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PETITIONER: MADHUSUDAN GORDHANDAS & CO.

       Vs.

RESPONDENT: MADHU WOOLLEN INDUSTRIES PVT.  LTD.

DATE OF JUDGMENT29/10/1971

BENCH: RAY, A.N. BENCH: RAY, A.N. PALEKAR, D.G.

CITATION:  1971 AIR 2600            1972 SCR  (2) 201

ACT: Companies  Act (1 of 1956), ss. 433(c)  and  557--Principles for ordering winding up of company.

HEADNOTE: The  appellants  filed  a petition for  winding  up  of  the respondent  company, on the grounds : (1) that  the  company was unable to pay the debts due to the appellants, (2)  that the  company  showed their indebtedness in  their  books  of account for a much smaller amount, (3) that the company  was indebted  to  other  creditors, (4)  that  the  company  was effecting  an  unauthorised sale of its machinery,  and  (5) that   the   company  had  incurred   losses   and   stopped functioning,  and  therefore the substratum of  the  company disappeared  and  there was no possibility  of  the  company doing any business at profit. The High Court dismissed the petition. Dismissing the appeal to this Court, HELD : The rules for winding up on a creditor’s petition are if there is a bona fide dispute about a debt and the defence is a substantial one, the court would not’ order winding up. The  defence of the company should be in good faith and  one of substance. if the defence is likely to succeed on a point of  law  and the company adduced prima facie  proof  of  the facts  on which the defence depends, no order of winding  up would  be  made by the Court.  Further under s. 557  of  the Companies  Act, 1956, in all matters relating to winding  up of  a  company  the court may ascertain the  wishes  of  the creditors.  If, for some good reason the creditors object to a winding up order, the court, in its discretion, may refuse to pass such an order.  Also, the winding up order will  not be made on a creditor’s petition if it would not benefit the creditor or the company’s creditors generally. [207 D,  G-H; 208 C-D] (1)  In the present case, the claims of the appellants  were disputed  both  in fact and in law.  The company  had  given prima  facie evidence that the appellants were not  entitled to  any claim.  The company had also raised the  defence  of lack of privity and of limitation. [208 D-F] (2)  One of the claims of the appellants was proved  by  the company  to be unmeritorious and ’false, and as regards  the admitted  debt  the  company had stated  that  there  was  a settlement  between the company and the appellants that  the

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appellants  would  receive  a lesser  amount  and  that  the company would pay it off out of the proceeds of sale of  the company’s properties. [208 F-G] (3) The creditors of the company for the sum of Rs. 7,50,000 supported   the   company  and  resisted   the   appellants’ application for winding up. [209 G] (4)  The cumulative evidence in support of the case  of  the company is that the appellants consented to any approved  of the  sale  of  the machinery.   As  shareholders,  they  had expressly written that they had no objection to the sale  of the  machinery and the letter was issued in order to  enable the company to hold an extraordinary general meeting on  the subject.   The company passed a resolution  authorising  the sale.  The 256 Sup.Cl/72 202 appellants themselves were parties to the proposed sale  and wanted  to  buy the machinery.  Where the  shareholders  had approved  of  the  sale  it  could  not  be  said  that  the transaction was unauthorised or improvident.[209 A-F] (5)  In  determining whether or not the  substratum  of  the company had gone, the objects of the company and the case of the  company on that question would have to be looked  into. In  the  present  case, the company alleged  that  with  the proceeds of sale the Company intend to enter into some other profitable  business.  such  as export  business  which  was within  its  objects.  The mere fact that  it  had  suffered trading losses will not destroy its substratum unless  there is no reasonable prospect of it ever making a profit in  the future.  A court would not draw such an inference  normally. One  of  its largest creditors, who opposed the  winding  up petition would help it in the export business.  The  company had not abandoned the objects of its business.  Their-,fore, on the facts and circumstances of the present case it  could not  be  held that the substratum of the company  had  gone. Nor could it be held that the company was unable to meet the outstandings  of any of its admitted  creditors.The  company had  deposited money in court as per the directions  of  the Court and had  not ceased carrying on its business. [211A-G] (6)  On  the  facts  of the case it  is  apparent  that  the appellants had presented the petition with improper  motives and not for any legitimate purpose.  The appellants were its directors,  had full knowledge of the company’s affairs  and never  made  demands ’for their alleged  debts.   They  sold their shares, went out of management of the company and just when  the  sale of the machinery was going  to  be  effected presented the petition for winding up. [211 A; 212 A-C] Amalgamated  Commercial  Traders  (P.)  Ltd.  v.  A.  C.  K. Krishnaswami  & Anr., 35 Company Cases 456, London  &  Paris Banking  Corporation, (1874) L.R. 19 Eq. 444, Re.   Brighton Club & Norfold Hotel Co. Ltd., (1865) 35 Beav. 204, Re.   A. Company,  94 S.J. 369, Re.  Tweeds Garages Ltd., (1962)  Ch. 406, Re.  P. & J. Macrae Ltd., (1961) 1 All.  E.R. 302,  Re. Suburban Hotel Co. (1867) 2 Ch.  App. 737 and Davis &  Co.v. Burnswick (Australia) Ltd., (1936) 1 A.E.R. 299, and Mann  & Am-.v. Goldstein & Anr., (1968) 1 W.L.R. 1091, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1113 of 1970. Appeal  from the judgment and order dated April 3,  1970  of the Bombay High Court in Company Appeal No. 1 of 1970. V.  M.  Tarkunde,  R. L. Mehta and 1.  N.  Shroff,  for  the appellant.

