Case Note & Summary
The appeal was filed by Stonemann Royale Limited against an order dated 19 March 2018 made by the learned Company Judge admitting and ordering advertisement of Company Petition No. 1205 of 2015 seeking winding up of the appellant company. The respondent, Asset Reconstruction Company (India) Ltd., claimed an amount of approximately Rs. 5.34 Crores. The appellant contended that it had more than ample security in the form of immovable properties and had been making profits since 2015. The appellant argued that under Section 434(1)(a) of the Companies Act, 1956, a company is deemed unable to pay its debts only if it neglects to pay or secure the sum to the reasonable satisfaction of the creditor. Since the appellant was willing and able to secure the claim, the petition should not have been admitted. The respondent opposed the appeal, but the court found that the Company Judge had not considered the appellant's offer of security. The court held that the legal fiction under Section 434(1)(a) requires the creditor to consider the offer of security, and if the company is able to secure the debt, the petition should not be admitted. The appeal was allowed, the impugned order was set aside, and the Company Petition was restored to the file of the Company Judge for consideration of the appellant's offer of security.
Headnote
A) Company Law - Winding Up - Admission of Petition - Section 434(1)(a) Companies Act, 1956 - The legal fiction under Section 434(1)(a) deems a company unable to pay its debts only if it neglects to pay or secure the sum to the reasonable satisfaction of the creditor. Where a company has ample security and is willing to secure the claim, the Company Judge ought not to admit the winding up petition. The appeal was allowed, setting aside the admission order and directing the Company Judge to consider the appellant's offer of security. (Paras 3-6)
Issue of Consideration
Whether a company petition for winding up ought to be admitted when the company is in a position to secure the claim of the petitioning creditor, even if the debt is undisputed.
Final Decision
Appeal allowed. Impugned order dated 19 March 2018 set aside. Company Petition No. 1205 of 2015 restored to the file of the Company Judge for consideration of the appellant's offer of security. The Company Judge to decide the petition afresh after hearing the parties.
Law Points
- Winding up petition
- admission
- security
- Section 434(1)(a) Companies Act
- 1956
- ability to pay debts
- legal fiction
- neglect to pay
- reasonable satisfaction
Case Details
2018 LawText (BOM) (09) 47
Appeal Lodging No. 200 of 2018 in Company Petition No. 1205 of 2015 with Notice of Motion (L) No. 413 of 2018
Mr. Vishal Kanade a/w Ms Dipti Das and Mr. Anagh Pradhan i/b Divya Shah Associates for the Appellant; Mr. Mayur Khandeparkar a/w Mr. Shakib Dhorajiwala and Ms Supriya Majumdar i/b Vidhi Partners for the Respondent
Asset Reconstruction Company (India) Ltd.
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Nature of Litigation
Appeal against order admitting winding up petition
Remedy Sought
Setting aside the order dated 19 March 2018 admitting Company Petition No. 1205 of 2015 and ordering advertisement
Filing Reason
The appellant company contended that it had ample security and was making profits, and therefore the winding up petition should not have been admitted under Section 434(1)(a) of the Companies Act, 1956.
Previous Decisions
The learned Company Judge admitted the winding up petition and ordered advertisement on 19 March 2018.
Issues
Whether the Company Judge erred in admitting the winding up petition despite the appellant's offer of security and ability to pay.
Whether Section 434(1)(a) of the Companies Act, 1956 requires the creditor to consider an offer of security before deeming the company unable to pay its debts.
Submissions/Arguments
Appellant: The company has ample security and is making profits; under Section 434(1)(a), the petition should not be admitted if the company can secure the claim.
Respondent: Opposed the appeal, arguing that the debt was undisputed and the company had neglected to pay.
Ratio Decidendi
Under Section 434(1)(a) of the Companies Act, 1956, a company is deemed unable to pay its debts only if it neglects to pay or secure the sum to the reasonable satisfaction of the creditor. Where a company offers security and is able to secure the debt, the winding up petition should not be admitted. The Company Judge must consider such an offer before admitting the petition.
Judgment Excerpts
Section 434 (1)(a) of the Companies Act, 1956 raises a legal fiction that a company shall be deemed to be unable to pay its debts only where the company, despite receipt of statutory notice neglects to pay the sum or to secure the same to the reasonable satisfaction of the creditor.
Where a company is in a position to secure the sum, even assuming the same to be an undisputed sum, the Company Judge ought not to even admit a petition seeking winding up of the company.
Procedural History
The respondent filed Company Petition No. 1205 of 2015 seeking winding up of the appellant. The learned Company Judge admitted the petition and ordered advertisement on 19 March 2018. The appellant filed Appeal Lodging No. 200 of 2018 against that order. The appeal was heard and allowed on 7 September 2018.
Acts & Sections
- Companies Act, 1956: 434(1)(a)
