The legal position of limitation period in winding up petition is no more res Integra. The various High Courts has taken a view that if the debt itself was barred by general law of limitation, then the petition for winding up on account of that debt would be barred. The limitation period is 3 years as provided under the Limitation Act, 1963 for various type of transaction.
Principles on which the court acts in winding up petition are –
- The defense of the company is in good faith and one of substance;
- The defense is likely to succeed on point of law;
- The company adduces prima facie proof of the facts on which the defense depends’
(Madhusudan Gordhandas & Co vs Madhu Woollen Industries Pvt. Ltd, 1971 AIR 2600, 1972 SCR (2) 201)
At the stage of admission in a winding up petition under Section 433 of Companies Act, 1956, before deciding as to whether winding up proceedings should be initiated, the Court has to ascertain whether, inter alia, (1) the claim made by the creditor is barred by limitation or (2) whether it is legally enforceable. If the claim made by the creditor is, on the face of it, not one which can be enforced, it is unnecessary to examine whether the claim is genuine and whether the respondent has a bonafide and reasonable defence on merits.
CONDONATION OF DELAY:
Any application, other than an application under any of the provisions of Order XXI of the Code of Civil Procedure, 1908, may be admitted after the prescribed period, if the appellant or the applicant satisfies the Court that he had sufficient cause for not making the application within such limitation period. (Section 5 of the Limitation Act, 1963).
WINDING UP TIME LIMIT UNDER DISABILITY:
The period of limitation is subject to provisions of extension in case of disability, and the postponement in case of acknowledgment or part payment, of fraud or mistake. Otherwise after lapse of a fixed period of time, as prescribed under the Limitation Act, 1963 an action is not maintainable. The fraud is one of disability under the section 17 of the Limitation Act, 1963.
Fraud: As Disability
“Fraud” as is well known vitiates everything (Fraus omnia vitiate). Fraud and justice never dwell together.
“Fraud” and collusion vitiate even the most solemn proceedings in any civilized system of jurisprudence. It is a concept descriptive of human conduct. Michael Levi likens a fraudster to Milton’s sorcerer, Comus, who exulted in his ability to, ‘wing me into the easy hearted man and trap him into snares’. It has been defined as an act of trickery or deceit. In Webster’s Third New International Dictionary “fraud” in equity has been defined as an act or omission to act or concealment by which one person obtains an advantage against conscience over another or which equity or public policy forbids as being prejudicial to another. In Black’s Legal Dictionary, “fraud” is defined as an intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or surrender a legal right; a false representation of a matter of fact whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury. In Concise Oxford Dictionary, it has been defined as criminal deception, use of false representation to gain unjust advantage; dishonest artifice or trick. According to Halsbury’s Laws of England, a representation is deemed to have been false, and therefore a misrepresentation, if it was at the material date false in substance and in fact.
Smt. Shrisht Dhawan vs M/S. Shaw Brothers 1991(AIR 1992 SC 1555)
(Appeal (civil) 5162-5167 of 2005 of Supreme Court)
As per the Commencement notification dated 12.09.2013 in terms of sub-section (3) of section1 of Companies Act, 2013 all the clauses and sections and provisions mentioned therein have commenced on 12.09.2013. The commencement of sections 447 (Sr. No.53 of said notification) has inter alia commenced on 12.09.2013.
The explanation clause to section 447 of Companies Act, 2013 defines ‘Fraud’ as follows:
“Explanation.—For the purposes of this section—
(i) “fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;
(ii) “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled;
(iii) “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.“
The section 17 of the Indian Contract Act, 1872 defines fraud as follows:
- ‘Fraud’ defined.—‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:
(1). the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.
Explanation.—Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak or unless his silence, is, in itself, equivalent to speech.
The section 17(1)(a) and (b) of the Limitation Act, 1963 reads as follows:
- Effect of fraud or mistake.—
(1) Where, in the case of any suit or application for which a period of limitation is prescribed by this Act,—
(a) the suit or application is based upon the fraud of the defendant or respondent or his agent; or
(b) the knowledge of the right or title on which a suit or application is founded is concealed by the fraud of any such person as aforesaid; or
(c) the suit or application is for relief from the consequences of a mistake; or
(d) where any document necessary to establish the right of the plaintiff or applicant has been fraudulently concealed from him, the period of limitation shall not begin to run until plaintiff or applicant has discovered the fraud or the mistake or could, with reasonable diligence, have discovered it; or in the case of a concealed document, until the plaintiff or the applicant first had the means of producing the concealed document or compelling its production: Provided that nothing in this section shall enable any suit to be instituted or application to be made to recover or enforce any charge against, or set aside any transaction affecting, any property which—
The point of limitation under Section 17(1)(a) & (b) of the Limitation Act, 1963 prescribes that statutory limitation period in case of fraud shall start when the petitioner got knowledge of the fraudulent reason for non-payment of dues. In order to invoke the aid of Section 17(1)(b) of the Limitation Act the petitioners must establish that there has been fraud and that by such fraud they have been kept away from knowledge of their right.
