Registrar Of Companies Rajasthan, Jaipur v. M/S. S. Sohanmal Golcha Pvt. Ltd., Jaipur

1. This petition for the winding-up of Messrs. S. Sohanmull Golcha Private Ltd., hereinafter referred to as "the company ", was presented by the Registrar of Companies, Rajasthan, on May 13, 1964, under Section 439(1)(e) of the Companies Act, 1956 (hereinafter referred to as " the Act "), on the ground that the company was unable to pay its debts within the meaning of Section 433(e). It remained pending all this time because of certain orders of the court, including an order dated February 3, 1967, directing that the case may be listed for hearing after the case (Union of India v. S. Sohanmull Golcha P. Ltd.) pending in the Hon'ble High Court at New Delhi was decided.

2. The company was incorporated on August 24, 1943, as a private company, with its registered office in Jaipur. It has an authorised capital of Rs. 5,00,000 divided into 50,000 ordinary shares of Rs. 10, but its issued and subscribed capital is Rs. 50,000 as only Re. 1 has been paid up for each share. The Registrar of Companies has stated that the working results of the company for the previous four years showed losses and that the balance-sheet as on August 31, 1962, showed a total loss of Rs. 8,50,067.13, whereas its total realisable assets were of the order of Rs. 84,300.10 including doubtful debts amounting to Rs. 24,258.19. The Registrar has, therefore, stated that exclusive of the paid-up capital of Rs. 50,000, the liabilities of the company amounted to Rs. 8,84,367-23.

3. It this state of the company's finances, notices were issued by the Central Government affording the company an opportunity of making its representation under Section 439(6) of the Companies Act. Thereafter, further opportunity was given to the company to raise its working capital and to convert the loans into paid-up capital, but to no avail. The Central Government, therefore, accorded its sanction to the presentation of the present petition for the winding-up of the company.

4. The company has filed a reply in which the basic facts regarding the assets and liabilities of the company have been admitted. It has also been admitted that notices were given by the Central Government under Section 439(6) of the Act, but it has been contended that they were not given consideration from the correct perspective. Then it has been stated that the suggestion for " raising the capital and converting the loans into paid-up capital were not practicable ; as such they could not be acted upon ". The contention that the company was unable to pay its debts has been denied on the ground that the balance-sheet as on August 31, 1962, did not disclose that this was so. By way of additional pleas, it has been stated that the company had submitted a tender for the construction of 200 clerks' quarters near Minto Road, New Delhi, in 1944, that the tender was accepted by the Central P.W.D., New Delhi, but that it committed a breach of contract so that the company had to incur " extra amounts" in constructing the quarters. The total amount claimed from the Government of India has been stated to be Rs. 13,60,896-15-6. Details of the dispute and the chequered career of the arbitration proceedings which took place in that connection have been stated, with the ultimate submission that if the claim is not allowed against the Central P.W.D., the company would resort to litigation for the realization of a sum of about Rs. 13 lakhs. On this basis it has been contended that if the claim of the company were allowed, it would not remain under any loss but would be earning some profit. As regards creditors of the company, it has been stated that they have been extending the time for the payment of the dues by the company. The company has contended further that if an order is made for winding it up, all its creditors would suffer very heavily.

5. The question for consideration, therefore, is whether it can be said to be established on the record that the company is unable to pay its debts within the meaning of Clause (e) of Section 433 of the Act ? It is not the case of the petitioner that any demand was served on the company by any of its creditors within the meaning of Clause (a) of Sub-section (I) of Section 434 of the Act. So also, it is not the case that any execution or other process issued on a decree or order of a court in favour of any creditor of the company has been returned unsatisfied in whole or in part within the meaning of Clause (b). It has, therefore, to be examined whether it has been proved to the satisfaction of the court within the meaning of Clause (a) of Sub-section (1) of Section 434 that the company is unable to pay its debts. In taking a decision, it is necessary for the court to take into account the " contingent and prospective liabilities of the company " as provided in Clause (c).

6. Mr. Rajnarain has argued that the question whether the company was unable to pay its debts should be decided with reference to the financial position revealed in the preceding balance-sheet of the company as on August 31, 1962, or on the date of presentation of the winding-up petition (May 13, 1964) after taking into consideration the contingent and prospective liabilities of the company in respect of the debt due to the Udaipur Mineral Development Syndicate P. Ltd. Mr. Kasliwal, learned counsel for the company, has contended, however, that this court should decide the fact of the winding-up petition on a consideration of the question whether the company is unable to pay its debts on the date of hearing. I shall, therefore, start by examining this first point of controversy.

7. Section 433 of the Companies Act, 1956, is similar to Section 222 of the English Companies Act of 1948, while our Section 434(1) corresponds to Section 223 of the English Act. There are four clauses in Section 223 of the English Companies Act, while our Section 434(1) contains three such clauses. Clause (c) of Section 434(1) of our Act is similar to Clause (d) of Section 223 of the English Act and, for reasons already stated, this case has to be examined with reference to that clause. Now the position regarding that clause has been stated as follows in Halsbury's Laws of England, third edition, volume 6, paragraph 1033 :

"A company, not being a life assurance company, may also be wound up on the ground of inability to pay debts when it is commercially insolvent, namely, unable to pay its debts as they become due, although its assets when realised, including uncalled capital, exceed its liabilities."

