MADHUSUDAN GORDHANDAS & CO. v. MADHU WOOLLEN INDUSTRIES PVT. LTD.

201 A **B** ## c I) E **F** **G** _Companies_ _Act_ (1 _of_ 1956), _ss._ 433(c) _and 557-Principles for_ _ordering winding up_ _of_ _company._ The appellants filed a petition for winding up of the respondent company, on the grounds : (1) that the company was unable to pay the debts due to the appellants, (2) that the company showed their indebtedness in their books of account for a much smaller amount, ( 3) that the company was indebted to other creditors, ( 4) that the company we.• effecting an unauthorised sale of its machinery, and (5) that the company bad incurred losses and stopped functioning, and therefore the substratum of the cl,\npany disappeared and there was no possibility of the company doing any business at profit. The High Court dismissed tho petition. Dismissing the appeal to this Court, HELD : •The rules for winding up on a creditor's petition arc if there is a _hona_ _fid••_ dispute about a debt and the defence is a substantial one. the court would not order winding up. The defence of the company should be in good faith and one of substance. If the defence is likely to **succeed on a point** **of** **law and** **the** **company adduced** _**prin1a**_ _**facie**_ **proof** of the facts on which the defence depends. no order of winding up would be made by the Court. Further under s. 557 of the Companies Act, 1956, **in all matters relating to winding up** **of** **a company the court may ascer-** **tain the wishes** **of** **the creditors.** **If.** _**for**_ _**so1ne**_ _**good**_ _**reason**_ **the creditors** **object to a winding up order, the court,** **in** **its** **discretion, may refuse to** **pass such** **an** **order.** **Also, the winding up order will not be made on a** **creditor"s petition** **if** **it** **would not benefit the creditor or** **the** **company's** creditors generally. [207 D, G-H: 208 C-D] (:) In the present cast:, the claims of the appellants were ilisputed both in fact and in law. The company had given _prima facie_ evidence that the appellants were· not entitled to any claim. The company had also raised the defence of lack of privily and of limitation. [208 D-F! (2) One. of the claims of the appellants was proved by the company to be unmentonous and 'false, and as regards the admitted debt the con1pany had stated that there was a settlement between the comp,l'ny and the appellants that the appellants would receive a lesser amount and that the company would pay it off out of th'c proceeds of sale of the company's properties. [208 F-G] ( 3) The creditors of tile. company for the sum of Rs. 7,50,000 supported the company and reS1sted the appellants' application for windina up. [209 G] ~ **MADHUSUDAN GORDHANDAS** **&** **CO.** _v._ **MADHU** **WOOLLEN** **INDUSTRIES** **PVT.** **LTD.** _October_ 29, 1971 [A. N. RAY AND D. G. PALEKAR, JJ.] ( 4) The cumulative evidence in support of the case of the company is that the appellants consented to any approved of the sale of the **H**,machi~er~. As shareholders, they had expressly wriuen that they had no ob1ection to the sale of the machrnery and the letter was issued in order t~ enable the company to hold an extraordinary general meeting 0 n the subject. The company passed a resolution authorising the sale. The L256 Sup.Cl/72 202 SUPREME COURT REPORTS _[1972J2 S.C.R. appellants themselves were parties to the proposed saie and wanted lo buy the machinery. Where the shareholders had approved of the sale it could not be said that the transaction was unauthorised or improvident. (209 A-Fl (5) In determining whether or not the substratum of the company had gone, the objects of the compony and the case of the company on that question would have to be looked into. In the present ciase, the company alleged that with the proceeds of sale the Company intend to enter into some other profitable business, such as export business which was within its objects. The mere fact that it had suffered trading losses will not destroy its substratum unless there is no reasonable prospect of it ever making a profit in the future. A court would not draw such an inference normally. One of its largest creditors, who opposed the winding up petition would help it in the export business. The company had not abandoned the objects of its business. Therdore. on the facts and circumstances of the present case it could not be held that the substratum of the company had gone. Nor could it be held that the .:i:ompany w.i.s unable to meet the outstandings of any of its admitted creditors. The company had deposited money in court as per the directions of the Court and had not ceased carrying on its business. [211 A-G] ( 6) On the facts of the case it is apparent that the appellants had presented the petition with improper motives and not for any legitimate purpose. The appellants were its directors, had full knowledge of the company's affairs and never made demands for their alleged debts. They sold their