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M. C. Chagla and S. N. Prasad, for Creditors Nos. 1, 3 to  6 and 10. A. K. Sen and E. C. Agrawala, for creditor No. 9. The Judgment of the Court was delivered by Ray, J. This is an appeal by certificate, from the  judgment dated 3 April, 1970 of the High Court of Bombay confirming 203 the  order of the learned Single Judge refusing to  wind  up the respondent company. The appellants are a partnership firm.  The partners are the Katakias.  They are three brothers.  The appellants carry on partnership  business  in the name of  Madhu  Wool  Spinning Mills. The  respondent  company  has the nominal.  capital  of  Rs. 10,00,000  divided  into 2000 shares of Rs. 500  each.   The issued  subscribed and fully paid up capital of the  company is Rs. 5,51,000 divided into 1,103 Equity shares of Rs.  500 each.   The three Katakia brothers had three shares  in  the company.  The other 1,100 shares were owned by N.C. Shah and other members described as the group of Bombay Traders. Prior  to  the  incorporation of the company  there  was  an agreement  between the Bombay Traders and the appellants  in the month of May, 1965.  The Bombay Traders consisted of two groups  known as the Nandkishore and the Valia groups.   The Bombay Traders was floating a new company for the purpose of running  a Shoddy Wool Plant.  The Bombay Traders agreed  to pay about Rs. 6,00,000 to the appellants for acquisition  of machinery and installation charges thereof.  The  appellants had  imported  some  machinery and were in  the  process  of importing  some  more.   The  agreement  provided  that  the erection  expenses  of the machinery would be treated  as  a loan to the new company.  Another part of the agreement  was that  the machinery was to be erected in portions of a  shed in  the  compound of Ravi Industries Private  Limited.   The company  was  to pay Rs. 3,100 as the monthly  rent  of  the portion of the shed occupied by them.  The amount which  the Bombay  Traders  would advance as loan to  the  company  was agreed  to be converted into Equity capital of the  company. Similar  option was given to the appellants to  convert  the amount  spent  by  them for erection  expenses  into  equity capital. The  company  was incorporated in the month of  July,  1965. The appellants allege that the company adopted the agreement between the Bombay Traders and the appellants.  The  company however denied that the company adopted the agreement. The appellants filed a petition for winding up in the  month of  January, 1970.  The appellants alleged that the  company was liable to be wound up under the provisions of section 43 3 (c) of the Companies Act, 1956 as the company is unable to pay the following debts. 204 The  appellants claimed that they were the creditors of  the company for the following sums of money :- A.(a) Expenses incurred by the appellants in connection with the erection of the plant and machinery. . .               Rs. 1,14,344.97 (b)  Interest on the sum of Rs. 1,14,344.97 from 1 April, 1966 till 31 December, 1969 at 1%  per mensem.                        Rs. 51,453.13 (c) Commission on the sum of Rs. 1,14,344. 97 due to the app- ellants at the rate of Ipercent per mensem from 1 April 1966 till 13 December,1969.                     Rs. 51,453.12

