INDIA ELECTRIC WORKS LTD Vs. STATE

JUDGEMENT

(1.) This is an application under Section 439 of the Companies Act, 1956 for the Winding-up of the India Electric Works Ltd. (hereinafter referred to as the Company). The petitioning creditor is the State Bank of India, who claims to be a secured creditor of the Company to the extent of Rs. 1,67,78,000. The petitioning creditor is supported by two other creditors namely, Anwar Ali and Bros, whose claim against the Company is for Rs. 33,157 for the price of goods supplied and Steel Distributors, whose claim is Rs. 31,000 also for goods supplied to the company. The petition is being opposed by several creditors, namely, James Finlay and Co., whose claim against the company is for Rs. 59,527, M/s. Narayan Choudhury Bros. (P.) Ltd., whose claim amounts to Rs. 54,525 and by the Secretary of the India Electric Works Employees Association, a registered trade union, who claims that the company is indebted to the members of the said association to the extent of Rs. 29,50,000 consisting of provident fund dues amounting to Rs. 22,00,000 approximately and arrears of dearness allowance of Rs. 7,50,000 approximately and also by an employee of the company, Tulsi Chatterjee, claiming an amount of Rs. 2,707 on account of arrears of salary, provident fund etc., and by Ravindra Krishna Rohatgi, one of the principal shareholders of the company, holding shares of the face value of Rs. 2,56,000 and also claiming to be a creditor of the company for another sum exceeding Rs. 3,00,000.

(2.) The facts stated in the petition are as follows. The company was incorporated in December, 1930 as a public company limited by shares with its registered office at Diamond Harbour Road, Behala. The authorised capital of the company is Rupees 1,00,00,000 (one crore) divided into seven lacs equity shares of Rs. 10 each and 30,000 7 1/2% cumulative redeemable preference shares of Rs. 100 each. The amount of capital paid-up or credited as paid-up at present is Es. 34,00,000. The company was incorporated for the purpose of taking over the business carried on by a firm or the name of the India Electric Works, which had been manufacturing electric fans and other electric goods and had acquired a reputation in the market for their product the India Fans'. The main object of the company was to manufacture various electrical fittings, cables, wires, lamps, bulbs, accumulators, batteries, motors, engines, fans etc. etc. Disputes and differences arose between two groups of shareholders of the company as a result of which the company started incurring heavy losses, In or about January, 1959 the Government of India appointed a committee under the provisions of the Industries (Development and Regulation) Act, 1951 to investigate the financial position of the company and on the recommendation of the said Committee, the company raised an additional capital of Rs. 9 lacs. Even after the increment in the capital as aforesaid there was no improvement in the company's affairs and the then bankers of the Company, M/s. Punjab National Bank Ltd., in or about June 1960 withdrew the financial accommodation accorded to the company resulting in the closure of the Company's factory. Thereafter by an order dated the 11th July, 1960, in exercise of the powers conferred by Section 18A of the Industries (Development and Regulation) Act, 1951, the Central Government appointed one S. C. Banerji, a Central Government Officer, as the authorised controller to take over the management of the affairs of the company in consultation with the Advisory Board. The financial arrangements with the Punjab National Bank Ltd. were revived after the Central Government took over the management of the company. Subsequently by an order dated the 8th November, 1960 one P. C. Basu, another officer was appointed the authorised controller of the company. The taking over of the management of the company by the Central Government did not result in any improvement in the affairs of the company and by the month of January, 1963 the liabilities of the company to M/s. Punjab National Bank Ltd. had amounted to Rs. 85,00,000 and the company had used for working capital purposes the employees' provident fund to the tune of Rs. 24,00,000. In January, 1963 the petitioner, State Bank of India, was appointed the bankers of the company by the Government of India and the liability of Rs. 85,00,000 of the company to its previous bankers M/s, Punjab National Bank Ltd. was transferred to the petitioner. Thereafter by an agreement dated the 2nd January, 1963, the petitioner agreed to advance monies and grant accommodation to the company to the extent of Rs. 85,00,000 with interest at 1/2% over the State Bank of India Advance Rate with a minimum of 5 1/2%. As security therefor the authorised controller, for and on behalf of the company, executed a promissory note for Rs. 85,00,000 payable on demand in favour of the President of India which was in turn assigned to the petitioner and on the same date the President of India executed a deed guaranteeing the due re-payment of the amount of the principal and interest due on tie aforesaid promissory note by the company in favour of the petitioner. By way of further security the company, on the same date, also hypothecated its stock-in-trade and various other goods and also created a first charge on book debts, outstandings, claims, bills, contracts etc. by an agreement for Cash Credit Account Hypothecation of Debts and Assets. By a further agreement entered into in January, 1963 the petitioner agreed to advance monies or grant accommodation to the company by way of Cash Credit called the Second Cash Credit Account, to the extent of Rs. 55,00,000 and the said limit was subsequently raised upto Rs. 70,00,000 during the year 1966. The amounts advanced or to be advanced to the company under the Second Cash Credit Account were secured by an equitable mortgage by deposit of title deeds on the 4th January, 1963 in respect of the lands and buildings comprising the factory, fixed, plant and machinery belonging to the company with intent to create a first mortgage on the said lands, buildings, factory, plant and machinery as continuing security for payment of all moneys due in respect of the said account No. 2. The company also executed an on-demand promissory note for Rs. 70,00,000 on 5th April, 1967 payable to the President of India which was in turn duly assigned to the petitioner and the President of India also executed a deed of guarantee on the 5th April, 1967 in favour of the petitioner for Rs. 70,00,000, The petitioner advanced various sums to the company in the said two Cash Credit Accounts and the said Accounts were at all material times maintained as mutual open current and continuous accounts according to the English calendar. As the company failed to abide by the terms of the said Cash Credit Account agreements, the petitioner by two letters both dated the 18th April, 1967 informed the company that the company would not be allowed to draw on the said two Cash Credit Accounts after the close of business on the 22nd April, 1967. On April 22, 1967 the petitioner stopped further operation of the said two accounts by the company and after adjusting the said two accounts the outstanding debit balance with interest on that date in the said Cash Credit Accounts Nos. 1 and 2 were Rs. 85,29,768 and Rs. 69,17,632.53 respectively. The petitioner duly notified the company that the said two amounts had become due in respect of the said two accounts. According to the petitioner upto the 5th November, 1967, a total of Rs. 1,01,30,623 became due and owing by the company to the petitioner in respect of the said two accounts. On the 22nd September, 1967 the petitioner's solicitors demanded the repayment of the said amount of Rs. 1,59,72,953 then due on account of principal and interest and the said notice of demand was received by the company on the 23rd September, 1967. In spite of the said notice the company failed and neglected to pay the petitioner the amounts aforementioned. The petitioner further states that the company had been incurring heavy losses year after year and such losses for the years ending 30.9.62, 30.9.63 & 30.9.64 amounted to Rs. 13,62,000, Rs. 9,05,000 and Rs. 12,67,000 respectively. The petitioner claims that the company is hopelessly insolvent and it is just and equitable that the company should be wound up.

