IN THE KARNATAKA HIGH COURT 

Udaya Holla for the petitioner. 

Jose Sebastian and Associates for the respondent. 

JUDGMENT 

M. F. SALDANHA J. - I have heard the learned advocates on both sides. This petition was admitted on December 17, 1998, and the several subsequent endorsements in the order sheet are eloquent enough to indicate that this court gave the respondents a very long leeway by deferring the order for advertisement. Normally, under the scheme of law the advertisement has to follow the admission of the petition as a matter of course but the reason why I deferred it was also because the respondents' learned advocate stated that his clients as businessmen would like to explore the possibility of resolving the outstanding issues. 

The scheme of the Companies Act, 1956, is such that, if an outstanding liability is not cleared despite the service of statutory notice a presumption arises against the company and this presumption being a rebuttable one, it is open to the company to satisfy the court even in the course of the proceeding among other things, that it has the capacity to discharge the debt in question and one of the safest methods of doing this is by paying-up the amounts. An elaborate argument was advanced before me on behalf of the respondent that the company court is not a "recovery court". What the respondents' learned advocate when he advances the submission has overlooked is that, these proceedings though not recovery proceedings are intrinsically interlinked with the aspect of a debt and recovery. It is the non-recovery of a debt that provides the cause of action for the winding-up proceedings to be initiated and under the scheme of the Companies Act it also gives rise to a presumption of commercial insolvency. Consequently, the statement that these proceedings are not recovery proceedings is only a half-truth for the simple reason that the proceedings emanate on the basis of a statutory notice and the statutory notice itself requires a specific requisition to be contained therein that the outstanding dues must be paid within a period of twenty-one days failing which the company will be liable to be wound up. As indicated by one earlier, it is a recovery notice which provides the starting point for these proceedings and from that stage onwards, short of a situation wherein a valid dispute or a valid defence can be pleaded there is no option for the company except to discharge the debt or face an order of winding up. It is necessary to view the scheme of the law in a proper context because while stating that these proceedings are not recovery proceedings it is true that the proceedings cannot end in a decree or a direction to pay the non-paid amount. On the other hand, this non recovery would inevitably result in a winding up order. This is one of the reasons why the company court shows some level of indulgence even during the pendency of the proceedings where a bona fide And valid ground is shown in order to afford the company an opportunity of avoiding the harsh consequences of a winding up order. My attention was drawn to the earlier decision of this court in Kanchanaganga Chemical. Industries Premier Studio Complex v. Mysore Chipboards Ltd. [1995] 2 Kar LJ85; [1998] 91 Comp Cas 646. I have perused the decision in question and I have benefited by a reading thereof but I do feel that the judgment in question requires to be qualified along the lines as indicated by me. 

The respondents' learned advocate thereafter submitted that while assessing the concept of "commercial insolvency", one of the important ingredients is the question as to whether the debts outweigh the assets or whether the financial status of the company is such that it is not in a position to discharge the debts in question. For this purpose, he submitted that supportive material will have to be produced by the creditor and in the absence thereof, the court is liable to dismiss the petition. That stage is yet to come because it is only after the individual creditor advertises the petition that the other creditors will come before the court. To my mind, it is irrelevant whether there is one creditor or several because the law itself prescribes the procedure which is to be followed, namely, that if the company cannot make good an outstanding debt which exceeds Rs. 500 irrespective of other considerations, it would still have to face a winding up order. It is also well-settled law that, there exists a category of cases wherein despite the argument that on paper the assets of the company are sub-stantial or that the financial position is sound or that it is prosperous, the court has to ultimately go by what has actually happened in the case before the court and if in the absence of any valid defence, the payment is not forthcoming, the result is inevitable. 

Lastly, the respondents learned advocate submitted that in the statement of objections it has been contended that there was something wrong with the quality of material supplied which is the reason why the payment is not made. This is a favourite defence in these proceedings and virtually as a last resort where the case is indefensible a party takes up such a contention. The party concerned will have to establish to the satisfaction of the court that the defence taken is a genuine one and it not a sham defence as the onus shifts. In the present instance, considerable time has elapsed since the supply of the goods, there has not been a single letter despite numerous letters that have been exchanged between the parties stating that the goods were sub-standard or that the respondents have rejected them or that they do not propose to pay for them. In the absence of any such material, this court cannot take any cognisance of such averments in the statement of objections. 

Having regard to the position in law and the fact that despite three months having elapsed after the petition was admitted and the respondents having been afforded an additional three months to pay-up the dues in question, the non-payment would leave this court with no option except to issue fresh directions which are to the effect that the petition be advertised in the local edition of the Times of India within a period of two weeks from today and a copy of the same to be filed with the office. The returnable date to be indicated as on June 18, 1999. Petition to be relisted for further orders on June 18, 1999. 

The respondents' learned advocate states that he would like to make a final effort and explore whether it is possible to arrive at an out-of court settlement. It is up to the parties to negotiate the matter and it is certainly in the interest of the petitioners also for their own good to resolve the entire issue if possible. This, however, will have to be done within an outer limit of two weeks from today. The aforesaid order will not take effect until the expiry of two weeks from today.