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Case Number

civil original no .33 of 197

Attorney(S)

D.R.Nanda
D.N.Awasthy

Judges

Mr. Justice Bal Raj Tuli

Acts

Clause (e) Section 433 read with Section 439(5) of the Companies Act, 1956 (hereinafter called " the Act"),
Sub-sections (5) and (6) of Section 439
Section 439(5) of the Companies Act
SECTION 434 COMPANIES ACT

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Smart Summary

Concise Analytical Summary of the Opinion

Factual and Procedural Background

This petition for winding-up of Messrs. Suraj Bachat Yojna Private Ltd., Amritsar (the company) was filed by the Registrar of Companies under Clause (e) of Section 433 read with Section 439(5) of the Companies Act, 1956. The Registrar relied on a scrutiny of the company's balance-sheet for the year ending 31 March 1969, which showed accumulated losses of Rs. 62,881.77 against a paid-up capital of Rs. 5,600 and a deficit of Rs. 57,916.77 (assets Rs. 1,86,492.70; liabilities Rs. 2,44,409.47). The Registrar obtained sanction from the Regional Director, Northern Region, Company Law Board, Kanpur, to file the petition (order dated 1 January 1971, exhibit P-17). The company filed a written statement denying that it was unable to pay its debts and provided a detailed explanation (exhibit P-16) including projected receipts and payments for its chit-fund schemes. The Registrar filed a replication. The following issues were framed for decision:

Whether the sanction accorded by the Regional Director under Section 439(5) of the Companies Act was invalid?
Whether the company is unable to meet its debts?
If issue No. (1) is not proved and issue No. (2) is proved, is the company liable to be wound up?

At the hearing, the petitioner produced one witness (Shri Krishan Kumar, Senior Technical Assistant, Registrar of Companies), who reiterated the Registrar's case. The respondents produced no evidence. The court proceeded to decide the issues on the material on record.

Legal Issues Presented

Validity of the sanction given by the Regional Director under Section 439(5) of the Companies Act, 1956.
Whether the company is "unable to pay its debts" within the meaning of Section 433(e) of the Companies Act, having regard to its loss-making balance-sheets and the company's explanation of future receipts and liabilities.
Whether, if the sanction is valid and the company is unable to pay its debts, the company should be wound up.

Arguments of the Parties

Petitioner's (Registrar of Companies) Arguments

The Registrar relied on the balance-sheets (years ending 31 March 1966, 1967, 1968 and 1969) showing continuous losses (Rs. 24,173.42; Rs. 19,264.25; Rs. 8,841.40; Rs. 10,602.61 respectively) and an accumulated loss of Rs. 62,881.77 as of 31 March 1969 compared to paid-up capital of Rs. 5,600, and a net deficit in assets over liabilities (Rs. 57,916.77).
On the basis of those figures the Registrar formed the opinion that the company was unable to pay its debts under Section 433(e) and sought sanction under Section 439(5) to file a winding-up petition; the Regional Director granted sanction (exhibit P-17).
The Registrar produced evidence by way of one witness (Krishan Kumar) who reiterated the Registrar's conclusions from the balance-sheets.

Respondent Company's Arguments

The company denied that it was unable to pay its debts and filed a written statement with various pleas (the specific pleas are not detailed beyond that denial).
The company furnished a detailed explanation (exhibit P-16) including a chart of projected income and payments for its chit-fund schemes, showing a projected profit (total income 5,80,787.40; payments 4,50,000.00; profit 1,30,787.40) and further calculations indicating prospective profitability over scheme periods and an approximate annual net profit.
It was contended (and the court noted the contention) that subscriptions to the chit fund do not become liabilities until the relevant chit matures, and that the company had historically met liabilities as chits matured; no creditor had complained to the Registrar that his claim remained unpaid.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
A.C.K. Krishnaswami v. Stressed Concrete Constructions Private Ltd., [1964] 34 Comp. Cas. 6, 9 (Mad.) (Veeraswami J.)	That liabilities exceeding assets on a balance-sheet do not necessarily establish that a company is unable to pay its debts; a company may have liabilities more than its assets yet be able, in particular circumstances, to meet demands from creditors.	The court relied on this authority to support the proposition that balance-sheet figures alone are insufficient to conclude inability to pay; additional evidence of inability to meet liabilities as they accrue was required.
S. Krishnamurthy, Registrar of Companies, Punjab v. Rohtak Hissar Transport Company (P.) Ltd., [1966] 36 Comp. Cas. 9, 14 (Punj.) (Harbans Singh J.)	That the mere fact that assets are less than liabilities is not by itself ground for winding up; the correct test is commercial solvency—whether the company can meet liabilities as and when they arise.	The court invoked this principle to emphasise that the statutory test is the company's ability to meet liabilities on becoming due, not a mechanical comparison of assets and liabilities in the balance-sheet.

