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1993 SCC OnLine Raj 19 : (1993) 1 RLW 617 : AIR 1994 Raj 120 : (1996) 86
Comp Cas 207 : (1993) 1 RLR 572 : (1993) 2 WLN 204 : (1994) 14 CLA 427

In the High Court of Rajasthan at Jaipur

(BEFORE K.C. AGRAWAL, C.J. AND V.K. SINGHAL, J.)

Falcon Gulf Ceramics Limited

Versus
Industrial Designs Bureau
D.B. Civil Special Appeal (Company) No. 76 of 1992
Decided on March 22, 1993
Companies (Court) Rules, 1959, Rule 96 and 99 and Companies Act, Sec. 434 —
Compliance of Rule 96 of the Rules is a must before any order of compulsorily winding up of
company — The purpose of advertisement is meant for the benefit of all the creditors and
share holders — It is not a defect of technical nature but it affects the merits — Court of
appeal has the same powers as the first court — Rule% is mandatory.
(Para 10 & 18)
Appeal allowed.
Case Law Referred:
(1) National Conduits (P) Ltd. v. S.S. Arora, ((1967) 37 C.C. 786)
Rajiv Sahni, Dinesh Agnani & N.K. Maloo, for the Petitioner
J.C. Seth & G.K. Bhartiya, for the respondent
The Judgment of the Court was delivered by
K.C. AGRAWAL, C.J.:— A petition, under section 434 of the Companies Act
(hereinafter to be referred to as ‘the Act’), was filed by Industrial Designs Bureau for
winding up of Falcon Gulf Ceramic Limited. The respondent entered into a Consultancy
Services Contract with the appellant-company for lay-out, drawings, engineering,
tender-invitation and supervision of construction of its factory, office and connected
buildings of their project in Plot No. 223 to 226, Matsya Industrial Area, Desalt, Alar.
The appellant-company was registered under the Companies Act vide Certificate of
Incorporation No. 3461 of 1985-86 dated 29.11.1985 as a public company limited by
shares. On the basis of tenders received, the work for the construction of the factory,
office and buildings connected with the project of the company at Alar was awarded on
15.6.1987 to Nucon India Pvt. Ltd., a Construction Contractor. The work under
consultancy services contract stood completed on 145.1991. Prior to submission of the
final bill for consultancy work, the credit balance of the respondent with the appellant-
company was Rs. 1,76,646.41 which had been outstanding since 31.1.1990.
2. The respondent gave a notice under section 434 of the Act dated 19.5.1991
claiming the aforesaid amount. The notice was received by the appellant-company on
25.5.1991. The company wrote in reply after the receipt of the notice under section
434 of the Act that “the Company has been incurring losses from its inception and
hence, the cash flow of the Company is under heavy strain”. It is added that “although
efforts are afoot to arrest the losses, no significant break through has been achieved”.
The respondent despite the repeated request could not receive the amount due to it
from the appellant-company which was as stated above in the sum of Rs. 1,76,646.41
filed the petition giving rise to the present appeal under section 434 of the Act
claiming that the appellant-company be wound up compulsorily.
3. When the petition bearing No. 12/1991 was presented in this Court, Hobble Mr.
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Justice M.B. Sharma, who was the learned Company Judge, passed the following order
on 12.7.1991:—
“It is a winding up petition in respect of which today under an order just now, I
have already ordered that the company petition is admitted and it is directed that
the notices be issued to the respondent company as to why the company petition
be not advertised. I have already issued an injunction order in that case and that
injunction order, in my opinion, will also safeguard the interest of the petitioner.
Connect this case with company petition No. 11/1991 and issue notice to the
respondent company returnable within two weeks as to why provisional liquidator
may not be appointed”.
4. The appellant-company filed a counter affidavit asserting that the petition filed
was not bonafide having been filed with the sole object of coercing the appellant-
company into making payment of amounts that was not legally due or payable, hence,
the petition was liable to be rejected. The appellant-company also asserted that the
claim was premature and unjustifiable and there was no neglect to pay the debt due
from it. The claim of the respondent was also alleged to be false.