shares, went out of management of the company and just when the sale of the machinery was going to be effected presented the petition for winding up. [211 A; 212 A-CJ _Amalgamated Commercial Traders_ (P.) _Ltd._ v. _A._ _C._ _K. Krishna-_ _swami_ & _Anr.,_ 35 Company Cases 456, _London_ & _Paris Banking Corpo-_ _ration,_ (1874) L.R. 19 Eq. 444, _Re. Brighton Club_ & _Nor/old Hotel_ _Co._ _Ltd.,_ (1865) 35 Beav. 204, _Re._ _A._ _Company,_ 94 SJ. 369, _Re. Tweeds_ _Garages Ltd.,_ (1962) Ch. 406, _Re._ _P._ & _J._ _Macrae Ltd.,_ (1961) 1 All. E.R. 302, _Re. Suburban Hotel Co._ (1867) 2 Ch. App. 737 and _Davis_ & _Co._ v. _Burnswick (Australia) Ltd.,_ (1936) 1 A.E.R. 299, and _Mann_ & _Anr._ v. _Goldstein_ & _Anr.,_ ( 1968) 1 W.L.R. 1091, referred to. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1113 Of 1970. Appeal from the judgment and order dated April 3, 1970 of the Bom~y High Court in Company Appeal No. I of 1970. _V. M. Tarkunde,_ _R._ _L. Mehta_ and _I._ _N. Shroff,_ for the appellant. _M._ C. _Chag/a_ and S. _N. Prasad,_ for Creditors Nos. 1, 3 to 6 and J 0. _A._ _K._ _Sen_ and _E._ C. _Agrawa/a,_ for creditor No. 9. The Judgment of the Court was delivered by . Ray, :J. This is an appeal by certificate from the judgment dated 3 April, 1970 of the High Court of Bombay confinning A B #### c D E F G H A MADHUSUDAN _v._ MAOHU INDUSTRIES _(Ray,_ /.) 203 the order of the learned Single Judge refusing to wind 11p the respondent company. The appellants are a partnership,firm. The partners are the Katakias. They are three brothers. The appellants carry on B partnership business in the name of Madhu Wool Spinning Mills. The respondent company has the nominal ~apital 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. C 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. Prior to the incorporation of the company there wa~ an agreement between the Bombay Traders and the appellants in the month of May, 1965. The Bombay Traders consisted of two D groups known as the Nandkishore and the Valia groups. The Bombay Traders was floating a new company for the purpose of nmning a Shoddy Wool Plant. The Bombay Traders agreed to pay about Rs. -0,00,000 to the appellants for acquisition of machinery and installation charges thereof. The appellants had imported some machinery and were in the process of importing E 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 v.:as 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 F 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. G 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. The appellants filed a petition for winding up in the month H of January, 1970. The appellants alleged that the company was liable to be wound up under the provisions of section 433 ( c) of the Companies Act, 1956 as the company is unable to pay the following debts. 204 SUPREME COURT REPORTS [1972] 2 S.C.R. The appellants claimed that they were the creditors of the company for the following sums of money : A. (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 B. (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** **amounnt 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 1o 31 December, 1969. Rs. 21,576.00 C. (a) Invoices in respect of 3 machines. Rs. 85,250.00 (bl 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 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. 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 function_ing since about the month of September, 1969. The company is indebted to a Director and the !J.rms 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 tlie company is Rs. 9,56,829.47 and the assets of the company on 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 allegatiOJlS 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 machineiy 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. 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. **A** **B** «:: **D** E **F** G **H** A B ### c D E F G ff MADHUSUDAN V. MAOHU INDUSTRIES _(Ray, J.)_ 205 When the petition was presented t? t~e High Court of ~ombay the learned Single Judge made a prlimmary order accepting the petition and directing notice to the company. When the company appeared ail the shareholders and a large numoer of creditors of the company of the aggregate value of Rs. 7,50,000 supported the company and opposed winding up. The company disputed the claims of the appellants under all the heads save th.e two amounts of R,s. 14,650 and Rs. 36,000 being the amounts of the second and third invoices. The company produced books of account showing lf 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. 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,~56.01 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. 