Court's Reasoning and Analysis

The court addressed the issues in sequence.

Issue No. 1 (Validity of sanction): The court found that the Regional Director's order dated 1 January 1971 granting leave to the Registrar to file the winding-up petition was produced in original (exhibit P-17) and its signatures proven by the Registrar's witness. The court therefore held that the sanction granted under Section 439(5) was in order and decided Issue No. 1 against the respondents.

Issue No. 2 (Whether the company is unable to meet its debts) was treated as the crucial question. The court observed that the Registrar and the Regional Director based their conclusion chiefly on the balance-sheets showing continuous losses and a deficit of liabilities over assets. The company had, however, submitted a detailed explanation (exhibit P-16) setting out projected income and payments from its chit-fund schemes and calculations indicating prospective profits when schemes concluded.

The court analysed statutory safeguards: Section 439(6) requires the Central Government's delegate to afford a company an opportunity to make representations before sanctioning the Registrar to file a petition. The court stressed that the delegate must consider the company's explanation with a "judicial mind" and not dismiss it mechanically. The Regional Director's brief statement that the explanation was "not considered satisfactory" was found inadequate because the Regional Director did not indicate on what points the explanation failed or appear to have procured further clarification where doubts existed.

The court considered the practical meaning of "unable to pay its debts." It held that the first inquiry is whether the company can meet liabilities as and when they fall due. It noted that Section 434 enumerates circumstances in which a company is deemed unable to pay its debts and that none of those circumstances were present in this case. The Registrar's witness admitted that no creditor had complained to the Registrar that a claim remained unpaid. The court emphasised that a "debt" is an amount presently due and payable; future liabilities that have not yet accrued cannot be treated as existing debts unless the company's future probable income is also taken into account.

The court relied on cited authorities (Veeraswami J. in A.C.K. Krishnaswami and Harbans Singh J. in S. Krishnamurthy) to support the proposition that liabilities exceeding assets does not automatically prove inability to pay; commercial solvency requires ability to meet liabilities as they arise. The court concluded that the Registrar and the Regional Director did not undertake the necessary further inquiry into the nature of the business, the probability of future income, nor did the Registrar place evidence on record to rebut the company's explanation. The Registrar also did not call further witnesses to explain why the company's explanation was unreliable.

Because the balance-sheet evidence and unexamined explanations were insufficient to establish inability to pay, the court decided Issue No. 2 in favour of the respondents.

Issue No. 3 (winding up) was determined in light of Issue No. 2: since the court found the company was not unable to pay its debts, it held the company was not liable to be wound up.

Holding and Implications

Holding: The petition for winding-up was dismissed. In the court's words, the petition "fails and is dismissed with costs." To emphasise the core ruling: DISMISSED.

Direct consequences and immediate implications:

The sanction granted by the Regional Director under Section 439(5) was held valid, but the substantive ground relied upon by the Registrar (that the company was unable to pay its debts) was not established on the record.
Because the company was held not to be unable to pay its debts, no winding-up order was made and the petition was dismissed with costs in favour of the company.