(3.) Mr. Subrata Roy Choudhury, the learned counsel for the petitioner, submitted that the petition was based on two grounds, namely, (1) that the company is unable to pay its debts and (2) that the company is unable to carry on its business due to recurrent losses in the past years. Apart from the creditors supporting and opposing this petition, various other creditors have filed suits in this Court as well as other court against the company, the total amount of claims in such suits being over Rs. 19,17,756. The creditors opposing the winding-up as well as the shareholder Rohatgi contest the petitioner's right to a winding-up order mainly on two grounds, namely, (1) that the petitioner is a secured creditor which has not given up its security and as such it is not entitled to proceed with the winding-up and (2) that the Central Government, which had been in actual control of the company for the last seven or eight years, had by its negligence, malfeasance and misfeasance created this huge burden of debt and the State Bank, which is another undertaking controlled by the said Government should not be allowed to present this application. Another point taken is that the sanction given by the Central Government under Section 18E (1) (c) of the Industries (Development and Regulation) Act is neither valid nor bona fide and as such the petition is not maintainable. The last two points have been elaborated by Mr, S. C. Sen, the learned counsel appearing for the shareholder Rohatgi and will be dealt with later. Mr. Roy Choudhury objected to the admission of the affidavit filed on behalf of the employees' association as neither the Secretary nor the Association could claim to be a creditor of the company. Though strictly the Association is not entitled 1o take part in these proceedings for winding-up, the affidavit filed oil its behalf gives some material facts which are to be taken into consideration in determining whether the company is solvent or is able to pay its debts. Apart from mentioning that an amount of about Rs. 29,50,000 is due to the members of the Association from the company on account of provident fund and arrears of dearness allowance, the affidavit points out that even prior to 1960 the company was working at a loss and its liabilities to the Punjab National Bank Ltd. and other creditors were to the extent of Rs. 1,07,85,000 upto September 30, 1960. This liability had further increased during the period the company was under the management of the Government and the affidavit makes certain suggestions as to the way the company could be put up on its feet again. But for that purpose another sum of Rs. 80 lakhs was required as working capital over and above its various other liabilities. There was no liquid working capital available and the production had practically come to a stand-still.