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 . . The ~rst claim for erection of plant and machinery was totally demed by the company. The defences were first that the books of the co!Ilpany showed no such transactions; secondly, there was no pnvlty between the company and the persons in wh?se names the appell~nt~ made the claims; thirdly, the alleged claims were barred by 1Im1ta!Jon; 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. The second claim for compensation was denied on the grounds that the appellants were not. entitled to any compensation for use ~f ~he. porl!on of the shed. and the alleged claim was bai:red by l~m1tat10n. As to _the claim for compensation the company relied o~ the resolution of the Board of Directors at which the Katakia brothers were present as Directors. The Board resolved 206 SUPREME COURT REPORTS [1972] 2 S.C.R. 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. With regard to the clail)l 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. T!Je 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. The High Court correctly gave four principal reasons to· reject the claims of the appellants to wind up the con1Pany 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 :;md 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 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. A B ## c D E. The ·alleged debts of. the appellants are disputed, denied, doubted and at least in one instance proved to be distionest 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 appellant~ that t~e books would not bind the appellants. G The appellants did. n,ot give any statutory notice to raise any pre sumption of inability to pay debt. The appellants would therefore be required to prove their claim. 'This Co~t in _Amalgamated Commercial Traders (P) Ltd._ v. _A._ _C._ _K._ _Krzshnaswami and Anr._ (1) dealt with a petition to wind up the ~?mpany on the ground that the company was indebted to the petitioner there for a sum of Rs, _1,_ 750 being the net divide!Jd (I) 35 Company Cases _456._ H A B ### c D E F G H MADHUSUDAN _V._ MADHU INDUSTRIES _(Ray,_ /,) 207 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 m1l!s. 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. 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. '.fhe court has dismissed a petition for winding up where the creditor claimed a sum for goods sold to the company and the company contenc!ed that no price had been agreed upon and the sum demanded by the creditor was unreasonable (See _London and Paris Banking Corporation(')._ 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.(_ _[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 deb.< precisely (See _Re._ _Tweeds_ _Garages Ltd._ ( [3 ] ) 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. 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 decline to make the winding up order. Under section 557 of the Company Act 1956 ~) [1874) L.R. 19 Eq. 444. (3) [1962) Ch. 406. (2) [1865] 35 Beav. 204. #### I 2!18 St1P.REME COURT REPORTS [1972) 2 S.C.R. in all matters rel_ating 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 Comp!J.ny Law, 21st Edition page A / 7 42 -as follows : "This right to a winding up order is, however, qualified by another rule, _viz.,_ that the court will regard the wishes B of the majority in value of the creditors, and if, for some good reason, they object to a4 [winding ] [up ] [order, the court in ] [its ] [discre-] tion 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 a~e matters which should be inquired into and c 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 iJ' 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 ## c (See _Re._ _P._ _&_ _I. Macrae Ltd.(1)._ 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 nanies the appellants claimed the amounts.,The company has raised the defence of lack of privily. 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 appel-· I ants. The company has proved the resolution . of the company that the company will pay rent to Ravi Industries for the us_e 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 reciept 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 agree D E F G H ment 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. Since the inception of the company Jayantilal Ka:takia .a partner of the appellants was the Chainnan 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. (I) [1961) I A.E.R. 302. MADHUSUDAN _V,_ MAOHU INDUSTRIES _(Ray,_ "J.) 209 A 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 meetmg. The Katakia brothers thereafter sold their three shares to the V alia group. The cumulative eviden~e in support of the case of, the company is not only that the Katakia brothers co.nsente~ to and. II approved of the sale of machmery 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 olijection to the sale of the machinery and the letter was issued in or~er to enab.le th7 company to hold an Extra-ordinary General meetmg on the subiect. The ### c company relied on the resolution of the Board meeting on 24 Octo ber 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 1he appellants would accept Rs. 14,850 in settlement of the sum of R;s. 72,000 due from the company and the company would make that payment out of proceeds