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B. (a) Compensation payable by the company to the appellants at the rate of Rs. 3,100 per month for 22 months and 14 days in respect of occupation of the portion of the shed given by the appellants to the company on the basis of leave and licence. . .                          Rs.69,600.00 (b) Interest on the amount of com- pensation from time to time by the said company to the appellants till 12 April, 1967.                      Rs. 7,857.00 (c) Further interest on compensation from 13 April, 1967 to 31 December, 1969.                                     Rs. 21,576.00 C. (a) Invoices in respect of 3 machines. Rs. 85,250.00    (b)    Interest on Rs. 85,250          Rs. 37,596.00    (c)    Commission at the rate of 1% per cent or Rs.85,250                   Rs. 37,596.00 The appellants alleged that the company failed and neglected to  show the aforesaid indebtedness in the books of  account save and except the sum of Rs. 72,556.01. The  other  allegations of the appellants were  these.   The company  incurred losses upto 31 March, 1969 for the sum  of Rs. 6,21,177.53 and thereafter incurred further losses.  The company stopped functioning since about the month of Septem- ber,  1969.  The company is indebted to a Director  and  the firms  of M/s Nandkishore & Co. and M/s Bhupendra &  Co.  in which  some of the Directors of the company are  interested. The  in-,  debtedness  of  the  company  to  the   creditors including  the appellant’s claim as shown by the company  at the  figure  of  Rs.  72,556.01  is  for  the  sum  of   Rs. 9,56,829.47.  The  liability of the  company  including  the share  capital amounted to Rs. 14,98,923.3 3. The  liability excluding   the  share  capital  of  the  company   is   Rs. 9,56,829.47  and the assets of the company on the  valuation put  by  the  company on the balance  sheet  amount  to  Rs. 8,81,171.96.  The value of the current and liquid assets  is about  Rs. 2,74,247.38. The appellants on these  allegations alleged  that even after the proposed sale of the  machinery at  Rs. 4,50,000 the company would not be in a  position  to discharge  the  indebtedness of the company.   The  proposed sale,  of  machinery for the sum of Rs. 4,50,000  was  at  a undervalue.   The market value was Rs. 6,00,000.  The  Board did not sanction such a sale. It was alleged that the substratum of the company disappear- ed  and  there was no possibility of the company  doing  any business  at profit.  The company was insolvent and  it  was just and equitable to wind up the company. 205 When the petition was presented to the High Court of  Bombay the learned Single Judge made a preliminary order  accepting the petition and directing notice to the company.  When  the company appeared all the shareholders and a large number  of creditors  of  the company of the, aggregate  value  of  Rs. 7,50,000 supported the company and opposed winding up. The company disputed the claims of the appellants under  all the heads save the two amounts of Rs. 14,650 and Rs.  36,000 being  the  amounts of the second and third  invoices.   The company  produced-books  of  account showing a  sum  of  Rs. 72,556.01 due to the appellants, as on 31 March, 1969.   The company alleged that the appellants had agreed to  reduction of the debt to a sum of Rs. 14,850 and to accept payment  of the same out of proceeds of sale of the machinery. The learned Single Judge held that the claims of the  appel-

