.)
4. In the case cited the passage was quoted from the 11th Edition of Buckley, pages 356, 357, and in quoting it, the learned Master of the Rolls observed that the law and practice in regard to such matters had been stated in the passage “with sufficient accuracy.”
5. In order to appreciate the passage correctly, it may be useful to recall what the position is as to making a winding-up order against a company on the ground of its inability to pay its debts. The basis of such an order is that the company has ceased to be commercially solvent and, accordingly, it is fit and proper in the interest of the creditors and shareholders not to allow it to function further as a company. When there has been a failure to pay a debt in accordance with a statutory notice of demand, insolvency is to be presumed, but it may also be proved in other ways. The basis of a winding-up order on the ground of a company's inability to pay its debts is, however, always insolvency.
6. Read in the light of that principle, the true meaning of Buckley's summary of the English decisions appears to me to be this: When a company has failed to pay a debt, but it appears that the failure occurred, not because the company was unable to pay, but because it disputed the liability on a substantial ground and there is nothing to show that if the dispute is decided against the company, it will not or will be unable to pay the debt, there is no present proof of insolvency and therefore no sufficient basis for making a winding-up order. In such a case, the winding-up Court will only see if the grounds on which the liability is disputed are substantial and if the dispute is in that sense bona fide If it finds the issue in favour of the company, it will ordinarily not proceed further and decide the dispute itself and determine whether or not a debt exists and has become payable. In such a case, the Court will either dismiss the petition for winding-up or keep it pending till the creditor has established his claim in a regular action. The principle on which the Court will forbear from deciding the dispute and making a winding-up order in case it decides it against the company, is that winding-up proceedings are not intended to be exploited as a normal alternative to the ordinary mode of debt-realisation and that it is more convenient that claims should be investigated and decided in a regular action.
7. According to the learned Advocate-General, in the case cited by him it was held that the winding-up court would not only consider whether the dispute was bona fide, but would also decide the dispute itself, at least in a case where the only contention of the company was that it was entitled to refuse payment until some future date I do not think that the case goes to the length contended for the facts of the case were that a creditor issued a writ in the King's Bench Division for the recovery of certain sums advanced by him to a company and thereafter, on a summons for a summary judgment, the Court made an order under Order 14 of the Rules of the Supreme Court, giving the company an unconditional leave to defend. Some two months afterwards, the creditor presented a petition in a county court for a winding-up order the company's defence was that the creditor was under an obligation to make advances up to the limit of ??? 5,000, which he had not yet done, and that under an agreement with the creditor, the company's obligation to repay was to be deferred will after he had completed the advances and the company had acquired certain properties and become self-sufficient It was argued before the county court Judge that since the King's Bench Division had given the company unconditional leave to defend, it must have done so in the view that it had a substantial defence and, therefore, the case ought to be treated as one where there was a bona fide dispute about the debt and where no winding-up order ought to be made. The county court Judge overruled that contention, went into the evidence, found that a debt existed and proceeded to make a winding-up order. The company then preferred an appeal which, being an appeal from a county court, was confined to matters of law. The grounds urged before the Court of Appeal were first that the county court Judge should have accepted the unconditional leave to defend granted by the King's Bench Division as conclusive proof that there was a bona fide dispute about the debt and should have refused to make a winding-up order and, secondly, that the evidence before the county court Judge was such that in law he could not hold as he had done. The Court of Appeal held that an order, giving unconditional leave to defend, could be made on grounds which fell short of a substantial ground of defence and accordingly such an order did not necessarily imply that the debt was disputed on a substantial ground. Lord Greene, M.R who delivered the-leading judgment, pointed out that besides making a bare reference to the order for unconditional leave made by the King's Bench Division, the company had placed no materials whatever before the county court Judge as to the facts on which the order had been made. He accordingly held it was competent to the county court Judge to consider the issue as to whether there was a substantial defence and to examine the question of whether or not a debt was owing. On the evidence in the case it was held by the learned Master of the Rolls, with reference to the second contention of the company, that the county court Judge could not have come in law to any different conclusion in view of the materials which he had before him. Lord Justice Morton delivered a separate but concurring judgment and Lord Justice Tucker agreed.
