“Better To Bury The Company”: Bombay High Court Dismisses Appeal Against Winding-Up Order Of Company That Defaulted On Government Loan

The Bombay High Court dismissed an appeal filed by a private company challenging a 2007 winding-up order issued against it under Section 433(e) of the Companies Act, 1956. The Court refused to interfere with the original winding-up order passed by a Single Judge and held that the Appellant had failed to establish any bona fide dispute regarding its admitted liabilities.

A Division Bench of Justice M.S. Sonak and Justice Jitendra Jain observed, “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.”

The Court added, “The action of the Appellant virtually amounts to defrauding the State and avoiding payment of dues despite there being a decree against them.”

Advocate Shadab Jan appeared for the Appellant.

Brief Facts

The Appellant company had entered into an agreement with the Respondent, a Government of India undertaking, in 1992 to avail financial assistance under a raw material financing scheme. Over the years, several cheques were issued by the Appellant to the Respondent, which were dishonoured. The Respondent also issued a Letter of Credit which remained unpaid.

In January 1999, the Appellant executed a demand promissory note in favour of the Respondent confirming outstanding dues of Rs. 2,83,70,700/-. A winding-up notice was issued in July 2001 and responded to by the Appellant with vague denials and requests for document inspection.

In 2001, the Respondent filed a winding-up petition under Section 433(e) of the Companies Act, which was allowed by the Company Court in 2007. That order was stayed in 2008, prompting the Appellant to approach the High Court.

Reasoning of the Court

The Court noted that there was no credible defence or genuine dispute raised by the Appellant to the statutory debt. The Court found that the Appellant had executed a demand promissory note admitting its liability and had never denied its dues until the filing of its reply to the winding-up petition.

The Court observed, “The defence in the reply is only taken almost after long lapse of time and in the interregnum no correspondence disputing the amount has been addressed by the Appellant… On the contrary a demand promissory note was executed for an admitted amount and interest.”

It further noted that a decree in a summary suit was passed against the Appellant and remained unpaid and unchallenged, stating, “We cannot ignore the decision passed in the Summary Suit decreeing the amount against the Appellant and which decree till today remains not satisfied. This clearly demolishes the submission of bona fide dispute to avert the winding up of the company.” It added, “The decree passed in Summary Suit itself goes on to show that the appellant (original respondent) is liable to pay the debts based on demand promissory note and cheques and is unable to pay the same till today. We also cannot ignore the fact that today 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. Therefore, we do not find any fault in the order passed in company petition whereby the appellant company is ordered to be wound up under Section 433(e) of the Act.”

Rejecting reliance on acquittals in criminal cases, the Court said, “Findings in criminal proceedings cannot be taken as sacrosanct for deciding civil matters… The findings in criminal proceedings are based on proof beyond reasonable doubt whereas civil proceedings are based on preponderance of probability.”

Noting that the Appellant had essentially defrauded the State, the Court stated, “The appellant (original respondent) after having obtained and utilised financial facilities cannot for the first time in reply to winding up petition raise defence for the first time when no such plea was raised earlier. The action of the appellant (original respondent) virtually amount to defrauding the State and avoid paying the due inspite of there being a decree against them.”

The Court said that the Appellant was unable to pay its debts and had failed to show any substantive defence to the claim. “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”, it added.

Accordingly, the appeal was dismissed and the interim stay on the winding-up order was vacated.

Cause Title: M/s. Bassein Metals Pvt. Ltd. v. National Small Industries Corporation Ltd. (Neutral Citation: 2025:BHC-OS:10338-DB)

Appearance:

Appellant: Advocates Shadab Jan, Niharika Jalan, Ruturaj V. Bankar