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lants  were disputed save that a sum of Rs.  72,556,.01  was payable by ’the company to the appellants and with regard to the sum of Rs. 72,556.01 the company alleged that there  was a  settlement at Rs. 14,850 whereas the  appellants.  denied that  there  was any such compromise.   The  learned  Single Judge  refused to wind up the company and asked the  company to  deposit the disputed amount of Rs. 72,556.01  in  court. The  further  order  was  that  if  within  six  weeks   the appellants did not file the suit in respect of the  recovery of  the  amount the company would be able  to  withdraw  the amount and if the suit would be filed the amount would stand credited to the suit. The  High Court on appeal upheld the judgment and order  and found  that the alleged claims of the appellants  were  very strongly and substantially denied and disputed. The first claim for erection of plant- and machinery was to- tally  denied by the company.  The defences were first  that the  books  of  the company  showed  no  such  transactions; secondly,  there was no privity between the company and  the persons  in  whose  names the appellants  made  the  claims; thirdly, the alleged claims were barred by limitation;  and, fourthly, there was never any demand for the alleged  claims either by those persons or by ,the appellants.  The  alleged claims  for interest and commission were  therefore  equally baseless according to the defence of the Company. The second claim for compensation was denied on the  grounds ,that  the appellants were not entitled to any  compensation for  use of The portion of the shed ’and the  alleged  claim was  barred by imitation.  As to the claim for  compensation the  company  relied  on  the resolution  of  the  Board  of Directors  at  which the Katakia brothers  were  present  as Directors The Board resolved 206 confirmation of the arrangement with M/s Ravi Industries for use of the premises for the running of the industry at their shed  at  a  monthly  rent of Rs.  4,250:  Prima  facie  the resolution  repelled any claim for compensation or  interest on compensation. With  regard  to the claim of invoices the High  Court  held that  the  first  invoice for Rs. 34,600  was  paid  by  the company to the appellants.  The receipt for such payment was produced  before  the learned trial Judge.   The  appellants also  admitted the same.  As to the other two  invoices  for Rs.  14,650 and for Rs. 36,000 the amounts appeared  in  the company’s books.  According to the company the claim of  the appellants was for Rs. 72,556.01 and the case of the company was  that  there  was  a settlement  of  the  claim  at  Rs. 14,850.00. The High Court correctly gave four principal reasons to  re- ject the claims of the appellants to wind up the company  as creditors.  First, that the books of account of the  company did  not show the alleged claims of the appellants save  and except the sum of Rs. 72,556.01. Second, many of the alleged claims are barred by limitation.  There is no allegation  by the  appellants to support acknowledgement of any  claim  to oust the plea of limitation.  Thirdly, the Katakia  brothers who were the Directors resigned in the month of August, 1969 and  their  three shares were transferred in  the  month  of December,  1969 and up to the month of December, 1969  there was not a single letter of demand to the company in  respect of any claim.  Fourthly, one of the Katakia brother was  the Chairman  of  the  Board  of  Directors  and  therefore  the Katakias  were  in the knowledge as to the  affairs  of  the company  and  the  books of accounts  and  they  signed  the balance  sheets  which  did not reflect  any  claim  of  the

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appellants  except the two invoices for the amounts  of  Rs. 14,650  and  Rs. 36,000.  The High Court  characterised  the claim   of  the  appellants  as  tainted  by  the  vice   of dishonesty. The  alleged debts of the appellants are  disputed,  denied, doubted and at least in one instance proved to be  dishonest by  the production of a receipt granted by  the  appellants. The  books  of  the company do not show any  of  the  claims excepting in respect of two invoices for Rs. 14,650 and  Rs. 36,000.  It was said by the appellants that the books  would not  bind the appellants.  The appellants did not  give  any statutory  notice to raise any presumption of  inability  to pay  debt.   The appellants would therefore be  required  to prove their claim. This  Court in Amalgamated COmmercial Traders (P) Ltd.  v.A. C.  K.  Krishnaswami and Anr. (1) dealt with a  petition  to wind up   the  company  on the ground that the  company  was indebted  to  the petitioner there for a sum  of  Rs.  1,750 being the net dividend (1) 35 Company cases 456. 207 amount  payable  on 25 equity shares which sum  the  company failed  and neglected to pay in spite of notice  of  demand. There  were other shareholders supporting the winding up  on identical  grounds.  The company alleged that there  was  no debt  due  and  that the company Was in  a  sound  financial position.   The  resolution  of  the  company  declaring   a dividend made the payment of the dividend contingent on the- receipt  of  the  commission  from  two  sugar  mills.   The commission  was  not received till the month of  May,  1960. The  resolution was in the month of December-, 1959.   Under section  207 of the Companies Act a company was required  to pay  a dividend which had been declared within three  months from the date of the declaration.  A company cannot  declare a  dividend  payable beyond three months.  This  Court  held that  the non-payment of dividend was bona fide disputed  by the  company.  It was not a dispute ’to hide’ its  inability to pay the debts. Two rules are well settled.  First if the debt is bona  fide disputed  and  the defence is a substantial one,  the  court will  not  wind up the company.  The court has  dismissed  a petition for winding up where the creditor claimed a sum for goods sold to the company and the company contended that  no price  had  been agreed upon. and the sum demanded  by  the, creditor  was  unreasonable (See London  and  Paris  Banking Corporation  (1).   Again, a petition for winding  up  by  a creditor who claimed payment of an agreed sum for work  done for the company When the company contended that the work had not  been done properly was not allowed. (See Re.   Brighton Club and Norfold Hotel Co. Ltd. (2) Where  the debt is undisputed the court will not act upon  a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt (See Re. A  Company  94 S.J. 369).  Where however there is  no  doubt that the company owes the creditor a debt entitling him to a winding  up  order  but  the exact amount  of  the  debt  is disputed  the  court will make a winding  up  order  without requiring  the creditor to quantity the debt precisely  (See Re.   Tweeds  Garages Ltd. (3) The principles on  which  the court  acts are first that the defence of the company is  in good  faith and one of substance, secondly, the  defence  is likely  to succeed in point of law and thirdly  the  company adduces prima facie proof of the facts on which the  defence depends. Another  rule  which the court follows is that if  there  is

