MANU/SC/0033/1971

Equivalent Citation: AIR1971SC 2600, [1972]42C ompC as125(SC ), (1972)1C ompLJ427(SC ), (1972)1C ompLJ427(SC ), (1972)1C TR(SC )193,
1973MhLJ537, 1973MPLJ602(SC ), (1971)3SC C 632, [1972]2SC R201

IN THE SUPREME COURT OF INDIA

Civil Appeal No. 1113 of 1970
Decided On: 29.10.1971
Appellants:Madhusudan Gordhandas & Co.
Vs.
Respondent:Madhu Wollen Industries Pvt. Ltd.
Hon'ble Judges/Coram:
A.N. Ray and D.G. Palekar, JJ.
Counsels:
For Appellant/Petitioner/Plaintiff: V.M. Tarkunde, R.L. Mehta and I.N. Shroff, Advs.
For Respondents/Defendant: A.K. Sen and E.C. Agrawala, Advs.
Case Note:
Company - winding up - Sections 207, 433 and 557 of Companies Act, 1956 -
appeal from judgment of High Court confirming Order of Single Judge refusing
to wind up respondent-company - appellants-firm claiming to be creditors of
respondent-company alleged that company was liable to be wound up under
Section 433 (c) of Act - before High Court all shareholders and large number
of creditors opposed winding up - when debt is bonafidely disputed and
defence by company is substantial Court will not wind up company - where
creditors oppose making of winding up order Court will consider their wishes -
where grounds furnished by creditors such opposition are reasonable Court
will decline to make winding up order - company demonstrated prima facie
evidence that appellants were not entitled to any claim for erection work by
raising defence of lack of privity - company raised defence of limitation -
company denied any privity with appellants with respect to appellants' claim
for compensation for use of shed - company produced payment receipt granted
by appellants in respect of one of three invoices claimed by appellants -
appellants did not give any statutory notice to raise any presumption that
company was unable to pay debt - mere fact that company has suffered
trading losses will not destroy its substratum unless there is no reasonable
prospect of it ever making profit in future - company alleged that by proposed
sale of machinery it would have sufficient money for carrying export business
- substratum of company was not lost and it was capable to meet
outstandings of admitted creditors - appeal dismissed.
Company - Winding up - High Court upheld order of Single judge to refuse to
wind up Respondent company and asked company to deposit disputed amount
of Rs. 72,556.01 in Court - Hence, this Appeal - Whether, Company was liable
to be wound up - Held, Company had given prima facie evidence that
Appellants were not entitled to any claim for erection work, as there was no
transaction between Respondent company and Appellants - However, High
Court was correct in refusing order for winding up on ground that

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indebtedness was for sum of Rs. 14,850 and company alleges agreement
between company and Appellants that payment be made out of proceeds of
sale - Respondent company proved unanimous resolution of Board - Moreover,
it was surprised that claim of year 1965 was never pursued until it was
included as item of debt in position for winding up company - Respondent
company had reasonable prospect of business and resources - Even Appellants
did not present Petition for any legitimate purpose - Hence, High Court
correctly found that Appellants could not sustain claim to support winding up
- Appeal dismissed.
Ratio Decidendi:
"Party shall produce effective evidence for winding up of Company."
ORDER
A.N. Ray, J.
1 . This is an appeal by certificate from the judgment dated 3 April, 1970 of the High
Court of Bombay confirming the order of the learned Single Judge refusing to wind up
the respondent company.
2. The appellants are a partnership firm. The partners are the Katakias. They are three
brothers. The appellants carry on partnership business in the name of Madhu Wool
Spinning Mills.
3. The respondent company has the nominal capital of Rs. 10,00,000 divided into 2000
shares of Rs. 500 each. The issued subscribed and fully paid up capital of the company
is Rs. 5,51,000 divided into 1,103 Equity shares of Rs. 500 each. The three Katakia
brothers had three shares in the company. The other 1,100 shares were owned by N.C.
Shah and other members described as the group of Bombay Traders.
4 . Prior to the incorporation of the company there was an agreement between the
Bombay Traders and the appellants in the month of May, 1965. The Bombay Traders
consisted of two groups known as the Nandkishore and the Valia groups. The Bombay
Traders was floating a new company for the purpose of running a Shoddy Wool Plant.
The Bombay Traders agreed to pay about Rs. 6,00,000 to the appellants for acquisition
of machinery and installation charges thereof. The appellants had imported some
machinery and were in the process of importing some more. The agreement provided
that the erection expenses of the machinery would be treated as a loan to the new
company. Another part of the agreement was that the machinery was to be erected in
portions of a shed in the compound of Ravi Industries Private Limited. The company
was to pay Rs. 3,100 as the monthly rent of the portion of the shed occupied by them.
The amount which the Bombay Traders would advance as loan to the company was
agreed to be converted into Equity capital of the company. Similar option was given to
the appellants to convert the amount spent by them for erection expenses into equity
capital.
5. The company was incorporated in the month of July, 1965. The appellants allege that
the company adopted the agreement between the Bombay Traders and the appellants.
The company however denied that the company adopted the agreement.
6 . The appellants filed a petition for winding up in the month of January, 1970. The
appellants alleged that the company was liable to be wound up under the provisions of