Broader implications noted by the court:

The decision emphasises that statutory safeguards in Sections 439(5) and 439(6) require more than mechanical reliance on balance-sheet deficits: the delegate must consider a company's explanations with a judicial mind and, where necessary, seek clarification or further evidence before granting sanction to file a winding-up petition.
The court did not purport to lay down a new legal principle; it applied established authorities that a mere excess of liabilities over assets does not automatically demonstrate inability to pay debts. No new precedent was announced by this opinion; the decision applies the existing test of commercial solvency (ability to meet liabilities as they fall due) to the facts before it.

Disposition

Result: The winding-up petition filed by the Registrar of Companies against Messrs. Suraj Bachat Yojna Private Ltd. was dismissed and the petitioner was ordered to pay costs.

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Registrar Of Companies v. Suraj Bachat Yojna Private Ltd. And Ors

1. This petition for the winding-up of Messrs. Suraj Bachat Yojna Private Ltd., Amritsar (hereinafter referred to as " the company "), has been filed by the Registrar of Companies under Clause (e) Section 433 read with Section 439(5) of the Companies Act, 1956 (hereinafter called " the Act"), on the ground that the financial position of the company was found unsatisfactory on a scrutiny of the balance-sheet of the company for the period ending March 31, 1969. The company had been incurring losses since its incorporation. During the years ending March 31, 1966, March 31, 1967, March 31, 1968, and March 31, 1969, the company incurred losses of Rs. 24,173.42, Rs. 19,264.25, Rs. 8,841.40 and Rs. 10,602.61 respectively. The total losses of the company thus accumulated to Rs. 62,881.77 on March 31, 1969, as against the paid-up capital of Rs. 5,600 only. The net tangible assets of the company on March 31, 1969, were valued at Rs. 1,86,492.70 while the liabilities amounted to Rs. 2,44,409.47 leaving a deficit of Rs. 57,916.77. From these figures, which have been taken from the balance-sheet for the year ending March 31, 1969, it is concluded that the company is unable to pay its debts within the meaning of Section 433(e) of the Act and should be wound up. The Registrar of Companies requested the Regional Director, Northern Region, Company Law Board, Kanpur, for the necessary sanction to file this petition under Section 439(5) of the Act which was granted. Written statement was filed by the respondent-company in which it has been denied that the company is unable to pay its debts and various pleas have been taken. To that written statement, replication was filed by the Registrar of Companies and the following issues were framed for decision :

" 1. Whether the sanction accorded by the Regional Director, Department of Company Affairs, Kanpur, under Section 439(5) of the Companies Act was invalid ?

2. Whether the company is unable to meet its debts ?

3. If issue No. (1) is not proved and issue No. (2) is proved, is the company liable to be wound up ? "

2. On behalf of the petitioner, Shri Krishan Kumar, Senior Technical Assistant, Office of the Registrar of Companies, Punjab, Jullundur, appeared as the only witness and reiterated what has been stated above. On behalf of the respondents no evidence has been adduced. I, therefore, proceed to decide these issues on the material on the record.

Issue No. 1:

3. The leave to file petition for winding-up was granted by the Regional Director, Company Law Board, Northern Region, Kanpur, by an order dated January 1, 1971. That order was sent to the Registrar of Companies and has been produced in original and has been marked as exhibit P-17. The signatures of the Regional Director on this order have been proved by the witness. I, therefore, hold that the order granting sanction to the Registrar of Companies to file the winding-up petition is in order and issue No. 1 is decided against the respondents.

Issue No. 2:

4. This is the crucial issue in the case. It has been stressed by the learned counsel for the petitioner that the balance-sheets of the company exhibit a very sad state of affairs and it is clear beyond doubt that the company has been incurring losses and is unable to meet its liabilities. It was, however, admitted by the only witness produced by the petitioner that no depositor or subscriber or creditor of the company had made any complaint to the Registrar of Companies to the effect that his claim had not been paid. The Registrar formed the opinion that the company was unable to pay its debts only on the basis of losses incurred by the company and the deficiency in the value of its assets over the liabilities. The Regional Director, Company Law Board, Kanpur, issued notice dated May 16, 1970, under Section 439(6) of the Act to the company in order to afford it an opportunity of making its representation, if any, against the prayer of the Registrar of Companies for sanction to file a winding-up petition on the ground that the company was unable to pay its debts, a copy of which is exhibit P-10. In reply to that notice, the company submitted a detailed explanation on June 13, 1970, in the form of a chart, exhibit P-16, showing that the financial position of the company was neither bad nor was it unable to pay its debts. But, curiously enough, the Regional Director brushed aside the explanation merely by stating that it was not considered satisfactory. In the explanation tendered by the company, the position of the chit fund, subscriptions received and the liabilities to be paid were explained. In the ultimate analysis, the following position was shown in the explanation :