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opposition  to  the making of the winding up  order  by  the creditors  the  court  will consider their  wishes  and  may decline to make the winding up order.  Under section 557  of the Company Act 1956 (1)  [1874] L.R. 19 Eq. 444. (3)  [1962] Ch. 406. (2)  [1865] 35 Beav. 204. 208 in all matters relating to the winding up of the company the court may ascertain the wishes of the creditors.  The wishes of  the shareholders are also considered though perhaps  the court  may  attach  greater  weight  to  the  views  of  the creditors.   The  law on this point is  stated  in  Palmer’s Company Law, 21st Edition page 742 as follows : "This  right to  a  winding up order is, however,  qualified  by  another rule,  viz.,  that the court will regard the wishes  of  the majority  in value of the creditors, and if, for  some  good reason, they object to a winding up order, the court in  its discretion  may  refuse  the  order’.   The  wishes  of  the creditors will however be tested by the court on the grounds as  to whether the case of the persons opposing the  winding up is reasonable; secondly, whether there are matters  which should  be  inquired into and investigated if a  winding  up order  is made.  It is also well settled that a  winding  up order will not be made on a creditor’s petition if it  would not  benefit him or the company’s creditors generally.   The grounds  furnished by the creditors opposing the winding  up will have an. important bearing on the reasonableness of the case (See Re.  P. & J. Macrae Ltd.(1). In  the  present  case  the claims  of  the  appellants  are disputed  in fact and in law.  The company has  given  prima facie  evidence that the appellants are not entitled to  any claim  for erection work, because there was  no  transaction between  the company and the appellants or those persons  in whose names the appellants claimed the amounts.  The company has raised the defence of lack Of privity.  The company  has raised  the  defence of limitation.  As to  the  appellant’s claim  for compensation for use of shed the  company  denies any  privity  between the company and the  appellants.   The company  has proved the resolution  of the company that  the company will pay rent to Ravi Industries for the use of  the shed.  As to the three claims of the appellants for invoices one  is proved by the company to be  utterly  unmeritorious. The  company- produced a receipt granted by  the  appellants for  the invoice amount.  The falsehood of  the  appellants’ claim has been exposed.  The company however stated that the indebtedness  is for the sum of Rs. 14,850 and  the  company alleges the agreement between the company and the appellants that  payment will be made out of the proceeds of sale.   On these facts and on the principles of law to which  reference has  been  made the High Court was correct in  refusing  the order for winding up. Since  the  inception of the company  Jayantilal  Katakia  a partner  of the appellants was the Chairman of  the  company until 22 August, 1969.  His two brothers were also Directors of  the  company since its inception till 22  August,  1969. The Bombay group had also Directors of the company. (1) [1961] 1 A.E.R. 302. 209 The company proved the unanimous resolution of the Board  at a  meeting held on June, 1969 for sale of machinery  of  the company.  The Katakia brothers were present at the  meeting. The  Katakia brothers thereafter sold their three shares  to the Valia group.  The cumulative evidence in support of  the case  of the company is not only that the  Katakia  brothers

