EASTERN SPINNING MILLS AND INDUSTRIES LIMITED Vs. STATE

JUDGEMENT

(1.) DESPITE the provision remaining effectively unchanged in the statute for more than a century and it apparently having been interpreted in favour of the secured creditors, the statutory right has once again been questioned as to whether a secured creditor of a registered company enjoys equal rights as an unsecured of a company to have its winding-up petition cross the initial threshold and be admitted without, in any circumstances, it being assessed whether the claim exceeds the value of the security that it holds. The legal issue has arisen in the context of the petitioning creditor having proceeded against the securities it holds under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. As a consequence, some age-old principles which have come to be accepted as axiomatic have also been called into question.

(2.) THE petitioning creditor has previously invoked the said Act of 2002 and has thereby not only evinced an interest to not give up the securities that it holds, but has actually enforced its claim against the securities. The question that arises upon such conduct of the petitioning creditor � of proceeding against both the securities held by it and seeking to have the company wound up - relates not so much to the double jeopardy faced by the company as it pertains to the propriety of a secured creditor seeking to have a company wound up only on the basis of the legal fiction of the company 's inability to pay its debts under Section 434(1)(a) of the Companies Act, 1956 without demonstrating that the value of its securities is less than its claim or establishing that the securities are inefficacious or spurious. The ancillary issue that arises is as to whether, in the context of the legal fiction under Section 434(1)(a) of the Act, even a creditor which holds adequate security covering the debt due from the company can insist on its petition being admitted and a winding-up order passed thereon; or, the provision only contemplates the admissibility of a claim of a secured creditor as an unsecured creditor to the extent that its claim exceeds the value of its securities.

(3.) THE consideration in the present proceedings hinges on the exact meaning of the expression "neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor ". On a creditor 's winding-up petition founded solely on Section 434(1)(a) of the Act being instituted, the company court has to assess whether the company has neglected to pay the sum; or, whether the company has neglected to secure or compound for the sum due from it to the creditor to the reasonable satisfaction of the creditor. In the first case preceding the word 'or ', the company court has to assess whether any sum is due from the company to the petitioner, for it to be able to adjudicate if there has been any negligence on the part of the company to pay off such debt. In the second case following the word 'or ', the company court has to first assess whether any sum is due from the company to the petitioner; and, if a sum in excess of Rs 500/- is found to be due, determine whether upon the company securing the sum due or compounding for it, such act ought to satisfy the creditor. The reasonableness of the creditor 's satisfaction is for the company court to ascertain. The underlying theme of Section 434 of the Act appears to be to evaluate whether a commercial entity is solvent enough to continue its business operations. The principles relating to insolvency are a fortiori incorporated in Section 434(1)(a) of the Act though the applicability of the rules relating to insolvency find express mention in Section 529 thereof, which is a provision that applies after a company has been wound up, and the rules relating to insolvency apply only to a company in liquidation to ascertain the inter se entitlement as between the creditors of a company in liquidation and such rules are otherwise of no relevance prior to a company being wound up. As a digression, it may be of some relevance that the provisions relating to the liquidation of a company have been carved out of the English statute and placed in another that deals exclusively with matters relating to insolvency. The original English Companies Act as modified over time is, of course, the one on which the Indian Companies Acts have been fashioned.