5. The petition was, thereafter, transferred to Hobble Mr. Justice I.S. Israni, who
became the Company Judge, who by the judgment challenged by means of this
appeal, allowed the petition of the respondent filed under section 434 of the Act
directing the winding up of the appellant-company. While directing for the winding up,
the learned Company Judge found that a sum of Rs. 1,76,646.41 was due to the
respondent and the disputes in regard to the debt as well as the quantum raised by
the appellant-company was not bonafide, as they are only manufactured to harass the
respondent.
6. Against the aforesaid judgment, the present appeal has been filed. On
14.12.1992, this Court directed the appellant-company to give a bank draft of Rs.
50,000/- to the respondent and further directed respondent to furnish the bank
guarantee for the said amount.
7. The learned counsel for the appellant urged that as the compliance of Rule 96 of
the Companies (Court) Rules, 1959 (hereinafter to be referred to as ‘the Rules’) had
not been made, the petition was liable to be rejected. The learned counsel urged that
the learned Company Judge did not consider as to whether the petition was liable to
be admitted and for advertisement to be published, the mandatory provision has not
been complied with and the consequence of the same was that the order winding up
was illegal. The learned counsel for the appellant also referred to Rule 99 of the Rules
and submitted that the advertisement had not since been made, the learned Company
Judge had no jurisdiction to go into the merits of the winding up petition and direct for
winding up.
8. Rules 96 and 99 of the Companies (Court) Rules, 1959 are reproduced below:—
“96. Admission of petition and directions as to advertisement:— Upon the filing
of the petition, it shall be posted before the Judge in Chambers for admission of the
petition and fixing a date for the hearing thereof and for directions as to the
advertisements to be published and the persons, if any, upon whom copies of the
petition are to be served. The Judge may, if he thinks fit, direct notice to be given
to the company before giving directions as to the advertisement of the petition.
“Advertisement of petition:— Subject to any directions of the Court, the petition
shall be advertised within the time and in the manner provided by rule 24 of these
rules. The advertisement shall be in Form No. 48.”
9. The learned counsel for the respondent urged that this objection ought to have
been raised before the learned Company Judge and as it had not been done, the
appellant was estopped from raising it in the appeal. In the alternative, counsel
contended that since the power of a court of appeal is the same as that of the first
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court, the appellate court can direct for the advertisement in accordance with Rule 96
of the Rules and could not be pleased in that event to set aside the order of the
learned Company Judge and send the case back for trial to him, inasmuch as, to do so
would be inequitable and unjust. The learned counsel urged that once a petition for
compulsorily winding up of a company was admitted, the Court was not bound
forthwith to advertise the petition. That being so, the Rule 96 was not mandatory and
had to be held as directory.
10. We have heard learned counsel for the parties and are of the opinion that since
the compliance of Rule 96 of the Rules was a must before any order of compulsorily
winding up made, the order of the learned Company Judge has to be set-aside. It may
be true that the Court of appeal has the same powers as the first court. We would
have certainly acted on that principle had the defect been of technical nature and
would have not affected the merits. The steps required by Rule 96 are of vital nature
and compliance of the same appears to be mandatory. The purpose of advertisement
contemplated by Rule 96 is very wholesome and is meant for the benefit of all the
creditors and shareholders.
11. Winding up of liquidation is the process by which the management of a
company's affairs is taken out of its directors' hands and its assets are realised by a
liquidator. A company may be wound up under the Companies Act by the Court on the
grounds laid down in Section 433. Before the winding up proceedings are taken by the
creditors, not only a petition must be served upon the company, but also it must be
advertised in the manner prescribed in Rule 24 of the Rules.