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consented to and approved of the sale of machinery but  also parted  with their shares of the company.  The three  shares were sold by the Katakia Brothers shortly after each of them had written a letter on 27 July, 1969 expressly stating that they  had no objection to the sale of the machinery and  the letter was issued in order to enable the company to hold  an Extra-ordinary General meeting on the subject.  The  company relied on the resolution of the Board meeting on 24 October, 1969  where it was recorded that the Valia group would  sell their 367 shares and 3 other shares which they had purchased from  the  appellants  to  the  Nandkishore  group  and  the appellants would accept Rs. 14,850 in settlement of the  sum of  Rs.  72,000 due from the company and the  company  would make that payment out of proceeds of sale of the  machinery. The  Board at a meeting held on 17 September, 1969  resolved that the proposal of R. K. Khanna to purchase the  machinery be  accepted.  On 20 December, 1969 an agreement was  signed between  R.  K. Khanna and the company for the sale  of  the machinery.  At the Annual General Meeting of the company  on 8 January, 1970 the Resolution for sale of the machinery was unanimously passed by the company. It  is in this background that the appellants impeached  the proposed   sale  of  the  machinery  as   unauthorised   and improvident.  The appellants themselves were parties to  the proposed sale.  The appellants themselves wanted to buy  the machinery at a higher figure.  These matters are within  the province  of  the  management of  the  company.   Where  the shareholders  have  approved of the sale it cannot  be  said that   the  transaction  is  unauthorised   or   improvident according to the wishes of the shareholders. It will appear from the judgment of the High Court that  the creditors for the sum of Rs. 7,50,000 supported the  company and  resisted  the appellants’ application for  winding  up. There  was some controversy as to whether all the  creditors appeared or not.  At the hearing of this appeal the  company gave a list of the creditors and notices were issued to  the creditors.   Apart from the appellants, two other  creditors who supported the appellants were Ravi Industries Ltd. whose name appears as one of the creditors as on 2 August, 1971 in the  list  of creditors furnished by the company and  K.  S. Patel & Co. with a claim for Rs. 44,477.56 though their name does not appear in the list.  Among the creditors who 210 supported the company the largest amount was represented  by Nandikshore and Company with a claim for Rs. 4,95,999.   The two  creditors who supported the claim of the appellants  in regard  to the prayer for- winding up were  Ravi  Industries Ltd. with a claim for Rs. 2,97,500 on account of rent and K. S.  Patel & Co. of Bombay with a claim for Rs.44,477.56.  It may be stated here that this claim of Rs. 44,477.56 was made on account of erection work of machinery and this  identical claim  was included in the list of expenses claimed  by  the appellants  on  account  of  erection  work.   The   company disputed the claim.  The High Court correctly found that the appellants  could not sustain the claim to  support  winding up.   It  is surprising that a claim of the  year  1965  was never  pursued until it was included as an item of  debt  in the petition for winding up the company.  With regard to the claim for rent, the company pursuant to an agreement between the  company and Ravi Industries Private Ltd. credited  Rowe Industries with the sum of Rs. 1,52,000 with the result that a  sum  of Rs. 1,45,500 would be payable by the  company  to Ravi  Industries  Ltd.  in respect  of  rent.   The  company alleges  that  Ravi  Industries  Pvt.   Ltd.  supported  the company  in  the  High  Court and that  they  have  taken  a