" Income

Amount to be received 4,48,530-00 Lucky winners 38,250-00 Interest 94,007-40 Total 5,80,787-40 Payments Refund 3,75,000-00 Prizes 75,000-00 Total 4,50,000-00 Total income at the end of Scheme 50 months 5,80,787-40 Less expenses 4,50,000 00 Profit 1,30,787-40 Calculation in other similar EPS

1. 30x1 1,30,787-40

2. 10x1 43,595-80

3. 25x1 1,08,989-50

4. 10x2 87,191-60

5. 10x1 43,595-80 Gross profits after 50 months 4,14,160-10 One year profit 1,03,540-10 Approximate expenses for one year 25,000-00 Net profit 78,540-00 "

5. From the order of the Regional Director, it is not clear on what matters the explanation was not considered to be satisfactory. According to this explanation, although there were losses in the first few years, there was scope for making profit when the schemes of chit fund were concluded. This explanation tendered by the company has not even been referred to by the only witness produced by the Registrar of Companies and, therefore, it is not easy to say that the explanation given by the company had been properly considered and rebutted by the Registrar of Companies by any facts and figures. It is also not so clear why the explanation tendered by the respondent-company was not considered to be correct and satisfactory. The legislature enacted a safeguard for the companies not to be harassed by frivolous or doubtful-of-success petitions for its winding-up by the Registrar in Section 439(6) of the Act by enjoining on the Central Government not to accord its sanction to the Registrar under Section 439(5) unless an opportunity is afforded to the company of making representations, if any. The delegate of the Central Government, while according sanction, has a solemn duty to perform of informing himself about the true position of the company in the light of the explanations made by it. The explanations have to be considered with a judicial mind and outlook and are not to be discarded off-hand unless considered to be flimsy, fallacious or frivolous. It is not a mere formality to receive the explanations from the company and dismiss them as unsatisfactory without getting the doubts cleared. If the position exhibited by the balance-sheet of a company only is considered to be a sound reason for filing a petition for its winding-up, the provisions made in Sub-sections (5) and (6) of Section 439 for sanction by the Central Government lose all meaning and significance. Something more is required to be gone into and that is why the provision for an explanation by the company has been enacted. The spirit of this provision was completely lost sight of by the Regional Director who passed his order granting leave to the Registrar of Companies to file the present petition mechanically and without applying his mind to the explanation tendered by the company, It should be borne in mind that a mechanical sanction leads to incurring expenses by the State, harassment to the company and a set-back to its business which may prove to be quite damaging and costly.

6. In the instant case, after the receipt of the explanation from the company, the Registrar of Companies and the Regional Director should have applied their judicial minds to its consideration to come to the conclusion whether the picture depicted was true or not and if they had any doubts, they should have got them cleared by making a back reference to the company or calling an officer of the company for further explanation. It has been admitted by Krishan Kumar, witness, that the company showed a profit of Rs. 4,000 in the balance-sheet for the year ending March 31, 1971, It is thus clear from the various balance-sheets that the losses were decreasing every year and ultimately the company was on the way to make profits. There is substance in the argument of the learned counsel for the respondents that the subscriptions received from the members of the chit fund do not become liabilities till the chit matures. All the chits of the subscribers do not mature at one and the same time but mature at regulated intervals and the company has been able to meet its liabilities towards its subscribers whenever a chit matured. That is why no creditor of the company has come forward to support this petition and the only witness for the petitioner has admitted that no creditor of the company has made any complaint to the Registrar's office from which it can be reasonably inferred that the company has not been able to meet its liabilities whenever they accrued.