8. The case, to my mind, is no authority for the proposition that even after the winding-up Court has found a dispute to be bona fide, it can or ought to proceed to decide the dispute for itself and make or not make a winding-up order according as it found a debt, due and payable, to exist or not to exist. The case only decides that the winding-up court can decide whether the dispute set up by the company is based on a substantial ground and therefore bona fide and that if it finds that there is no valid basis for a dispute, it can then decide the so-called dispute for itself and if it finds that a debt exists, it can make a winding-up order. It will be remembered that unconditional leave was held by the Court of Appeal as not showing conclusively that there was a substantial ground of defence. The county court Judge had, therefore, to find, first, whether there was a substantial ground and whether the dispute raised by the company was a bona fide dispute. He found that issue not in favour of the company but against it, and it was only thereafter that he proceeded to consider for himself if a debt existed and to make a winding-up order when he found that a debt did exist. It is not as if he found that there was a bona fide dispute and yet proceeded to decide the dispute himself and make a winding-up order. The decision upholding the county court Judge does not therefore indicate that the Court of Appeal intended to modify in any way the rule of practice, as summed in Buckley.
9. In the present case, there can be no question that the scheme presents a substantial problem of construction and accordingly, it can by no means be said that the dispute raised by the company rests on a ground which is plainly unsubstantial. It does not appear to me to be material, at any rate in the facts of the present case, that the dispute is not as to the existence of a debt, but only as to its immediate payability. If the debts are not immediately payable, the omission or failure to pay them cannot entail a winding-up order, because there being yet no debts to pay, the question of ability or inability to pay does not really arise. Indeed, it seems to me that where there is evidence that if the dispute about the debt is decided against the company, it will be paid, the fact that the dispute is only as regards the time of payment is all the greater reason why the winding-up court should not proceed to decide the dispute, because no issue of insolvency is involved. Reverting to the facts of the present case, it is clear that there being a bona fide dispute as to the maturity of the appellant's claim and as to the company's liability for immediate payment, no winding-up order can be made till the dispute is decided and till it is established that the company's reading of the scheme was wrong and that being liable thereunder to pay the first instalment of the debts immediately, it failed to pay. In those circumstances, if we were to follow what Buckley refers to as the modern practice in England, we would have to dismiss the appeal straightaway and uphold the learned trial Judge's order, disallowing the petition for winding-up. There is, however, one circumstance in the case for which we think we ought to desist from adopting that course.
10. Admittedly the company has made no profits since the date of the scheme sufficient to pay all its debts and, therefore, if it be found that the scheme requires the company to pay the first instalment of its debts immediately, it can do so, if at all, only by selling its capital assets. A company which has to sell its capital assets in order to pay its debts cannot ordinarily be said to be commercially solvent, unless the assets are surplus assets, which has not been shown to be the case here. The present case, therefore, is not one where it can be said that there is evidence that if the dispute is decided against the company, it will or will be in a position to pay the debts immediately. On the other hand, for reasons I have explained, there cannot be a winding-up order merely on the basis that if there had been debts immediately payable, the company would be unable to pay them. In view of such being the position, we think that we should not dismiss the appeal straightaway at this stage, but should keep it pending till the appellants or some other creditor obtains a decision in a regular suit. We feel all the more inclined to adopt that course, because we are informed that a suit has already been brought on the original side for a construction of the scheme and is awaiting decision. In our opinion, the dispute can be more conveniently decided in the suit already brought and the winding-up court ought not to undertake the task of construction.
11. I desire to make it clear that we are not laying down any general law as regards what the winding-up court should or should not do when a debt is disputed. The question is one of convenience and practice and we have only indicated what, as a rule, the practice ought to be when the dispute is a bona fide one and when it is not so.
12. I desire also to add that if the dispute regarding the construction of the scheme be decided against the company, the company will still have the liberty to urge that no winding-up order should be made against it on such other grounds as may be open to it. Equally, it will be open to the creditors, when the appeal comes up for further hearing, to urge the two remaining grounds on which also they claimed a winding-up order before the learned trial Judge.
13. For the reasons given above, we direct that the further hearing of the appeal do stand adjourned till after the decision of suit No. 1225 of 1951 (Premraj Dulichand v. Mahaluxmi Cotton Mills Ltd.) pending on the Original Side of this Court.
S.R Das Gupta, J.:— I agree.
Solicitors: S.C Ray Chaudhuii for the Appellants; P.C Ghosh & Co. for the Creditor, supporting the Appellants; A. Das Gupta for the Respondents; P.C Basu for the Creditor, supporting the Respondents.
A.K.D.G
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