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completely different position ill this Court.  In this Court the  company has also relied on a piece of writing dated  24 September,   1971  wherein  Ravi  Industries  Private   Ltd. acknowledged payment of Rs. 1,52,000 to Rowe Industries Pvt. Ltd.  and  further  agreed to write off the  amount  of  Rs. 1,45,500.  Ravi Industries Pvt.  Ltd. is disputing the same. This  appears  to be a matter of substantial  dispute.   The Court  cannot go into these questions to settle  debts  with doubts. Counsel  for the appellants extracted observations from  the judgment of the High Court that it was never in dispute that the company was insolvent and it was therefore contended the company  should  be wound up.  Broadly stated,  the  balance sheet  shows  the  share capital of the company  to  be  Rs. 5,51,500,  the  liabilities to be Rs.  9,77,829.47  and  the assets to be Rs. 8,87,177.93. The assets were less than  the liability by Rs. 90,000.  Accumulated losses of the  company for  five years appear to be Rs. 6,21,17.53. The  plant  and machinery  which  are  shown in the  balance  sheet  at  Rs. 6,07.544.58  are agreed to be sold at Rs.  4,50,000.   There would then be a short-fall in the value of the fixed  assets by about Rs. 1,50,000 and if that amount is added to the sum of Rs. 90,000 representing the difference between the assets and  liabilities the shortfall in the assets of the  company would be about Rs. 2,50,000. The  appellants contended that the- shortfall in the  assets of  the company by about Rs. 2,50,000 after the sale of  the machinery  would indicate first that the substratum  of  the company was 211 gone  and  secondly  that the  company  was  insolvent.   An allegation that the substratum of the company is gone is  to be  alleged and proved as a fact, The sale of the  machinery was alleged in the petition for winding up to indicate  that the substratum of the company had disappeared.  It was  also said  that  there was no possibility of  the  company  doing business  at  a profit.  In determining whether or  not  the substratum  of  the  company has gone, the  objects  of  the company  and the case of the company on that  question  will have  to be looked into.  In the present case  the,  company alleged  that  with the proceeds of sale  the  company  in-, tended  to enter into some other profitable  business.   The mere fact that the company has suffered trading losses  will not  destroy  its substratum unless there is  no  reasonable prospect  of it ever making a profit in the future, and  the court  is  reluctant to hold that it has no  such  prospect. (See  Re.   Suburban  Hotel  Co.(1);  and  Davis  &  Co.  v. Brunswick (Australia) Ltd. (2 ) The company alleged that out of  the proceeds of sale of the machinery the company  would have  sufficient money for carrying on export business  even if the company were to take into consideration the amount of Rs  1,45,000 alleged to be due on account of  rent.   Export business, buying and selling yarn and commission agency  are some  of the business which the company can carry on  within its objects.  One of the Directors of the Company is Kishore Nandlal  Shah who carries on export business under the  name and  style of M//’s.  Nandkishore & Co. in partnership  with others.  Nandkishore & Co. are creditors ’of the company  to the  extent of Rs. 4,95,000.  The company will not  have  to meet that claim now.  On the contrary, the Nandkishore group will bring in money to the company.  This Nandkishore  group is alleged by the company to help the company in the  export business.    The  company  has  not  abandoned  objects   of business.  There is no such allegation or proof.  It  cannot in  the facts and circumstances of the present case be  held

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that  the substratum of the company is gone.  Nor can it  be held in the facts and circumstances of the present case that the company is unable to meet the outstandings of any of its admitted creditors.  The company has deposited in court  the disputed  claims  of the appellants.  The  company  has  not ceased  carrying  on its business.  Therefore,  the  company will  meet the dues as and when they fall due.  The  company has reasonable. prospect of business and resources. Counsel  on behalf of the company contended that the  appel- lants  presented  the  petition  out  of  improper   motive. Improper  motive  can  be spelt out where  the  position  is presented   to  coerce  the  company  in   satisfying   some groundless  claims made against it by the  petitioner.   The facts  and circumstances of the present case  indicate  that motive.  The appellants were Directors.  They sold,’ (1) [1867] 2 Ch.  App. 737. (2) [1936] 1 A.F.R. 299. 212 their  shares.   They  went out of  the  management  of  the company in the, month of August, 1969.  They were parties to the proposed sale.  Just when the sale of the machinery  was going to be effected the appellants presented a petition for winding  up.  In the recent English decision in Mann &  Anr. v.  Goldstein  & Anr. (1) it was held that  even  though  it appeared  from the evidence that the company was  insolvent, as   the  debts  were  substantially  ,disputed  the   court restrained  the prosecution of the petition as an  abuse  of the  process  of  the  court.   It  is  apparent  that   the appellants  did not present the petition for any  legitimate purpose. The appeal therefore fails and is dismissed with costs.  The company  and the supporting creditors will get  one  hearing fee.  The amount of Rs. 72,000 which was deposited in  court will  remain  deposited in the court for a period  of  eight weeks from this date and if in the meantime no suit is filed by the appellants within eight weeks the company will be  at liberty  to  withdraw  the amount by  filing  the  necessary application.   In the event of the suit being  filed  within this  period  the amount will remain to the credits  of  the suit. V.P.S.                                Appeal dismissed. (1) [1968] 1 W.L.R. 1091. 213