Gurdino Jiwatram Kukreja and Others vs The Eastern Mining and Allied Industries Ltd.

P.P. Naolekar, C.J.—The winding-up proceedings were initiated by six persons, the present appellants, by moving the High Court under Sections 433/434/439 of the Companies Act, 1956 (hereinafter shall be referred to as the "Companies Act") for winding-up of the Eastern Mining and Allied Industries Limited (hereinafter shall be referred to as the "Company").

The winding-up petition was filed on the allegations that in pursuance of the representation and advertisement issued by the Company the petitioners applied for "Right Issues" of the Company in 1993 and deposited an amount of Rs. 4,87,200/- by cheques dated 24.3.93 along with "Right Renounced Forms" in the State Bank of Indore at Mumbai. By letter dated 18.10.94 the State Bank of Indore has certified that the cheques have been encashed in favour of the Company. Despite receipt of the said amount of Rs. 4,87,200.00 the Company did not allot the share in favour of the petitioners. The petitioners wrote several letters to the Company and its Directors and also personally visited the offices of the Company at Mumbai, Delhi and Shillong complaining of non-allotment of the shares. One Shri T.S. Bareh, Chairman of the Company, Shri M.S. Jairam, Managing Director of the Company and Shri Sukhram Verma, Director of the Company partly settled the claim of the petitioners by making payment to four petitioners of an amount of Rs. 1,90,400/- by Bank Drafts, dated 16.10.96 drawn on Bank of Baroda, Parliament Street Branch, New Delhi. The said three officers of the Company assured the petitioner No. 1 that they would settle the entire claim of the petitioners within a period of two months thereafter. Despite such assurance the balance amount of Rs. 2,96,800/-, which was paid as application money for the Rights Issue, was not refunded to the petitioners. The petitioners issued notice on 22.4.98 u/s 434 of the Companies Act to pay the balance amount of Rs. 2,95,800/- together with interest at the rate of 5% per annum. It has been specifically mentioned in the notice that the notice be treated as a statutory notice u/s 433/434 of the Companies Act, 1956 and that in the event of non-payment within the statutory period of 21 days from the date of receipt of the notice, petition will be filed for winding-up of the Company. The Company by its letter dated 30.5.98 denied that any amount is due or payable by the Company to the petitioners. Aggrieved by the action of the Company the petitioners filed winding-up petition in the High Court against the company, which was numbered as Company Petition No. 2/1998.

After service of notice on the respondents an affidavit in opposition has been filed by Shri M.S. Jairam, Managing Director of the Company on behalf of the Company denying liability of the Company to the petitioners. It is alleged in the counter that as per the advertisement payment for the "Right Issues" was to be made in the account of the Company "EML-Right Issues A/C No. 62." The investigation and enquiry made by the Company revealed that some sub-brokers and jobbers in connivance with Bank officials managed to open Current Account No. 63 in the name of the Company in State Bank of Indore, in the same Branch in which Rights Issues A/C No. 62 had been opened. The Current Account No. 63 was opened unauthorisedly and without the knowledge/consent of the Company and many of the applications and connected subscriptions collected by the sub-brokers found their way to that account. The amount of the petitioners deposited in the Current Account No. 63 was not received by the Company. That a Civil Suit No. 3879/95 has been filed by the Company in Bombay High Court claiming some relief against the parties who had opened the Current Account No. 63 and to withdraw the amount deposited therein and the matter is pending consideration. It is denied that no amount or part payment has been made by or on behalf of the Company, by the officers of the Company in part settlement of the claim of the petitioners. The payment so made of an amount of Rs. 1,90,400/- was paid by one Shri T.S. Bareh, who happened to be the Chairman of the Company, from his personal account at the Bank of Baroda, Parliament Street Branch, New Delhi and that the Managing Director of the Company was not aware of the purpose for which such payments were made. It is further stated that no assurance was made by any authorised officer of the Company to settle the amount alleged to be due to the petitioners. After submission of the written statement by the Company an affidavit in rejoinder has been filed on behalf of the petitioners stating, inter alia, that the Current Account No. 63 was opened in the State Bank of Indore by a resolution of the Board of Directors of the Company on 23.3.93 and that the application for opening up of the said current account was signed on behalf of the Company by the Director and that current account was opened in accordance with the procedures of the Bank. On 9.8.99 an additional affidavit was filed on behalf of the Company that the Current Account No. 63 was an unauthorised Account opened by one Vithal Jajoo and that the money that was deposited in that account was subsequently withdrawn in a fraudulent manner.