8. It, therefore, appears that the inability to 'pay the debts has to be examined with reference to the period of time when " they become due."

9. The point was expressly examined in In re European Life Assurance Society, [1869] L.R. 9 Eq. 122, 127 and it was held as follows :

".........inability to pay debts must refer to debts absolutely due, that is to say, debts for which a creditor may go at once to the company's office and demand payment."

10. A reference to Buckley on the Companies Acts, 13th edition, shows that the position has been clearly brought out there. It has been stated at page 460 that Clauses (a), (b) and (c) are all included in Clause (d) of Section 223 (of the Companies Act of 1948), and they are all instances of commercial insolvency, " that is of the company being unable to meet current demands upon it". Dealing with Clause (d) of Section 223 (which corresponds to Clause (c) of our Act), the position has been stated as follows:

"Para, (d), however, now recognizes and, in conjunction with Section 222 (e), expressly authorizes a winding up in the case of another kind of insolvency ; that is to say, if the existing and probable assets will be insufficient to meet the liabilities, taking into account not only liabilities, presently due but also those which are contingent and prospective."

11. I have no doubt that the view propounded above is correct, and is equally applicable to India, for when a debt becomes absolutely due in the sense that the creditor is entitled to claim its payment " presently ", it will be a debt which is payable by the company within the meaning of Clause (e) of Section 433 of the Act. In addition, the court is bound to take into account the contingent and prospective liabilities of the company, for that is the express requirement of Section 434(1)(c). It follows, therefore, that the court has to examine the company's inability to pay its debts with reference to the date when it became absolutely due for payment, along with the contingent and prospective liabilities of the company. The purpose of the provision of Clause (e) of Section 433 read with Clause (c) of Sub-section (1) of Section 434 of the Act is to determine the basic question of the commercial solvency of the company, and there is no reason why that determination should be put off to so uncertain a date as the hearing of the winding-up petition. This view finds support from the decision in Sri Shanmugar Mills Ltd. v. Dharmaraja Nadar, [1969] 39 Comp. Cas. 297 (Mad.) cited by Rajnarain.

12. I have gone through S. Krishnamurthy v. Rohtak Hissar Transport Co. P Ltd., [1966] 36 Comp. Cas. 9 (punj.) on which reliance has been placed by Mr. Kasliwal, learned counsel for the company. In that case also the winding-tip petition was made on the ground that, as disclosed in its balance-sheet for the period ended June 30, 1962, the company was unable to pay its debts. The learned judge examined the point with reference to the subsequent balance-sheets up to June, 1965, but the question regarding the period of time with reference to which the question of the company's inability to pay its debts was to be examined was not really raised before him. It cannot, therefore, be said to have been decided one way or the other. Mr. Kasliwal has placed reliance on In re Fildes Bros. Ltd., [1970] 1 W.L.R. 592, [1970] 1 All E.R. 923, 40 Comp. Cas. 998 (Ch. D.) also, where it has been observed at page 927 that the winding-up order must be based on subsisting facts and not on past history. That was, however, a case which fell under Section 222(f) of the Companies Act, 1948, so that it was under a different " head " altogether, and the view expressed in it has no bearing on the point under consideration. The ground under head (f) relates to the question whether it is just and equitable that the company should be wound up, and it does not fall to be governed by Section 434(1) of the Act.

13. I shall, therefore, examine whether the company was plainly and commercially insolvent, that is to say, whether the existing and probable assets were insufficient to meet its liabilities taking into account not only liabilities presently due but also those which were contingent and prospective.

14. As has been stated, the petition has been based on the company's liability to pay a debt of a little over eight lakhs of rupees, and it is not in dispute that this was so because a sum of Rs. 8,73,812.27 was advanced to the company by the Udaipur Mineral Development Syndicate Private Ltd., between April 30, 1950, and August 31, 1960. This has been stated to be so in the affidavit of Smt. Chandra Kanta Golcha dated August 18, 1966, on which reliance has been placed by the company, Smt. Chandra Kanta Golcha is the wife of Shri S. Harish Chandra Golcha (one of the directors of the respondent-company) and she has been a director of the Udaipur Mineral Development Syndicate Private Ltd. over a long period of time. She has stated that the shareholders of the Udaipur Mineral Development Syndicate Private Ltd. passed a resolution on June 26, 1961, deferring the demand for the sum outstanding against the company for a period of three years. There is no reason to disbelieve this statement, and it follows, therefore, that the sum of Rs. 8,73,812.27, with whatever interest was payable on it, became due for payment on June 25, 1964, when the period of three years expired. The creditor could, therefore, go to the company's office and demand payment. Even otherwise, it was a prospective liability of the company when the winding-up petition was presented on May 13, 1964. The petitioner has in fact categorically stated in paragraph 9 of the petition that the balance-sheet of the company showed that its total realisable assets on August 31, 1962, were of the order of Rs. 84,300.10, including , doubtful debts amounting to Rs. 84,256'19, while its liabilities amounted to Rs. 8,84,357.23 excluding the paid up capital of Rs. 50,000, and the company has, in its reply, admitted the correctness of this statement of fact, so that it is abundantly clear that the company was unable to pay its debts at that period of time. It is significant to mention in this connection that it is not the case of the company that it had the capacity to meet the demand from its creditor in any other manner.