7. In order to determine whether a company is unable to pay its debts, the first matter to be considered is whether the company is able to meet its liabilities as and when they accrue due. Section 434 of the Companies Act enumerates the exigencies in which the company is deemed to be unable to pay its debts, and admittedly none of those exigencies are found in the present case. It has been admitted by Krishan Kumar, witness for the petitioner, that no complaint from any creditor of the company has been received in the office of the Registrar to the effect that the amount due to him had not been paid by the company. " Debt" really means an amount which is due and can be claimed in praesenti by the creditor, so that if the demand is not met, the company can be said to be unable to pay its debts. But, if a debt has not yet accrued due, no demand can be made and it cannot be said that any debt is due by the company to any person. If the future liabilities of the company are to be taken into consideration, the future probable and reasonable income should also be taken into account. The mere fact that in the balance-sheet, the liabilities shown are more than the value of the present assets of the company, does not necessarily lead to the conclusion that the company will not be able to meet its liabilities when they accrue due. Veeraswami J. in A.C.K. Krishnaswami v. Stressed Concrete Constructions Private Ltd., [1964] 34 Comp. Cas. 6, 9 (Mad.) observed as under :

" It is true that as found in the affidavit of the Registrar, the liabilities of the company far exceed its assets as in 1962. But, it does not necessarily follow from it that the company is unable to pay its debts. A company may have liabilities more than its assets; but still may have, in particular circumstances, the capacity to meet demands from its creditors. No evidence has been placed before me beyond the affidavit of the Registrar that the company is really unable to pay its debts. The second ground for a winding-up order is, therefore, not made out."

8. Reference may also be made to the judgment of Harbans Singh J. (as my Lord the Chief Justice then was) in S. Krishnamurthy, Registrar of Companies, Punjab v. Rohtak Hissar Transport Company (P.) Ltd., [1966] 36 Comp. Cas. 9, 14 (Punj.). to the following effect:

" .... the mere fact that the company's assets are less than its liabilities is, by itself, no ground for sending the company to winding up. The test laid down is that the company should be commercially solvent which means that the company should be in a position to meet its liabilities as and when they arise."

9. As I have said above, the only basis for the conclusion of the Registrar of Companies that the company is unable to pay its debts is the position revealed by the balance-sheets filed in his office. No further investigation seems to have been made by the Registrar of Companies to find out the real nature of the business or the probable future income of the company which it was incumbent on the Registrar to do, in view of the explanation submitted by the company to the Regional Director in reply to his notice under Section 439(6) of the Act. In any case, it should have been explained by the Registrar of Companies either by appearing in the witness box or through some other witness why the explanation tendered by the company was not correct and believable. In the absence of such material on the record I am not satisfied that the Registrar of Companies and the Regional Director, Company Law Board, correctly formed the opinion that the company was unable to pay its debts and a winding-up petition should be filed against it on that ground. The only matter emphasised in the petition and by the learned counsel for the petitioner at the hearing is that the company suffered losses and its assets are less than its liabilities and, therefore, it could be legitimately inferred that the company was unable to pay its debts. The two facts emphasised by the petitioner and his counsel are not sufficient to come to the conclusion that the company is unable to pay its debts. Something more is to be proved, that is, the business of the company is such that the income to be derived by the company in future coupled with the present assets would not be sufficient to meet all the liabilities of the company when they accrue due. No such attempt has been made in the present case. This issue is accordingly decided in favour of the respondents and against the petitioner.

Issue No 3 :

10. In view of my decision on issue No. 2, this issue is decided in favour of the company, that is, that the company is not liable to be wound up.

11. In the result, this petition fails and is dismissed with costs.

Registrar Of Companies v. Suraj Bachat Yojna Private Ltd. And Ors

Concise Analytical Summary of the Opinion

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Petitioner's (Registrar of Companies) Arguments

Respondent Company's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Disposition

Registrar Of Companies v. Suraj Bachat Yojna Private Ltd. And Ors

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