JUDGMENT
D.G. Karnik, J.
1. Heard learned counsel for the parties. The respondent company is engaged principally in the business of production of audio and video cassettes and compact discs. The petitioner is a well-known artist who has given play back music to several movies and also has sung various songs for different audio and video cassette and compact disc producers. Albums of certain songs sung by the petitioner were made by the respondent company for royalty amounts to be paid to the petitioner on sale of such albums. According to the petitioner, though several albums cassettes and compact discs of the songs of the petitioner’s were sold and the price was received by the respondent company, still it did not make the payment of the amount of royalty due to her. The petitioner therefore, filed the Summary Suit No. 1873 of 2003 against the respondent company for the recovery of Rs. 66,74,780/- being the value of the royalty for the sales made till then and for interest thereon. In the said suit, the respondent company admitted the liability to pay the dues of the petitioner and accordingly, a decree in terms of the consent terms was passed on 1st October, 2002. Under the said consent decree, the respondent company was to pay to the petitioner a sum of Rs. 66,74,780/- together with interest thereon at the rate of 15% p.a. from 1st July, 2001 and a further sum of Rs. 43,39,095/- together with interest thereon at the rate of 15% p.a. from 1st April, 2000 till payment. The petitioner agreed to permit the respondent company to pay the dues in four instalments. The first instalment of Rs. 16,82,000/- was to be paid before 30th April, 2002 and second instalment of the like amount was to be paid on or before 28th April, 2003. The third instalment of Rs. 39,24,000/- was to be paid on or before 30th June, 2003 and the balance of Rs. 39,25,000/- was to be paid on 31st August, 2003 along with the costs of the suit. It was agreed on behalf of the respondent company that on payment as the aforesaid decree shall be marked as satisfied.
2. Pending the adjudication in the suit, the petitioner also filed the present Company Petition No. 719 of 2002 against the respondent for winding up. An order in terms of the consent terms agreed between the parties was passed in the Company Petition on 7th October, 2002. It was agreed that in the event of the respondent company making payment as per the consent terms filed in the suit (copy of which was annexed as Exhibit I) the Company Petition shall stand disposed of, but in the event of the respondent company committing any default in the payment persisting for 30 days, the Company Petition shall stand admitted without further reference to the Court.
3. It is not in dispute that the respondent Company has not paid the first instalment of Rs. 16,82,000/- which was due on 30th December, 2002 and the default persisted for a period of more than 30 days. Therefore, as per the order dated 7th October, 2002 Company Petition No. 719 of 2002 stands admitted. It is also not disputed that even the second instalment of Rs. 16,82,000/- which was due on 28th April, 2003 has also not been paid till date.
4. By this application, the petitioner has requested for the appointment of Official Liquidator as the provisional liquidator under Section 450 of the Companies Act, 1956 (for short the Act). The petitioner has filed on record affidavits dated 11th March, 2003 and 19th March, 2003. In response, the respondent company has filed affidavits of Mr. Shashi Gopal, Director of the respondent company, dated 17th March, 2003, 26th March, 2003 and 1st April, 2003. The respondent has also filed an affidavit of one Mr. Mukesh G. Desai Director of Amson Audio Private Limited dated 17th March, 2003 to oppose the company application.
5. Learned counsel for the petitioner submitted :
(i) the respondent company has made a default in payment of the amount due and the Company Petition stood admitted by reason of self operative order of the Court dated 7th October, 2002; (ii) the respondent company is virtually insolvent and the substratum of the company is completely eroded; (iii) a final order of winding up is an inevitable consequence and there was strong possibility that such an order would inevitably be passed at the time of final hearing of the petition ; (iv) The company has received the sale proceedings in respect of the sale of music albums - music cassettes and compact discs and the funds have been siphoned away by the promoters or persons in control of the management of the company; (v) further business of the company was not viable and any further carrying of the business by the company would only enure to further liabilities and allowing the company to further carry on the business was prejudicial to the applicant and wider body of creditors as there was likelihood of the company incurring further losses. 6. Mr. Narula, learned counsel for the respondent company controverted all the submissions of the learned counsel for the applicant and submitted : (i) the company is in a sound financial position ; (ii) that the company is owner of the copyrights in the works of several artists which if properly valued far exceeded its liabilities including the claim of the applicant. (iii) There was only a temporary liquidity problem; (iv) Though the company had previously made profits only for the period of last couple of years, the company was making losses which were attributed to slow down in the sale in the music industry on account of piracy and free music download in MP3 format available on the internet; (v) the company has entered into a contract with Amson Audio Private Limited which has agreed to finance, manufacture and distribute the music albums and products of the company every month by way of long term arrangement. By this arrangement, the company was likely to get out of the woods and pay all the creditors. 7. Mr. Narula referred to and relied upon a much quoted passage from the judgment of Lord Romilly In re: London, Hamburg and Continental Exchange Bank Emmerson's case reported in (1866) LR 2 EQ 231, 236 :
“It is perhaps convenient that I should state what my practice is with reference to the appointment of provisional liquidators. Where there is no opposition to the winding up, I appoint a provisional liquidator as a matter of course, on the presentation of the petition. But, where there is an opposition to it, I never do, because I might paralyse all the affairs of the company and afterwards refuse to make the winding up order at all. But, when the directors themselves apply, or do not oppose the winding up, then I appoint the provisional liquidator.”