15. Mr. Kasliwal has, however, argued that as only Re. 1 per share of Rs. 10 was paid up, it was open to the company to call for the balance totalling to Rs. 4,50,000 and that this balance of the uncalled capital should also be taken into consideration. But this contention of the learned counsel is not tenable for two reasons. Firstly, the balance of the uncalled capital could be no more than Rs. 4,50,000 whereas the liabilities admittedly exceeded Rs. 8 lakhs. Secondly, I find that it has been established beyond doubt that the shareholders were not inclined to pay the uncalled capital. The Registrar of Companies (P.S. Mathur, P.W. 1) has stated that the company was advised to increase its paid up capital but it did not care to do so in spite of the Central Government's notice under Section 439(6) of the Act. The learned counsel for the petitioner in fact made two applications to this court on October 6, 1966, and January 17, 1967, suggesting that the company should call up its uncalled capital but those suggestions went unheeded and the company has not led any evidence by way of rebuttal to show that the subscribed but uncalled capital was available to it. On the other hand, as has been mentioned, the company stated in its reply to the winding-up petition that the suggestion for the raising of the capital was " not practicable " and " could not be acted upon ". The fact, therefore, remains that the company has not ventured to call up the uncalled capital in spite of its hopeless financial condition, and it has not cared to do so even though the present winding-up petition was filed as far back as May 13, 1964, and has remained pending over a period of more than seven years.

16. Mr. Kasliwal has, however, argued that the fact that the liabilities of the company far exceed its assets cannot, by itself, mean that the company was unable to pay its debts, and he has tried to find support for his argument by a reference to A.C.K. Krishnaswami v. Stressed Concrete Constructions Ltd., [1964] 34 Comp. Cas. 6 (Mad.) and S. Krishnamurthy v. Rohtak Hissar Transport Co. (P.) Ltd., [1966] 36 Comp. Cas. 9 (Punj.). I have gone through both the judgments, but they are of no avail to the company. In A.C.K. Krishnaswami's case, a notice of demand had been served on the company within the meaning of Clause (a) of Sub-section (1) of Section 434 of the Act, and it was held that a company may have liabilities more than its assets but still may have, in particular circumstances, the capacity to meet the demands from its creditors. No such circumstance has been urged or proved in the present case. I have already made a reference to S. Krishnamurthy's case, [1966] 36 Comp. Cas. 9 (Punj.). in another connection, and I find that it really upholds the test laid down in such cases that the company should be commercially solvent in the sense that it should be in a position to meet its liabilities as and when they arise and I do not see how that judgment could be said to be of any avail to the company.

17. On a consideration of the financial position of the company at the relevant period of time, I have no hesitation in holding that the existing and probable assets of the company were insufficient to meet its liabilities, taking into account not only liabilities presently due, but also the contingent and prospective liabilities.

18. The same conclusion will, in fact, be reached in this case even if the financial position of the company is examined on the basis of its last balance-sheet as on August 31, 1970, on which considerable reliance has been placed by Mr. Kasliwal. It shows that even though the loan which was due to the Udaipur Mineral Development Syndicate Private Ltd. was written off before its preparation the board of directors presented the balance-sheet for 1970 with the following statement of fact :

" This year the company has earned a net profit of Rs. 2,266.42, which is added to the last year's credit balance of Rs. 66,137.59, and brings the total to Rs. 68,404.01, Provision of income-tax liability, Rs. 1,80,694, has been debited to profit and loss appropriation account and this converts the credit balance into the debit balance of Rs. 1,12,289.99. Your directors recommend it to be carried forward to the next year's account."

19. It is, therefore, clear that even on the basis of the company's last balance-sheet as on August 31, 1970, it had a debit balance of Rs. 1,12,289.99 and there is nothing whatever to show under what particular circumstances it can bo said that the company is in a position to meet the demands of its creditors. As has been shown already, it is not possible to take the uncalled capital into consideration.

20. It has thus been established that the company is unable to pay its debts, and should be wound up. It is therefore ordered that Messrs. S. Sohanmull Golcha Private Ltd., Johri Bazar, Jaipur, shall be wound up by order of this court. The winding-up of the company shall be deemed to commence on May 13, 1964, when the winding-up petition was first presented. The official liquidator shall, by virtue of his office, become the liquidator of the company. Let this order be advertised in the Slate Gazette, the Hindustan Times and the Rashtradoot. The petitioner will be entitled to his costs from the company.