Acknowledgement: As Disability:
The section 18 of the Limitation Act, 1963 states that where before the expiry of the prescribed period of limitation in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, “a fresh period of limitation shall be computed from the time when the acknowledgment was so signed”. In Tilak Ram Vs. Nathu, AIR (1967 SC, 935), the Hon’ble Supreme Court deciphered the following requirements to attract Section 18 of the Limitation Act:-
[i] an admission or acknowledgment;
[ii] such acknowledgment must be in respect of a liability regarding a property or right;
[iii] acknowledgment must be made before the expiry of limitation period
[iv] it should be in writing and signed by the party against whom such right is claimed.
Whenever a debtor acknowledges his liability and promises to pay the due amount on a future date and the creditor accepts such offer, the cause of action to take legal action for the recovery of such due amount stands suspended. It is only if the debtor fails to honour his promise to make payment on the consented date that the cause of action will arise afresh or revive in favour of the creditor.
COMMON DEFENSE BY DEFENDANT COMPANY:
- Plea of defect in delivered goods and services:
The most prevalent type of plea raised for non-payment of dues by Defendant Company in winding up proceedings is defect in delivered goods and services. Such plea by Defendant Company is without production of any document supporting their contention. This type of argument is generally raised after issuance of statutory notice for demand in terms of the section 434 of the Companies Act, 1956, compounded with the fact that, there is not even a whisper by the Defendant Company after the receipt of the consignment that goods delivered were of inferior quality contrary to the agreed terms and conditions. The fact of the matter is that all these issues are usually raised only after service of the statutory notice for winding up, which is ex-facie a coined excuse of the Defendant Company.
In Joti Prasad Bala Prasad Vs. ACT Developers Pvt. Ltd. (1990) 68 CC 601 (Delhi) the defence set up by the respondent company that the goods supplied were defective and not up to the mark; the Court had noted that this defence clearly appears to be an afterthought as the respondent has failed to prove that these defects were ever communicated to the petitioner; the so called defence was accordingly rejected as it was only to ward off the winding up petition.
- Defense of Running Account:
In case of a decision of the High Court of Delhi in Rishi Pal Gupta v. S.J. Knitting and Finishing Mills (P) Ltd., ( 1994 (1) Com. L.J. 343 (Delhi)) it was held that in a running account each and every entry in the books of account shall have to be proved. In the said decision, a learned Single Judge of the Delhi High Court has held that if the petition is based on the running account between the parties, and in the absence of positive proof regarding each and every entry in the books of account, the appropriate remedy is not winding up of petition but a suit.
In case of Ashoka Agencies & Business Forms Ltd. ((1999) Vol.95 Company Cases page 172 ), the petition for winding up was filed against the respondent company on the ground of its failure to pay the balance of Rs.24,32,416.01 on a running account which was acknowledged by the said company by its communication dated 21.9.1992. The company raised defence, that the said communication was not a promise to pay and at the most, it was an acknowledgement of a time-barred debt. The Calcutta High Court on the facts of the said case held that in the light of the petitioner’s affidavit that there was continuous and running transactions; there could be no presumption that the acknowledgement was of a time-barred debt. The High Court of Calcutta citing the said reasons, ordered issuance of advertisement for winding up.
- Defense of bonafide Dispute:
Where the debt is bonafide disputed, a Petition for winding up is not an alternative to the Suit to recover the same. The Company court provides the opportunity to the defendant company to put forth their case so as to be convinced about the prima facie case of the winding up. The decisions rendered by the various High Courts has clearly put forth the argument that winding up petition is not a legitimate means of seeking to enforce payment of debt which is bonafide disputed by the company. If there is a bonafide dispute about a debt and the defense is substantial one, the Court would not order winding-up but the defense of the company should be in good faith and one of substance.
The section 2(94a) has been added to the Companies Act, 1913 by the Schedule XI to the Insolvency & Bankruptcy Code, 2016. It reads as follows:
“winding up” means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable.
The mode of winding up has been provided under section 270 of the Companies Act, 1913 reads as follows:
270. Modes of winding up.—
(1) The winding up of a company may be either—
(a) by the Tribunal; or
(2) Notwithstanding anything contained in any other Act, the provisions of this Act with respect to winding up shall apply to the winding up of a company in any of the modes specified under sub-section (1).
The Ministry of Corporate Affairs vide Gazette notification dated December 7, 2016 notified the commencement of various sections of the Companies Act, 1956 wef from 15th December, 2016 including section 270 to 288 covering winding up. However, the provision of winding up due to inability to pay corporate debt has been removed from the Companies Act, 2013 vide section 255 of the Insolvency and Bankruptcy Code, 2016. more specifically schedule XI of said code by amending section 271 of the Companies Act, 2013. The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provides for rule regarding recovery of corporate debt from company debtor including raising of demand vide Form 3.
Adviocate, Bombay High Court