This passage was quoted with the approval by the Madhya Pradesh High Court in Virendrasingh Bhandari and Ors. v. Nandlal Bhandari and Sons P. Ltd, reported in 7979 (Volume 49) Company Cases 552. After quoting the said passage, the learned single Judge of the Madhya Pradesh High Court held that making of an order of appointment of the Official Liquidator as the provisional liquidator was an extreme step and should not ordinarily be passed except on a petition of a creditor who is unable to obtain payment of his money or unless the company asks for or agrees to the appointment. The dangers involved in appointing a provisional liquidator and then finding that there is no justification for making of an order by way of winding up are obvious. Before the Court takes steps for appointment of the Official Liquidator as the provisional liquidator, it must be satisfied that such an order is absolutely necessary; the appointment of provisional liquidator for a company which is carrying on business and is functioning would in fact put a stop to the business though ultimately the Court may refuse to wind up. Similar views are expressed by a Division Bench of the Madhya Pradesh High Court, in Kailash Prasad Misra and Ors. v. Medwin Laboratory (P) Ltd. and Ors. reported in (1995) 5 Company Law Journal 449. So far as this Court is concerned, it has expressly disproved the dictum of Lord Romilly, In re: London Hamburg and Continental Exchange Bank. In Darshan Anilkumar Patel v. Gitaneel Hotels Pvt. Ltd. reported in 1993(2) BCR 440 after referring to the passage of Lord Romilly in para 13 of the judgment, Dhanuka, J. observed:
“Practice followed by our Courts is to the contrary and not the practice followed by Lord Romilly. We never hesitate to appoint Provisional Liquidator of a company in an appropriate case particularly when a strong prima facie case for winding up is made out and the Court is the view that would be just, equitable and proper to appoint provisional liquidator in the interest of the company, complaining shareholders or creditors or workmen’s or public interest etc. Section 450(1) does not impose any such restriction or limitation on exercise of the power vested in the company Court while considering an application for appointment of a provisional liquidator. It is well settled that discretionary power must be exercised on just and equitable considerations and the Court can appoint provisional liquidator of a company only if it would be proper to do so after weighing all pros and cons of the matter and after considering as to whether the petitioners have made out a strong prima facie case for winding up the company. The mere possibility of the Court taking a different view at the stage of final hearing of the petition for winding up or at the stage of consideration of ‘admission’ of the petition can be no ground to deny jurisdiction to the Court to pass appropriate interim order in the interest of justice as contemplated under Section 450 of the Act. With respect, I do not agree with the views expressed by Lord Romilly in the above referred case.”
In Re : The Central India Spinning, Weaving and Mfg. Co. Ltd. reported in 1986 (88) BLR 227 another learned single Judge of this Court held that the Court would not lightly and arbitrarily but exercise its discretionary jurisdiction carefully and judicially in the appointment of the Official Liquidator as the provisional liquidator, it would consider the pros and cons, practical benefits of the appointment and the basic consequences of not appointing. The Court would not overlook the dire need of the movement and the attendant risk in default of such appointment. If the spector of commercial insolvency looms large over the company and the imminent risk and danger to its assets and escalating gravity of the financial crisis, appointment of a provisional liquidator becomes an urgent need and a must.
8. I am in respectful agreement with the views expressed by the two learned single Judges of this Court in the two cases referred to above. While it is true that the Official Liquidator would not be likely appointed, the Court should not hesitate to appoint the Official Liquidator as a provisional liquidator in case in the following cases:
(i) Where there is no opposition to the winding up or where the company concedes to an appointment of a liquidator as a provisional liquidator; (ii) The substratum of the company is lost and there is no possibility of the company's revival;
(iii) Though the substratum is not lost completely, but the commercial insolvency looms large on the face of the company and the Court is of the opinion that there is a strong prima facie view, though not a certainty, that the company would ultimately be wound up at the final hearing of the petition. The Court must further be satisfied that prima facie, the liquidity problem was not temporary and by allowing the company to carry on further business without appointment of the official liquidator as the provisional liquidator the company was not likely to come out of the woes but was likely to incur further losses which is not in the interest of the creditors.”
