[Companies Act] Debtor Company Cannot Contest Its Liability For The First Time In Winding-Up Proceedings: Bombay High Court

The Bombay High Court has dismissed an appeal against the winding-up of a company that defaulted on dues owed to a government enterprise and had no ongoing business activity or assets. The Court rejected the company's defence that there was a “bonafide dispute” over the debt, holding that the company's objections were afterthoughts and that its inability to pay was well established.

A division bench of Justices M.S. Sonak and Jitendra Jain was hearing an appeal filed by M/s. Bassein Metals Pvt. Ltd., challenging a 2007 Single Judge order allowing a winding-up petition filed by the National Small Industries Corporation Ltd. (NSIC) under Section 433 of the Companies Act, 1956.

In 1992, the appellant (original respondent) entered into an agreement with the respondent (original petitioner) for availing the benefits of the “raw material assistance scheme” in the form of finance. In 1999, the company executed a demand promissory note for ₹2.83 crore, acknowledging its dues. Despite repeated demands, including a statutory winding-up notice in 2001, the company failed to pay.

The company argued that since it was acquitted in cheque dishonour cases under Section 138 of the Negotiable Instruments Act, the winding-up order should not stand. It also claimed discrepancies in the amounts due.

The Court rejected this defence, stating:

“Findings in criminal proceedings are based on the proof 'beyond reasonable doubt' whereas in civil proceedings the extent of proof is based on 'preponderance of probability'. The findings in criminal proceedings cannot be relied upon while adjudicating civil proceedings.”

The Court noted that the decree passed in the Summary Suit itself goes on to show that the appellant is liable to pay the debts based on a demand promissory note and cheques and is unable to pay the same till today. Further, the court emphasized that as of this date, there are no activities in the appellant company and there are no assets, which goes on to further show its inability to pay the debts.

On the appellant's defence, the Court said that after having obtained and utilised financial facilities, the appellant cannot, for the first time, in reply to a winding up petition, raise a defence when no such plea was raised earlier. The Court said that the action of the appellant virtually amounts to defrauding the State and avoiding paying the due in spite of there being a decree against them. The Court also noted that the company had not paid any part of the decretal amount to date and admitted that it had no ongoing business or assets.

Accordingly, the Court dismissed the appeal, vacated the interim stay on the 2008 winding-up order.

Case Title: M/s. Bassein Metals Pvt. Ltd. v. National Small Industries Corporation Ltd. [Appeal No. 287 of 2008 in Company Petition No. 921 of 2001]

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