We need not go into the question as to whether Current Account No. 63 was opened with the concurrence or authority of the Company, whether the amount of Rs. 4,87,200/- or part thereof has been deposited in the said current account and whether said amount was withdrawn and appropriated by the Company, at this stage as the questions which are required to be determined do not require us to go into those questions. The learned Single Judge has also not dealt with the company petition on merits. The learned Single Judge has dealt with the question of limitation and in paragraph 9 of the judgment has held that as per the case of the petitioners the entire amount of Rs. 4,87,200.00 was paid by the petitioner by cheques dated 24.3.93 to the Company. The case is governed by Article 24 of the Schedule to the Limitation Act, 1963, which is in relation to money payable to the defendant by the plaintiff for money received by the defendant for the plaintiffs use and the period of limitation commences from the date the money is received. The learned Single Judge has held that [he period of limitation for filing a suit for recovery of the said amount of Rs. 4,87,200/- would expire on 24.3.96, the date on which three years are over, from the date money was received by the Company. The learned Single Judge has also held that even if the amount of Rs. 1,97,400/- was paid on 16.10.96 for partial settlement of the claim by the Directors of the Company by issuing four demand drafts, it cannot constitute as an acknowledgement of the liability as there is no acknowledgement in writing. Even if it is held to be acknowledgement in writing the payment of debt by such demand draft will not give fresh case of action because when debt was paid it was beyond the period of limitation and cannot revive the limitation as an acknowledgement after the debt has become time-barred, because under Sections 18 and 19 of the Act the acknowledgement of liability of payment or part of the debt has to be made before the expiry of the period of limitation. As per the learned Single Judge the period of limitation for filing of suit for recovery of the amount expired on 24.3.96 whereas the so called acknowledgement has been made on 16.10.96, which was beyond the period of limitation. The Court has also dealt with the question in another angle by applying the provisions of Section 434, Clause (c) of the Companies Act and held that on the basis of the balance sheet filed it cannot be said that the Company is unable to pay its debt and on these findings the petitioners'' petition for winding-up of the Company was dismissed. Aggrieved by the said order the present appeal is filed before us.

His contended by Mr. G.N. Sahewalla, learned Senior Counsel for the appellant that the learned Single Judge has committed an error in dismissing the winding-up petition on the ground that debt due to the petitioners was barred by limitation. That there is no provision in the Companies Act and particularly Section 434 providing for a period of limitation for filing a winding up petition. The only requirement of Section 434 of the Companies Act is that no service of statutory notice if the Company is unable to pay its debt the creditor is entitled to file petition and the Court gets jurisdiction to wind-up the Company. It is further submitted that the Court was not right in applying Article 24 of Schedule I of the Limitation Act. The limitation, if any, would apply under Article 47 of Schedule I of the Limitation Act, 1963. The learned Counsel has also contended that the learned Single Judge could not have relied upon the balance-sheet of the year 1998 alone for arriving at the conclusion that the Company''s position was not such whereby it can be held that the Company is unable to pay its debts,