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Section 433(c) of the Companies Act, 1956 as the company is unable to pay the
following debts.
7. The appellants claimed that they were the creditors of the company for the following
sums of money :-
(a) Expenses incurred by the appellants in connection with the erection of the
plant and machinery. .. Rs. 1,14,344.97 (b) Interest on the sum of Rs.
1,14,344.97 from 1 April,-1966 till 31 December, 1969 at 1 % per mensem. ..
Rs. 51,453.13 (c) Commission on the sum of Rs. 1,14,344. 97 due to the
appellants at the rate of 1 per cent per mensem from 1 April 1966 till 13
December, 1969. .. Rs. 51,453.12 (a) Compensation payable by the company to
the appellants at the rate of Rs. 3,100 per month for 22 months and 14 days in
respect of occupation of the portion of the shed given by the appellants to the
company on the basis of leave and licence. .. Rs. 69,600.00 (b) Interest on the
amount of compensation from time to time by the said company to the
appellants till 12 April, 1967.. .. Rs. 7,857.00 (c) Further interest on
compensation from 13 April, 1967 to 31 December, 1969.. .. .. Rs. 21,576.00
(a) Invoices in respect of 3 machines .. .. Rs. 85,250.00 (b) Interest on Rs.
85,250 .. .. .. Rs. 37,596.00 (c) Commission at the rate of 1 per cent or Rs.
85,250 Rs. 37,596.00
8. The appellants alleged that the company failed and neglected to show the aforesaid
indebtedness in the books of account save and except the sum of Rs. 72,556.01.
9. The other allegations of the appellants were these. The company incurred losses upto
31 March, 1969 for the sum of Rs. 6)21,177.53 and thereafter incurred further losses.
The company stopped functioning since about the month of September, 1969. The
company is indebted to a Director and the firms of M/s. Nandkishore & Co. and M/s.
Bhupendra & Co. in which some of the Directors of the company are interested. The
indebtedness of the company to the creditors including the appellant's claim as shown
by the company at the figure of Rs. 72,556.01 is for the sum of Rs. 9,56,829.47. The
liability of the company including the share capital amounted to Rs. 14,98,923.33. The
liability excluding the share capital of the company is Rs. 9,56,829.47 and the assets of
the company oh the valuation put by the company on the balance sheet amount to Rs.
8,81,171.96. The value of the current and liquid assets is about Rs. 2,74,247.38. The
appellants on these allegations alleged that even after the proposed sale of the
machinery at Rs. 4,50,000 the company would not be in a position to discharge the
indebtedness of the company. The proposed sale of machinery for the sum of Rs.
4,50,000 was at a undervalue. The market value was Rs. 6,00,000. The Board did not
sanction such a sale.
10. It was alleged that the substratum of the company disappeared and there was no
possibility of the company doing any business at profit. The company was insolvent and
it was just and equitable to wind up the company.
11. When the petition was presented to the High Court of Bombay the learned Single
Judge made a preliminary order accepting the petition and directing notice to the
company. When the company appeared all the shareholders and a large number of
creditors of the company of the aggregate value of Rs. 7,50,000 supported the company
and opposed winding up.
12. The company disputed the claims of the appellants under all the heads save the two
amounts of Rs. 14,650 and Rs. 36,000 being the amounts of the second and" third

