The Hindu Business Line : Exits need to be fixed up

WINDING up proceedings in India are known to be slow and long-winded. This is probably the reason why every now and then an opportunity is given to companies to wind up voluntarily with "exit" schemes — whether simplified or not. However, a recent decision by the Gujarat High Court in UTI Bank Ltd vs Shree Rama Multitech Ltd (2005 58 SCL 328) would probably make companies sing the famous Boney M tune "the money or your life".

Substratum

Although IDBI was the main lender to the company, UTI Bank and Karnataka Bank were impatient enough to file winding-up proceedings against the company. The company had applied for a short-term loan to UTI Bank and Karnataka Bank in 2001 repayable in nine months. At the end of the period, the company promptly applied for an extension and got three months. However, it could not honour its commitments forcing the banks to issue the dreaded `434' notice.

It was argued on behalf of the bank that they deal with public monies and have a fiduciary duty to safeguard the money received. They were also answerable to the RBI and the Finance Ministry. The substratum of the company has been lost and could not be allowed to continue its affairs since this would be injurious to the economy as a whole. They had a host of legal cases to back their stand.

The Big Fight

The company did not quit without a fight. Their stand was that it was factually incorrect to say that the company was unable to pay its debts and had lost its substratum. The present liquidity crunch was a temporary phenomenon which was because of a general business slowdown, a price war contributed by competitors apart from the communal riots in Gujarat.

In the past the company had taken financial assistance from banks and financial institutions and had repaid them without working up a sweat. The inevitable restructuring plan was sanctioned by IDBI which would put the company back on track again. It had a pan-India presence with about 458 employees and a pretty high payroll cost every month.

There was a Gujarat High Court decision in the American Express Bank Ltd vs Core Health Care Ltd (1999 96 Comp Cases 841) case, wherein it was held that "a claim to an order of winding up is not a matter of right but is in the discretion of the court."

Another source of help came from the Tata Iron and Steel Co. vs Micro Forge (India) Ltd (41 2 GLR 1594) case, wherein it was ruled that "certain chronicles and contours are kept in the mental radar before reaching the conclusion for a winding up petition". Further, since a complaint was lodged by both the lenders in the Debts Recovery Tribunal, a further legal case was not in order as was held in the Bank of Nova Scotia v. RPG Transmission Ltd (2003 42 SCL 69) case.

Decision

The Gujarat High Court observed that the position of the company has worsened over the years. There was enough material before the court to arrive at the conclusion that the company was unable to pay its dues to creditors and the financial crisis that the company was very much not temporary.

What made the court come to this conclusion was that even during the winding-up proceedings, the court gave an opportunity to the company to pay up. All that the company could give were false promises.

The court saw the IDBI plan as time-wasting and non-implementable for a company of this nature.

The court also had information that the Registrar of Companies had filed a criminal complaint against the company and that there was information in the possession of SEBI that the problem before the company was clear diversion of funds and the directors of the company filling up their personal coffers than those of the company. All these were clear pointers that the company was a no-show from the beginning.

What stands out in this case is the speed at which the judgement was delivered. The loan was taken in 2001, but the case was decided in 2005. This would be a good reason to make winding up less painful in the proposed draft of the Companies Bill, 2005.

(The author is a Hyderabad-based chartered accountant.)

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