Sum due u/s 434 of the Companies Act, must mean what has fructified and can not merely be a contingent liability or deferred payment
SUMMARY OF CASE LAW
The “sum due” as referred to under section 434 of the Companies Act, 1956 must mean what has fructified and can not merely be a contingent liability or deferred payment; if the liability has not fructified within 21 days from the time the date of service of notice, it cannot be said to be a debt which company is unable to pay, in order that the Court could find a justification for winding up the company.
CASE LAW DETAILS
Decided by: HIGH COURT OF PUNJAB & HARYANA, In The case of: Priyaraj Electronics Ltd. v.Motorola India (P.) Ltd., Appeal No. :C.A. No. 124-127 of 2006 and C.P. No. 17 of 2006, Decided on: April 17, 2009
7. The parties, therefore, are locked up in lis before this Court and the central point to be resolved is whether there exists a “debt” within the provisions of Companies Act and whether the company could be deemed to be “unable to pay” as required under Section 434 of the Companies Act. The terms “debt” itself has not been defined under the Companies Act and if we must make reference to the P Ramanatha Aiyar’s Concise Law Dictionary, 2004 Edition Law Lexicon it is defined as “a sum of money due under an express or implied agreement (as) a bond of bill or note; amount due or payable from one person to another in return for money, services, goods, or other obligation.”
8. The Act again does not make any specific reference as to whether the debt shall be a debt already owed by the company or it could even be yet a debt payable in future by the company. These two expressions “debt owed” or “debt payable” shall be ascertained or certain amount, which is opposed to inchoate, contingent, future un-ascertained or imperfect obligation. In a case where the liability is contingent, it cannot be said to be “debt owed” by the company. The “debt payable”, on the other hand could be even a contingent liability. P Ramanatha Aiyar’s Concise Law Dictionary, 2004 Edition defines the term ‘payable’ as having two meanings: (1) owing and (2) payable at a particular point of time, and when this expression is used without any qualification it generally means payable at once. This assumes importance only because a petition for winding up under the Companies Act could be invoked only for an amount that is ascertained and owed by the company. That is why there is a statutory requirement of having to issue a notice. In case where a creditor complains that the company is unable to pay its debts and as such the presumption is available under Section 434 (1) (a) if the company is indebted in a sum exceeding one lakh rupees and company is unable to pay for three weeks after the demand is made. The “sum due” as referred to under Section 434 must, therefore, mean what has fructified and can not merely be a contingent liability or deferred payment. If the liability has not fructified within 21 days from the time the date of service of notice, it cannot be said to be a debt which company is unable to pay, in order that the Court could find a justification for winding up the company.
9. The contingent liability has reference under the Scheme of the Act in relation to winding up only as a factor among other events which the Court shall consider whether the Company shall be required to be wound up or not. This finds expression in Section 434 (1) (c) where the section spells out that if it is proved to the satisfaction of the Court that the company is unable to pay its debt, the Court shall take into account the contingent and prospective liability of the companies (also). In other words, the Court shall first see whether there exists a debt which payable and whether the amount has not been paid within 3 weeks from the date of the demand or it has neglected to pay such sum. Every non-payment will not be a ground of winding up the company. The Court shall have due regard to the contingent and prospective liability for making such inference. The justification for applying for winding up the company will have to be therefore seen in such a context whether the debt has become payable on the date when the notice was issued or any time after receipt within 3 weeks from the date of the demand.
VI. Future liability or contingent liability is not a “debt”:
10. The services rendered by the petitioner company itself is not in doubt. Although objection to the exact amount is made by the respondent by reference to certain aspects such as delay in completion of the work, non furnishing of proofs of tax returns of the petitioner company, they would fall to way side, if we address the core issue as to the nature of liability, especially having regard to the provision being made by the respondent company in its balance sheet admitting the liability though not to the entire sum as claimed in the notice but to substantial amount thereof. The liability springs from a clause which both parties have referred to under Clause 4.3.4 which reads: “The claim of the petitioner becomes due and payable upon the respondent’s receipt of the last payment in relation to the contractual works from the BSNL.” The petitioner claims the liability as having arisen by its statement in para 7 (d) when it says that BSNL has already made the last payment to the respondent in January 2004 and as such 20% of the contractual price is due and payable since then. This assertion of the petitioner has been unsubstantiated, particularly when the respondent company even sworn to an affidavit saying that about 16.5 % of the contract price has not been paid by the BSNL and that there are arbitration proceedings pending between the respondent and BSNL before the Kerala High Court and before the Arbitrator. Under such circumstances, I have no doubt in my mind that debt has not become payable on the date of filing of the petition.
11. The expression whether the liability to pay in future would also be considered as a debt for the purpose of invoking Section 433 was considered by the High Court of Gujarat in the Registrar of Companies, Gujarat vs. Kavita Benefit Pvt. Ltd. reported in 1978 (48) Company Cases 231. The learned Counsel for the respondent relies on this judgment, which referred to a petition for winding up of a chit fund company where the company had its liability to repay subscription to several persons who were members of the chit fund. The court found that the liability was contingent and that such liability would not be a debt in praesenti and dismissed the petition. The similar statement of law was also made in a decision of this Court in Registrar of Companies vs. Ajanta Lucky Scheme and Investment Company Private Ltd. And Ors. decided in Civil Original No.87 of 1971 on 28.9.1972. This Court had held that the term ‘debt’ really meant an amount which was due and could be claimed by creditor, so that if the demand was not met, the company could be said to be unable to pay its debts. But if a debt had not accrued due and no demand could be made and the mere fact that certain liabilities would accrue due in future, it would not unnecessarily lead to the conclusion that the company was unable to meet its liability even in instances where the future liabilities could be more than the value of the present assets of the company. The matter ought to rest there, viz., the debt cannot simply be contingent, to found an action for winding up. That is precise by what it is.