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invoices. The company produced books of account showing a sum of Rs. 72,556.01 due
to the appellants, as on 31 March, 1969'. The company alleged that the appellants had
agreed to reduction of the debt to a sum of Rs. 14,850 and to accept payment of the
same out of proceeds of sale of the machinery.
13. The learned Single Judge held that the claims of the appellants were disputed save
that a sum of Rs. 72,556.01 was payable by the company to the appellants and with
regard to the sum of Rs. 72,556.01 the company alleged that there was a settlement at
Rs. 14,850 whereas the appellants denied that there was any such compromise. The
learned Single Judge refused to wind up the company and asked the company to
deposit the disputed amount of Rs. 72,556.01 in court. The further order was that if
within six weeks the appellants did not file the suit in respect of the recovery of the
amount the company would be able to withdraw the amount and if the suit would be.
filed the amount would stand credited to the suit.
1 4 . The High Court on appeal upheld the judgment and order and found that the
alleged claims of the appellants were very strongly and substantially denied and
disputed.
1 5 . The first claim for erection of plant and machinery was totally denied by the
company. The defences were first that the books of the company showed no such
transactions; secondly, there was no privity between the company and the persons in
whose names the appellants made the claims; thirdly, the alleged claims were barred by
limitation; and, fourthly, there was never any demand for the alleged claims either by
those persons or by the appellants. The alleged claims for interest and commission were
therefore equally baseless according to the defence of the company.
16. The second claim for compensation was denied on the grounds that the appellants
were not entitled to any compensation for use of the portion of the shed and the alleged
claim was barred by limitation. As to the claim for compensation the company relied on
the resolution of the Board of Directors at which the Katakia brothers were present as
Directors. The Board resolved confirmation of the arrangement with M/s. Ravi Industries
for use of the premises for the running of the industry at their shed at a monthly rent of
Rs. 4,250. Prima facie the resolution repelled any claim for compensation or interest on
compensation.
17. With regard to the claim of invoices the High Court held that the first invoice for Rs.
34,600 was paid by the company to the appellants. The receipt for such payment was
produced before the learned trial Judge. The appellants also admitted the same. "As to
the other two invoices for Rs. 14,650 and for Rs. 36,000 the amounts appeared in the
company's books. According to the company the claim of the appellants was for Rs.
72,556.01 and the case of the company was that there was a settlement of the claim at
Rs. 14,850.00.
18. The High Court correctly gave four principal reasons to' reject the claims of the
appellants to wind up the company as creditors. First, that the books of account of the
company did not show the alleged claims of the appellants save and except the sum of
Rs. 72,556.01. Second, many of the alleged claims are barred by limitation. There is no
allegation by the appellants to support acknowledgement of any claim to oust the plea
of limitation. Thirdly, the Katakia brothers who were the Directors resigned in the
month of August, 1969 and their three shares were transferred in the month of
December, 1969 and up to the month of December, 1969 there was not a single letter
of demand to the company in respect of any claim. Fourthly, one of the Katakia brother

