09 July 2025 Civil Appeals >> Civil & Consumer Law  

In a recent judgment of M/s. Bassein Metals Pvt. Ltd., Mumbai v/s The National Small Industries Corpn. Ltd., Mumbai, the High Court of Judicature at Bombay dismissed an appeal challenging a 2007 order to wind up a company, reaffirming the principle that a company unable to pay its crystallized debts should be dissolved to protect future creditors. The appeal, filed by the original respondent (appellant), sought to overturn a learned Single Judge's decision in Company Petition No. 921 of 2001.

Background of the Dispute:

The case originated from an agreement in November 1992, where the appellant company availed financial assistance from the respondent (original petitioner), a Government of India undertaking, under a "raw material assistance scheme." The agreement was supported by an undertaking, a personal guarantee from the appellant's Managing Director, and a Letter of Credit.

Trouble arose in August 1998 when two cheques issued by the appellant to the respondent, totaling over Rs. 2.67 crores, were dishonored, leading to proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). Further issues emerged in September 1998 regarding a Letter of Credit worth Rs. 44.74 lakhs, which remained unpaid despite the appellant clearing discrepancies.

In January 1999, the appellant's Managing Director executed a demand promissory note, confirming a balance of Rs. 2,83,70,700/- as of March 31, 1999, with an undertaking to pay 10% interest per annum. Despite requests for repayment and provision of account statements, the dues remained outstanding. Consequently, in July 2001, the respondent issued a statutory winding-up notice, demanding Rs. 3,68,29,634/- within 21 days. The appellant's reply vaguely denied liability and sought document inspection, prompting the respondent to file a winding-up petition under Section 433 of the Companies Act, 1956. The winding-up order was initially passed on October 11, 2007, and stayed by the High Court in September 2008, with the Supreme Court urging expeditious disposal of the appeal in October 2009.

Appellant's Contentions and Court's Analysis:

Mr. Shadab Jan, counsel for the appellant, argued that a winding-up order requires a crystallized debt, not a disputed amount. He highlighted the appellant's acquittal in the Section 138 NI Act proceedings concerning the dishonored cheques, suggesting it negated the basis for the winding-up notice. He cited Madhusudan Gordhandas & Co. Vs. Madhu Woollen Industries Pvt. Ltd. and Satish Chander Ahuja Vs. Sneha Ahuja in support of his arguments. The appellant also informed the court that the company was no longer active and possessed no assets, suggesting winding up would burden the exchequer.

However, the High Court found the appellant's arguments unconvincing. The Court noted that the appellant's disputes regarding the figures and non-execution of documents were raised only in reply to the winding-up petition in March 2002, long after the transactions began in 1992 and after the execution of the demand promissory note in January 1999. The Court highlighted that the appellant never disputed liability until the winding-up notice.

Crucially, the Court pointed out that while the appellant was acquitted in the criminal proceedings under the NI Act (which require proof beyond reasonable doubt), a civil decree had been passed against the appellant in Summary Suit No. 4441 of 2001, based on the same cheques. This decree, the Court noted, remained unchallenged and unpaid to date. The Court reiterated that findings in criminal proceedings are not sacrosanct for civil matters, which operate on a "preponderance of probability" standard.

The High Court observed that the appellant's conduct, particularly the admitted liability via the promissory note and the unchallenged civil decree, along with the current lack of business activities and assets, strongly indicated an inability to pay debts. The Court emphasized that the objective of Section 433(e) is to prevent financially distressed companies from engaging in further transactions and defaulting on new creditors.

Conclusion:

The High Court found no fault in the original winding-up order. It concluded that the appellant's grounds for opposing the winding up were not bona fide but rather an afterthought to subvert the proceedings. Citing Roshan Singh & Co. P. Ltd. vs. Daewoo Motors India Ltd., the Court stated, "It is better to bury the company with no activities and assets than to give life to commit more defaults and put many creditors in trouble."

Consequently, the appeal was dismissed, and the interim stay order granted on September 17, 2008, was vacated. The judgment underscores the judiciary's commitment to holding companies accountable for their financial obligations and protecting the interests of creditors, especially when the company demonstrates a clear inability to pay its undisputed debts.

Section 138, Negotiable Instruments Act - 1881  

Negotiable Instruments Act, 1881  

Section 433, Companies Act - 1956