of sale of the machinery. The Board at a meetD ing 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 E company. F 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 t~e company. Where the shareholders have approved of the sale It cannot be said that the transaction is unauthorised or improvident acording to the wishes of the shareholders. It will appear from the judgment of the High Court that the # G cre~itors for the sum of Rs. ?,50,000 supported the company and resisted the appellants' apphcatio111 for winding up. There was some contr~versy as .to whether all the creditors appeared or not. '\t the heanng. of this appeal the company gave a list of the creditors and notices were)ssued to the creditors. Apart from the appellants, two other creditors who supported the appellants were H Ravi Industries Ltd. whose- name appears as one of the creditors as on 2 August, 1971 in the list of creditors furnished by the comPlll!Y a,nd K. S. Patel & Co. ".¥ith a c!aim for Rs. 44,4 77.56 though their 'name does not appear m the hst. Among the creditors who 2 I II SUPREME COURT REPORTS - (1972] 2 S.C.R. supported the company the largest amount was represented by· A 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 B 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 i;upport winding up. It is' surprising that a claim of the year ## 1965 was never pursued until it was included as an item <if debt c 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 ar sum of'Rs. l,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 D 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 fodustries Pvt. Ltd, and further agreed to write off the amount of Rs. 1,45,500. Ravi Indusrties Pvt. Ltd. is disputing the same. E This appears to be a matter of substantial dispute. The Court cannot go into these questions to settle debts with doubts. Counsel for the appellants extracted observations from the judgment of the High Court that it was never in dispute that the company _'Nas_ insolvent and it was therefore contended the complmy 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 shortfall in the assets of the company would be about Rs. 2,50,000. F G, H 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 MADHUSUDAN' _V,_ MAOHU INDUSTRIES _(Ray,_ _/,)_ ~ 11 A B gone and secondly that the company was insolvent. An allegation that the substratum of the CO!Dpany is gone is to be alleged; and proved as a fact. The sale of the machinery was alleged iri· 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 in tended to enter into some other profitable business. The mere fact that the company has suffered. trading losses will not destroy #### c its substratuin unless there is no reasonable prospect of it ever making a profit in the future, and the court is reluctant to hold. that it ~as no such prospect., (See _Re. Suburban Hotel_ Co.(1). and _Davis_ & _Co._ v. _Brunswick (Australia)_ _Ltd.(')_ The company allegesf that out of th~ proceeds of sale of t~e machinery the company would have suffiqent money for carrymg on export D business even if 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 sellin11; yarn and commission agency are some of the business which the company,_can carry on within its objects. One of the Directors of _the Coml'any is Kishore Nandlal Shah who carries on export business under the name and style E F G ff of M/s. Nandkishore & Co. in partnership with others. Nandkishore & Co. are creditors of the company to the extent of Rs. 4;9s,OOO. 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 outstandings of any of its a~mitted cn:ditors. 1:he company has deposited in court the d1spu.ted cla1!11s of !he appellant~. The company has not ceased carrymg on its busmess. Therefore, the company will meet the dues as and when they fall due. The company has reasonable prospect of business and resources. Counsel on behalf of the company contended that the appel lant~ presented the petition out of improper motive. Improper mouve can be spelt out where the· position is· presellted to coerce the comp~~y in satisfying some groundless claims made against it ~y !he petilloner .. The facts and circumstances of the present case md1cate that motive. The appellants were Directors. They sold (1) )1867) 2 Ch. App. 7~7. (2) [1936] 1 A.E.R. 299. 212 SUPREME COURT REPORTS [1972] 2 S.C.R. :their shares. They went out of the mangement 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_ _&_ _Anr._ v. _Goldstein_ _&_ _Anr._ ( [1] ) it was held that even though it appeared from the evidence that the company was insolvent, as the debts were substantially disputed the' court restrai·ned 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. 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 company will be at liberty to withdraw the amount by filing the necesary application. In the event of the suit b<:ing filed within this period the amount will remain to the credits of the suit. V.P.S. _Appeal dismissed._ (I) [1968] 1 W.l.R. 1091. A B ### c D -.