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was the Chairman of the Board of Directors and therefore the Katakias were in the
knowledge as to the affairs of the company and the books of accounts and they signed
the balance sheets which did not reflect any claim of the appellants except the two
invoices for the amounts of Rs. 14,650 and Rs. 36,000. The High Court characterised
the claim of the appellants as tainted by the vice of dishonesty.
19. The alleged debts of the appellants are disputed, denied, doubted and at least in
one instance proved to be dishonest by the production of a receipt granted by the
appellants. The books of the company do not show any of the claims excepting in
respect of two invoices for Rs. 14,650 and Rs. 36,000. It was said by the appellants that
the books would not bind the appellants. The appellants did not give any statutory
notice to raise any presumption of inability to pay debt. The appellants would therefore
be required to prove their claim.
20. This Court in Amalgamated Commercial Traders (P) Ltd v A.C.K. Krishnaswami and
Anr. 35 Company Cases 456 dealt with a petition to wind up the company on the ground
that the company was indebted to the petitioner there for a sum of Rs. 1,750 being the
net dividend amount payable on 25 equity shares which sum the company failed and
neglected to pay in spite of notice of demand. There were other shareholders supporting
the winding up on identical grounds. The company alleged that there was no debt due
and that the company was in a sound financial position. The resolution of the company
declaring a dividend made the payment of the dividend contingent on the receipt of the
commission from two sugar mills. The commission was not received till the month of
May, 1960. The resolution was in the month of December, 1959. Under Section 207 of
the Companies Act a company was required to pay a dividend which had been declared
within three months from the date of the declaration., A company cannot declare a
dividend payable beyond three months. This Court held that the non-payment of
dividend was bona fide disputed by the company. It was not a dispute 'to hide' its
inability to pay the debts.
21. Two rules are well settled. First if the debt is bona fide disputed and the defence is
a substantial one, the court will not wind up the company. The court has dismissed a
petition for winding up where the creditor claimed a sum for goods sold to the company
and the company contended that no price had been agreed upon and the sum demanded
by the creditor was unreasonable (See London and Paris Banking Corporation [1874]
L.R. 19 Eq. 444. Again, a petition for winding up by a creditor who claimed payment of
an agreed sum for work done for the company when the company contended that the
work had not been done properly was not allowed. (See Re. Brighton Club and Norfold
Hotel Co. Ltd. [1865] 35 Beav. 204.
2 2 . 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 (See Re. A Company 94 S.J. 369). Where however 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 quantity the debi precisely (See Re. Tweeds Garages Ltd. [1962] Ch.
406. 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.
23. Another rule which the court follows is that if there is opposition to the making of
the winding up order by the creditors the court will consider their wishes and may

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decline to make the winding up order. Under Section 557 of the Company Act 1956 in
all matters relating to the winding up of the company the court may ascertain the
wishes of the creditors. The wishes of the shareholders are also considered though
perhaps the court may attach greater weight to the views of the creditors. The law on
this point is stated in Palmer's Company Law, 21st Edition page 742 as follows : "This
right to a winding up order is, however, qualified by another rule, viz., that the court
will regard the wishes of the majority in value of the creditors, and if, for some good
reason, they object to a winding up order, the court in its discretion may refuse the
order'. The wishes of the creditors will however be tested by the court on the grounds
as to whether the case of the persons opposing the winding up is reasonable; secondly,
whether there are matters which should be inquired into and investigated if a winding
up order is made. It is also well settled that a winding up order will not be made on a
creditor's petition if it would not benefit him or the company's creditors generally. The
grounds furnished by the creditors opposing the winding up will have an important
bearing on the reasonableness of the case (See Re. P. & J. Macrae Ltd. [1961] 1 A.E.R.
302.
24. In the present case the claims of the appellants are disputed in fact and in law. The
company has given prima facie evidence that the appellants are not entitled to any claim
for erection work, because there was no transaction between the company and the
appellants or those persons in whose names the appellants claimed the amounts. The
company has raised the defence of lack of privity. The company has raised the defence
of limitation. As to the appellant's claim for compensation for use of shed the company
denies any privity between the company and the appellants. The company has proved
the resolution of the company that the company will pay rent to Ravi Industries for the
use of the shed. As to the three claims of the appellants for invoices one is proved by
the company to be utterly unmeritorious. The company produced a receipt granted by
the appellants for the invoice amount. The falsehood of the appellants' claim has been
exposed. The company however stated that the indebtedness is for the sum of Rs.
14,850 and the company alleges the agreement between the company and the
appellants that payment will be made out of the proceeds of sale. On these facts and on
the principles of law to which reference has been made the High Court was correct in
refusing the order for winding up.
25. Since the inception of the company Jayantilal Katakia a partner of the appellants
was the Chairman of the company until 22 August, 1969. His two brothers were also
Directors of the company since its inception till 22 August, 1969. The Bombay group
had also Directors of the company.
26. The company proved the unanimous resolution of the Board at a meeting held on
June, 1969 for sale of machinery of the company. The Katakia brothers were present at
the meeting. The Katakia brothers thereafter sold their three shares to the Valia group.
The cumulative evidence in support of the case of the company is not only that the
Katakia brothers consented to and approved of the sale of machinery but also parted
with their shares of the company. The three shares were sold by the Katakia Brothers
shortly after each of them had written a letter on 27 July, 1969 expressly stating that
they had no objection to the sale of the machinery and the letter was issued in order to
enable the company to hold an Extra-ordinary General meeting on the subject. The
company relied on the resolution of the Board meeting on 24 October, 1969 where it
was recorded that the Valia group would sell their 367 shares and 3 other shares which
they had purchased from the appellants to the Nandkishore group and the appellants
would accept Rs. 14,850 in settlement of the sum of Rs. 72,000 due from the company
and the company would make that payment out of proceeds of sale of the machinery.

