So you think 433 (e) of the Companies Act,1956 can be taken for a ride?...well, the court doesn't

If you are one of those corporate individuals who know that court can not be taken for a ride, please don't read this article. For the rest, here is an incredible information that would make you realize that the companies act,1956 dare not be misused, or you have deep waters to be in.

What is The Companies Act,1956?
The companies act,1956 is the most important piece of legislation that empowers the central government to regulate the formation ,financing, functioning and winding up of companies. This Act contains the mechanism regarding organizational, financial, managerial and all the relevant aspects of a company, to direct special audit, to order investigation into the affairs of a company and to launch prosecution for violations of the act. If an inspection discloses a prima facie case of fraud or cheating, action is initiated under the provisions of the Companies Act,1956 or the same is reported to the Central Bureau of Investigation. The companies act is administered by the central government through the ministry of corporate affairs and the offices of registrar of companies and official liquidators, public trustees, Company law board, Director of inspection etc. the registrar of the companies (ROC) controls the task of incorporation of new companies and the administration of the running companies.

What is section 433(e)?
Circumstances under which company may be wound up by the tribunal(1).these are:
a) If the company has by special resolution, resolved that the company be wound up by the tribunal

b) if default is made in delivering the statutory report to the registrar or in holding the statutory meeting

c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year

d) if the number of members is reduced, in the case of a public company, below seven ,and in case of a pvt company below two

e) if the company is unable to pay its debts

f) if the tribunal is of the opinion that it is just and equitable that the company should be wound up

g) If the co. has made a default in filling with the registrar its balance sheet and profit and loss account or annual return for any five consecutive financial year

h) If the co. has acted against the interests of the sovereignty and integrity of India, the security of the state, friendly relations with foreign states, public order, decency or morality.

i) If the tribunal is of the opinion that the company should be wound up under the circumstances specified in 424G:
Provided that the tribunal shall make an order for winding up of a company under clause h) on application made by central govt or a state govt.

It has often been observed by courts that many cases that fall under section 433 (e)(2) of this act are generally driven by the creditor's intention to claim his own debt, which lies pending with the company which is being challenged. Courts consider this unacceptable, "it is not a bonafide winding up petition, it is nothing but an abuse to the process of court. In each every case for the inability of the company to pay its debts, winding u petition cannot be admitted as a rule or right(3).courts are of the view that this section isn't an escape route for the creditors to have back their debts, this provision has be used in public interest(4).mere possibility of fiction being employed to deem that the company is unable to pay its debts can not itself ipso facto lead to the inference that the company can be ordered winding up.it is in the discretion of the court to pass an order to wind up a company in the circumstances mentioned in sec 433 of the Act should necessarily be fulfilled for the court to examine as to whether the situation warrants an order to wind up the affairs of the co,even if the circumstances stipulated in any one of the clauses of sec 433 of the act are present, still its the in the discretion of the court to pass an order to wind up a company. It is for the court to bestow its attention to protect public interest. For the transaction of this nature where payment of the cost of the goods, supplied to the respondent co. hasn't been made, the petitioner has a remedy of filing of the summary suit.from the provisions of order 37 of the cpc.

Then under what conditions does sec 433 (e) of the companies act apply?
it was held by the Patna HC(5) the following points need to be considered in this connection(6)
1)that the mere fact,that business hasn't been commenced within a yr isn't a ground 4 the court to order winding up, although courts have jurisdiction for the same
2)that it has to be found out whether the non commencement of business was for some good reason accounting for it
3)that the fact fact of non commencement is an evidence that indicates that the co. has no intention of carrying on business or its not likely to do so
4)that the decisive question is whether there is a reasonable hope of the co. commencing business and doing it a profit & whether the Substratum of the companies has disappeared

Besides these points put forward by Patna HC, there is another consideration in this matter of winding up order. This includes taking into consideration the wishes of the majority of the share holders(7)
The court may look at the overall circumstances. They also see if the creditor has come in a bonafide faith. So the next time you want your debt back think twice before moving the court under section 433(e).In fact a wiser option would be filling a suit under the provisions of order 37 of the cpc.
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End notes
1)Subs for court by the companies (2nd amendment) Act,2002(11 of 2003),S,50
2)s,433(e)-if the company is unable to pay its debt
3)Ajanta enterprises v/s Anita tax print ltd. (2004) 49 SCL section 566(raj)
4)HMT Ltd v/s NT Rahamatulla khan & associates(2010)155 comp cas 169 (car)
5)Registrar of companies v/s Bihar wire and wire products(p)Ltd (1975) 45 comp cas 194(pat)
6)A Ramaiya, Nexis butterworths, Wadha Nagpur,17th edition, part 3 page 4618
7)Middlesborough assembly rooms company (1880)14

The  author can be reached at: imehta.777@legalserviceindia.com