12. In Hulsbury's Laws of England (Fourth Edition at paragraph 1463), it has been
said that non-compliance with these provisions is a ground on which the court shall
reject the petition. An order for winding up of a company operates in favour of all the
creditors and all the contributories of the company as if made on the joint petition of a
creditor and of a contributory. After the order for winding up of a company is made, an
application to the Court for appointment of a provisional liquidator may be made by
the petitioner or by a creditor of the company or by a contributory or by the company
itself.
13. In the instant case, as stated above, Rules 96 and 99 of the Rules had not been
complied with. Admittedly, the petition had not been advertised.
14. The learned counsel for the appellant urged that in the absence of
advertisement of the petition, the same was liable to be rejected. For the submission
made, the learned counsel relied on a decision reported in National Conduits (P) Ltd. v.
S.S. Arora (1). In this case, the Supreme Court held:—
“When a petition is filed before the High Court for winding up of a company
under the order of the Court, High Court (i) may issue notice to the company to
show cause why the petition should not be admitted (ii) may admit the petition and
fix a date for hearing, and issue a notice to the company before giving directions
about advertisement of the petition; or (iii) may admit the petition, fix the date of
hearing of the petition, and order that the petition be advertised and direct that the
petition be served upon persons specified in the order. A petition for winding up
cannot be placed for hearing before the court, unless the petition is advertised; that
is clear from the terms of rule 24(2). But that is not to say that as soon as the
petition is admitted, it must be advertised. In answer to a notice to show cause why
a petition for winding up be not admitted, the company may show cause and
contend that the filing of the petition amounts to an abuse of the process of the
court. If the petition is admitted, it is still open to the company to move the court
that the interest of justice or to prevent abuse of the process of the court, the
petition be not advertised. Such an application may be made where the court has
issued notice under the last clause of rule 96, and even when there is an
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unconditional admission of the petition for winding up.”
The Supreme Court further held:—
“For reasons already set out, in our judgment, the High Court erred in holding
that a petition for winding up must be advertised even before the application filed
by the company for staying the proceeding for the ends of justice, or to prevent
abuse of the process of the court. The view taken by the High Court that the court
must, as soon as the petition is admitted, advertise the petition is contrary to the
plain terms of rule 96. Such a view, if accepted, would make the court an
instrument, in possible cases, of harassment and even of blackmail, for once a
petition is advertised, the business of the company is bound to suffer serious loss
and injury.”
15. From the aforesaid decision of the Supreme Court, it is clear that advertisement
was a must and in the absence of advertisement and its admission, the petition was
bound to be rejected. The learned counsel for the appellant also urged that a winding
up petition should not be allowed to be taken recourse of as a means to recover debts
from the company. It is not a legitimate way to enforce payment of debts which are
not bonafide. If such a position is entertained, the proceeding would become a weapon
to pressurise. However, this is not necessary in this case. When we are allowing the
appeal on the preliminary, ground mentioned above, it is not necessary for us at this
stage to go into the question as to whether the amount for which recovery was sought
in the winding up petition was bonafide or not.
16. In the appeal, the appellant-company was directed to hand over a bank draft of
Rs. 50,000/- and respondents were directed to furnish bank guarantee for the said
amount. The appellant-company has complied with the order. We consider it
appropriate to direct that the bank guarantee shall not be withdrawn by the
respondent till further orders of the Court.
17. In the beginning, we have noted the order of the then learned Company Judge,
who being of the opinion that as the company petition filed in the connected case No.
11/1991 had been advertised, it was not necessary to advertise the present petition.
Two matters were different. Advertisement of one petition No. 11/1991 was for the
purposes of that alone. The requirement of law needed advertisement of other as well.
As this had not been done, the order of the learned Company Judge is liable to be set-
aside.
18. For what we have said above, the only course left is to set aside the order of the
learned Company Judge and send the case back to him for decision after getting the
winding up petition advertised in accordance with the Companies (Court) Rules, 1959.
19. In the result, the appeal is allowed.
———
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