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The Board at a meeting held on 17 September, 1969 resolved that the proposal of R. K.
Khanna to purchase the machinery be accepted. On 20 December, 1969 an agreement
was signed between R. K. Khanna and the company for the sale of the machinery. At the
Annual General Meeting of the company on 8 January, 1970 the Resolution for sale of
the machinery was unanimously passed by the company.
27. It is in this background that the appellants impeached the proposed sale of the
machinery as unauthorised and improvident. The appellants themselves were parties to
the proposed sale. The appellants themselves wanted to buy the machinery at a higher
figure. These matters are within the province of the management of the company.
Where the shareholders have approved of the sale it cannot be said that the transaction
is unauthorised or improvident according to the wishes of the shareholders.
28. It will appear from the judgment of the High Court that the creditors for the sum of
Rs. 7,50,000 supported the company and resisted the appellants' application for
winding up. There was some controversy as to whether all the creditors appeared or
not. At the hearing of this appeal the company gave a list of the creditors and notices
were issued to the creditors. Apart from the appellants, two other creditors who
supported the appellants were Ravi Industries Ltd. whose name appears as one of the
creditors as on 2 August, 1971 in the list of creditors furnished by the company and
K.S. Patel & Co. with a claim for Rs. 44,477.56 though their "name does not appear in
the list. Among the creditors who supported the company the largest amount was
represented by Nandikshore and Company with a claim for Rs. 4,95,999. The two
creditors who supported the claim of the appellants in regard to the prayer for. winding
up were Ravi Industries Ltd. with a claim for Rs. 2,97,500 on account of rent and K.S.
Patel & Co. of Bombay with a claim for Rs. 44,477.56. It may be stated here that this
claim of Rs. 44,477.56 was made on account of erection work of machinery and this
identical claim was included in the list of expenses claimed by the appellants on account
of erection work. The company disputed the claim. The High Court correctly found that
the appellants could not sustain the claim to support winding up. It is" surprising that a
claim of the year 1965 was never pursued until it was included as an item of debt in the
petition for winding up the company. With regard to the claim for rent, the company
pursuant to an agreement between the company and Ravi Industries Private Ltd.
credited Rowe Industries with the sum of Rs. 1,52,000 with the result that a' sum of Rs.
1,45,500 would be payable by the company to Ravi Industries Ltd. in respect of rent.
The company alleges that Ravi Industries Pvt. Ltd. supported the company in the High
Court and that they have taken a completely different position in this Court. In this
Court the company has also relied on a piece of writing dated 24 September, 1971
wherein Ravi Industries Private Ltd. acknowledged payment of Rs. 1,52,000 to Rowe
Industries Pvt. Ltd. and further agreed to write off the amount of Rs. 1,45,500. Ravi
Industries Pvt. Ltd. is disputing the same. This appears to be a matter of substantial
dispute. The Court cannot go into these questions to settle debts with doubts.
29. Counsel for the appellants extracted observations from the judgment of the High
Court that it was never in dispute that the company was insolvent and it was therefore
contended the company should be wound up. Broadly stated, the balance sheet shows
the share capital of the company to be Rs. 5,51,500, the liabilities to be Rs.
9,77,829.47 and the assets to be Rs. 8,87,177.93. The assets were less than the liability
by Rs. 90,000. Accumulated losses of the company for five years appear to be Rs.
6,21,17.53. The plant and machinery which are shown in the balance sheet at Rs.
6,07.544.58 are agreed to be sold at Rs. 4,50,000. There would then be a short-fall in
the value of the fixed assets by about Rs. 1,50,000 and if that amount is added to the
sum of Rs. 90,000 representing the difference between the assets and liabilities the