Before we consider the question whether the petition for winding-up, on the ground that the Company is unable to pay its debt, can be filed in regard to the time-barred debt or not it is necessary for us to ascertain whether the unpaid debt for which the company petition has been filed is barred by limitation and as to what provision of law of the Limitation Act, 1963 is applicable to the facts and circumstances of the case. The learned Single Judge has held that the debt due from the Company is lime-barred on account of Article 24 of Schedule I to the Limitation Act, 1963 which provides for limitation of three years from the date the money is received, for the money payable by the defendant to the plaintiff for money received by the defendant, for the plaintiff''s use Article 47 of the Limitation Act provides for limitation of three years from the date of failure for money paid upon an existing consideration which afterwards fails. The fact alleged in the petition are that the Company has allotted and offered the Right Issues Shares to the petitioners. In pursuance of the allotment and the offer made by the Company the petitioners have accepted the offer of the Right Issues shares and deposited the amount for the purposes of issuance of Right Issues Shares in their favour. Therefore, on the facts it cannot be said that the money, which has been paid to the defendant Company, was received by the defendant Company for the plaintiff''s use. The money which has been paid to the Company by the petitioners is for the existing consideration of issuance of Right Shares in favour of the petitioner and that consideration has subsequently failed as the Company failed to issue the Right Shares Certificates in favour of the petitioners. Thus in our view, the case in hand will be governed by Article 47 of the Schedule to the Limitation Act, 1963 and not under Article 24 of the Limitation Act, 1963, as held by the learned Single Judge. The petitioners have deposited an amount with the Company for allotment of Right Issues Shares by depositing an amount of Rs. 4,88,200/- by cheque, dated 24.3.93, This amount has been deposited in pursuance of the allotment and offer of the Right Issues Shares which has been accepted by the petitioners by depositing the amount demanded by the Company. u/s 113 of the Companies Act every Company is duty bound under law to issue Share Certificates within the period of three months after allotment of its shares. The proviso to Section 113 of the Companies Act provides for extension of the period not exceeding nine months for delivery of the Share Certificates, if the Company applies to the Company Law Board for extension of the period of three months, by which the Share Certificates can be issued. Therefore, u/s 113 of the Companies Act on allotment of shares, which shall be the date on which the offer of allotment of Right Issues has been accepted by the petitioners by depositing the amount, the Company is bound to issue Share Certificates within the period of three months. If Share Certificate is not issued within the period of three months and if the Company has not obtained the order of extension of period from the Company Law Board for issuance of Share Certificates, the period of limitation commences for enforcement of right for issuance of Share and consequently on completion of three months from allotment of shares by the Company period of limitation for recovery of the amount shall commence under Article 47 of the Limitation Act, 1963, In the present case the offer of allotment having been accepted by petitioners by depositing the amount on 24.3.93 the period of limitation for enforcement of right of Right Issues Certificate was commenced from 24.6.93. The period of limitation for recovery of the amount or enforcement of the right to get the Share Certificates expires after three years from the date. The cause of action accrues to the petitioners on 24.6.93 and the action for recovery of the amount paid by the petitioners to the Company would be upto 24.6.96. After this date the petitioners'' debt has become time-barred under the Limitation Act.

6A. We may now proceed with the question whether the petition for winding-up could be filed in regard to the time-barred debt. The question is whether the petition for winding up is maintainable u/s 433(e) read with Section 434 of the Companies Act. Section 33 enumerates the circumstances in which the Company may be wound-up by the Court. Clause (e) of Section 433 of the Act reads "if the company is unable to pay its debts". Thus if the Company is unable to pay its debt the Company may be wound up by the Court. Section 434 of the Act is a deeming provision under which it shall be deemed that the Company is unable to pay its debts. The material provision for our purpose is Section 434(1)(a) which is reproduced below for better understanding.

"434(1)(a)--If a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor."

Under Section 434(1)(a) if the Company is indebted to a creditor in a sum exceeding rupees five hundred then due, the creditor may serve the notice on the Company by causing it to be delivered at its registered office, by registered post or otherwise demanding the Company to pay the sum so due and if the Company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor the Company shall be deemed to be unable to pay its debts. Under this provision, after service of notice for three weeks demanding payment of the debts due the Company fails or neglects to pay the debts the presumption shall be drawn that the Company is unable to pay its debts and the Court gets jurisdiction to wind-up the Company, if in its discretion it is found that a case is made out for winding-up of the Company.

While considering the case for winding-up by the Court two rules are well settled. First, if the debt is bonafide disputed and the defence is a substantial one, the Court will not wind up the Company. But where the debt is undisputed the Court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt (A Company, Re (1894) 94 SJ 369). Where there is no doubt that the company owes the creditor a debt entitling him to a winding-up order but the exact amount of the debt is disputed the Court will make a winding-up order without requiring the creditor to quantify the debt precisely [Tweeds Garages Ltd., Re (1962) Ch 406 ]. While refusing relief for winding-up of the Company the principles on which the Court acts are first that the defence of the company is in good faith and one of substance, secondly, the defence is likely to succeed in point of law, and thirdly, the company adduces prima facie proof of the facts on which the defence depends. These principles are approved by the Supreme Court in the case of Madhusudan Gordhandas and Co. Vs. Madhu Wollen Industries Pvt. Ltd., and in the case of Pradeshiya Industrial and Investment Corporation of U.P. Vs. North India Petrochemical Ltd. and Another, The principle is clearly settled that the machinery for winding-up will not be allowed to be utilised merely as a means for realising its debts due from a company. In Amalgamated Commercial Traders (P.) Ltd. v. A.C.K. Krishnaswami (1965) 35 Com Cas 456 (SC) the Supreme Court has quoted with approval the following passage from Buckley on the Companies Acts, (13th Edn., p. 451).