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shortfall in the assets of the company would be about Rs. 2,50,000.
30. The appellants contended that the shortfall in the assets of the company by about
Rs. 2,50,000 after the sale of the machinery would indicate first that the substratum of
the company was gone and secondly that the company was insolvent. An allegation that
the substratum of the company is gone is to be alleged: and proved as a fact. The sale
of the machinery was alleged in the petition for winding up to indicate that the
substratum of the company had disappeared. It was also said that there was no
possibility of the company doing business at a profit. In determining whether or not the
substratum of the company has gone, the objects of the company and the case of the
company on that question will have to be looked into. In the present case the company
alleged that with the proceeds of sale the company intended to enter into some other
profitable business. The mere fact that the company has suffered, trading losses will not
destroy its substratum unless there is no reasonable prospect of it ever making a profit
in the future, and the court is reluctant to hold that it has no such prospect. (See Re.
Suburban Hotel Co. [1867] 2 Ch. App. 737 and Davis & Co. v. Brunswick (Australia)
Ltd. [1936] 1 A.E.R. 299. The company alleged that out of the proceeds of sale of the
machinery the company would have sufficient money for carrying on export business
even the company were to take into consideration the amount of Rs. 1,45,000 alleged to
be due on account of rent. Export' business, buying and selling yarn and commission
agency are some of the business which the company, can carry on within its objects.
One of the Directors of the Company is Kishore Nandlal Shah who carries on export
business under the name and style of M/s. Nandkishore & Co. in partnership with
others. Nandkishore & Co. are creditors of the company to the extent of Rs. 4,95,000.
The company will not have to meet that claim now. On the contrary, the Nandkishore
group will bring in money to the company. This Nandkishore group is alleged by the
company to help the company in the export business. The company has not abandoned
objects of business. There is no such allegation or proof. It cannot in the facts and
circumstances of the present case be held that the substratum of the company is gone.
Nor can it be held in the facts and circumstances of the present case that the company
is unable to meet the outstanding of any of its admitted creditors. The company has
deposited in court the disputed claims of the appellants. The company has not ceased
carrying on its business. Therefore, the company will meet the dues as and when they
fall due. The company has reasonable prospect of business and resources.
3 1 . Counsel on behalf of the company contended that the appellants presented the
petition out of improper motive. Improper motive can be spelt out where the position is
presented to coerce the company in satisfying some groundless claims made against it
by the petitioner. The facts and circumstances of the present case indicate that motive.
The appellants were Directors. They sold their shares. They went out of the
management of the company in the month of August, 1969. They were parties to the
proposed sale. Just when the sale of the machinery was going to be effected the
appellants presented a petition for winding up. In the recent English decision in Mann
and Anr. v. Goldstein and Anr. [1968] 1 W.L.R. 1091 it was held that even though it
appeared from the evidence that the company was insolvent, as the debts were
substantially disputed the court restrained the prosecution of the petition as an abuse of
the process of the court. It is apparent that the appellants did not present the petition
for any legitimate purpose.
3 2 . The appeal therefore fails and is dismissed with costs. The company and the
supporting creditors will get one hearing fee. The amount of Rs. 72,000 which was
deposited in court will remain deposited in the court for a period of eight weeks from
this date and if in the meantime no suit is filed by the appellants within eight weeks the

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company will be at liberty to withdraw the amount by filing the necessary application.
In the event of the suit being filed within this period the amount will remain to the
credits of the suit.

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