"It is well settled that ''a winding-up petition is not a legitimate means of seeking to enforce payment of the debt which is bonafide 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 stigmatised as a scandalous abuse of the process of the Court''."

Therefore, applying the settled principles, we have to consider whether for the debt, which is barred by limitation, a petition for winding-up can be filed and relief claimed by the petitioner can be granted or it may be considered to be a machinery utilised against the company for realisation of the debt which is otherwise barred by limitation and is not enforceable in the Civil Court.

In Bombay Dyeing and Manufacturing Co. Ltd. Vs. The State of Bombay and Others, it is held that the statute of limitation only bars the remedy but does not extinguish the debt, except in cases provided, for by Section 28 of the Limitation Act, which does not apply to a debt. There is ample authority for the proposition that though a debt is time-barred, it will be a debt due though not recoverable, the relief being barred by limitation. In Halsbury''s Laws of England (3rd Edn.) Vol. 24 at p. 205, Article 369 it is stated--"except in the cases previously mentioned, the Limitation Act, 1939 only takes away the remedies by action or by set-off; it leaves the right otherwise untouched and if a creditor whose debt is statute-barred has any means of enforcing his claim other than by action or set-off, the Act does not prevent him from recovering by those means. ''The Court of Appeal in Curwen v. Milburn (1989) 42 Ch D 424 Cotton, L.J. said--"Statute-barred debts are dues, though payment of them cannot be enforced by action".

In Punjab National Bank and others Vs. Surendra Prasad Sinha, the Apex Court stated that Section 3 of the Limitation Act only bars the remedy but does not destroy the right which the remedy relates to. The right to the debt continues to exist notwithstanding the remedy is barred by the limitation. Therefore, when the principal debtor did not repay the Bank loan, the Bank as creditor can adjust it at maturity of the Fixed Deposit Receipts deposited by the guarantor with the Bank as security, though the debt became barred by limitation at the time of maturity of the said Fixed Deposit Receipts. This authority clearly indicates that the debt although time-barred the right to debt continues to exist but the remedy is barred. If there are any other means by which the debt can be recovered that means can be adopted by the creditor without intervention of the Court and that is permissible. But when the creditor wants to enforce its right through Court it has to be done within the period of limitation because enforceability of the right through Courts depends on the action being taken within the prescribed period. In the present case although the debt is due and it continues to exist against the Company as alleged by the petitioners it cannot be enforced. The enforceability in the Court of law has to be in accordance with the law of limitation and if action is not taken within the period of limitation the Court itself does not have any jurisdiction to issue any direction of pass a decree for repayment of the debt, although is in existence. The petition for winding-up cannot be permitted to be filed as a means to recover the debt, which is otherwise unenforceable.

In the case of Modern Dekor Painting Contracts (P.) Ltd. v. Jenson and Nicholson (India) Ltd., reported in (1985) 3 CL.J. 29 (Paragraph 17) the Division Bench of the Bombay High Court has held.

"It is not disputed that to maintain a petition for winding-up on the ground of inability to pay the debt, the debt must be recoverable, i.e. due and payable and not barred by limitation at the date of the petition. This was so because u/s 439, quoted above one of the persons inter alia entitled to file a petition for winding-up was a creditor and in order that a person could qualify himself to be a creditor he must be able to satisfy the Court that at the date of the petition there was a debt ascertainable or due and payable to him which he could claim."

u/s 434(1)(a) of the Companies Act the presumption that the Company is unable to pay its debts will only arise if after service of notice of three weeks for payment of the debt due, the Company has neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor. Can it be said that if the Company has refused to pay the debt it being time-barred it has neglected to pay the sum? The Company would be within its rights to take the defence that the debt having become time-barred they are not bound to pay it and, therefore, non-payment of the debt would not fall within the category of neglect on the part of the Company to pay the debt which under the law of limitation is not enforceable against the Company.

The learned Counsel for the appellant has placed strong reliance on two decisions of the Apex Court in Khadi Gram Udyog Trust Vs. Ram Chandraji Virajman Mandir, Sarasiya Ghat, Kanpur, and Panjab National Bank and Others (supra) for his submission that the company petition can be filed even in regard to time-barred dues. In the case of Khadi Gram Udyog (supra) the defendant has claimed protection from ejectment on the ground that he was not required to pay entire arrears of rent which includes the time-barred rent. The Apex Court has held that the landlord, under the statutory provision, has a right of ejectment if the tenant does not pay or deposit the arrears of rent within the time stipulated and the defendant has a right to be protected if he has paid the rent. Thus the statute has conferred a benefit on the tenant to avoid a decree for eviction by complying with the requirement of Section 20(4). If he fails to avail himself of the opportunity and has not paid the entire rent which includes time-barred rent, the landlord u/s 20(2) would be entitled to an order of eviction. It is a case where the landlord was not enforcing its right to recover the time-barred rent but it is a case where the tenant is seeking protection which has been provided to him under the statute on his depositing the arrears of rent, which includes the time-barred rent also. For seeking the protection of the statute the tenant is required to pay the entire rent, even time-barred rent. The choice is of the tenant to seek protection or not to seek protection of law and if he wants to have the protection of law whatever rent is due, time-barred or not, he has to deposit the same. The case is clearly distinguishable on its own facts. In the present case the petitioners want to enforce their right of recovery of the debt, which is time-barred and it is not the Company, which is seeking protection under any particular statutory provision.

In the case of Punjab National Bank and Others (supra) as the principal debtor did not repay the rent the Bank as a creditor adjusted on maturity of the FDR the outstanding debt due to the Bank in terms of the contract and deposited the balance in the S/B Account of the guarantor. That was challenged on the ground that the Bank has no authority to adjust the unpaid sum of the debt after it has become time-barred. The Apex Court said that--"Though the right to enforce the debt by judicial process is barred u/s 3 read with the relevant Article in the Schedule, the right to debt remains. The time-barred debt does not cease to exist by reason of Section 3 and that right can be exercised in another manner than by means of a suit. The debt is not extinguished, but the remedy to enforce the liabilities destroyed. What Section 3 refers is only to the remedy but not to the right of the creditors. Such debt continues to subsist so long as it is not paid. It is not obligatory to file a suit to recover the debt and the creditor would be entitled to adjust, from the payment of a sum by a debtor, towards the time barred debt. The respondent stood guarantor to the principal debtor and executed the security bond and entrusted the FDR as security to adjust the outstanding debt from it at maturity. Therefore, though the remedy to recover the debt from the principal debtor is barred by limitation, the liability still subsists and in terms of the contract the Bank is entitled to appropriate the debt due and credit the balance amount to the Saving Bank Account of the respondent." The Apex Court recognises the right of a creditor to adjust the debt in the manner permissible under law and under the contract between the parties but does not say that the right can be exercised through Court of law. Therefore, this case cannot be said to have laid down the principle of law that even the time barred debt can be enforced by filing a suit or petition in the Court. The principle enunciated by this case is that the time-barred debt remains a debt and it can be adjusted by any other means except through the Court of law.

u/s 439(b) of the Companies Act, 1956 an application to the Court for the winding-up of a company shall be by petition presented by any creditor or creditors, including any contingent or prospective creditor or creditors, besides the parties and juristic persons mentioned in Clauses (a), (c), (d), (e) and (f). The company petition for winding-up can be filed by the creditor or creditors if the company is unable to pay its debts as mentioned in Section 433(e) of the Act. For the purposes of filing the winding-up petition on the ground of company being unable to pay its debts debt, debt should be enforceable in Court of law and it is only for enforceable debt the person becomes a creditor of the company when he files a petition in the Court. The creditor should be a person who can enforce his right through Court of law for recovery of the debt which is due to him from the company. In the present cas as we have already held the debt has become time-barred and, therefore, in our view the appellant/petitioners could not have filed the petition for winding-up of the company on the ground that the company is unable to pay its debts and, therefore, bound to be wind-up.

For the aforesaid reasons the appeal fails and is dismissed. Respective costs shall be borne by the parties.