9. While considering whether the official liquidator should be appointed as a provisional liquidator, pending the hearing and final disposal of a winding up petition, the Court looks beyond the claim of the appellants and considers whether the appointment would be in the benefit of all the creditors in general.
10. I would now come to the material facts emerging from the petition and the affidavit filed at the hearing of the petition for appointment of provisional liquidator in the light of the aforesaid principles.
11. The balance sheet of the respondent company shows that the company is making losses since prior to the financial year 2000-01. The company had accumulated losses of Rs. 3.37 crores at the beginning of the financial year, 2000-2001 i.e. on 1st April, 2000. For the financial year ending 31st March, 2001 the company incurred a net loss of Rs. 2.75 crores. For the year ending 31st March, 2002 the company suffered a net loss of Rs. 12.05 crores. The company has not produced the balance sheet for the financial year ending 31st March, 2003 but has filed the balance sheet and profit and loss statement for nine months period ending 31st December, 2002 which shows further loss of Rs. 3.17 crores and total accumulated loss of Rs. 21.36 crores. Thus, atleast for the last more than three years, the company is making losses every year. The sales are dwindling. In the year 2000-2001, the company had total sales of Rs. 16.35 crores. In the next year ending 31st March, 2002 the sales went down to Rs. 17.83 crores and in the nine months of the current year the sales went further down to Rs. 4.64 crores. The sales graph shows a steep decline and losses are going up every year.
12. In order to consider whether there is a strong prima facie case that the company would be wound up at the final hearing. I must refer to the principles laid down by the Supreme Court in Madhusudan Gordhandas & Co v. Maadhu Woollen Industries (P) Ltd. . Therein the supreme Court held that if there is a dispute as to the debt for which a winding up is claimed and the dispute is bona fide and the defence is a substantial one, the Court will not wind up the company. Where however, the debt is undisputed, the Court will not act upon the defence that the company has liability to pay the debt but, chooses not to pay a particular debt. Even where the debt is admitted, the Court before passing an order for winding up would take into consideration the wishes of a majority of the creditors, and also consider whether the grounds given by the majority in value of creditors for opposing the winding up are reasonable. It is well settled that a winding up will not be made on a creditors’ petition if it would not benefit him or the company’s creditors generally. The grounds furnished by the creditors opposing the winding up has a important bearing on the reasonableness of their case. The mere fact that the company has suffered trading losses for some time will not destroy the substratum of the company unless there is no reasonable prospect of it making profit in future.
13. In the affidavit dated 1st April, 2003 filed by Mr. Shashi Gopal, Chairman and Managing Director of the respondent company, he has given details of the creditors under two different heads namely :
(i) payments due to the artists
(ii) other creditors.
An amount of Rs. 50.61 lacs is stated to be due to over 70 artists. Other creditors are to the extent of Rs. 12.02 crores. The company owes an excess of Rs. 1.17 crores to the suppliers of raw materials and sum in excess of Rs. 4.36 crores to the creditors who have rendered various services to the company. Out of these creditors, only one viz. Amson Audio Private Limited having a credit of about Rs. 93 lakhs has filed an affidavit dated 1st April, 2003 supporting the respondents for opposing the winding up or appointment of the official liquidator as the provisional liquidator. Even the admitted debt due to the petitioner is higher than the debt due to Amson Audio who is opposing the winding up and appointment of provisional official liquidator. Thus, the test of the majority in value of the creditor opposing the petition as laid down by the Apex Court in Madhusudan Gordhandas (supra) is not applicable to the present case. The debt of the petitioning creditor is not disputed. It is not shown that company has any reasonable prospects of coming out of the woods. Mr. Narula learned counsel for the respondent company has stated that the principal reason for the losses incurred by the company in the last three years namely are :
(i) piracy of music cassettes and compact discs. (ii) availability of free music download of music on the internet in MP3 format; (iii) introduction of private FM radio stations.
There is no evidence that piracy is on the decline. Judicial notice can be taken that more and more music is available in MP3 form on the internet and in any event, it is not on the decline. Private FM radio stations which have started are here to stay. Thus, all the three factors on account of which the petitioner suffered losses are continuing unabated and there is no reason to believe that there would be any abatement in them in future. It is not shown by the respondent that there would be any improvement in the business, despite these adverse factors which have gripped the respondents in the last three years. Sales are on the decline and the losses are mounting. In the circumstances, there is no reason to hold that there is a reasonable prospect of the company staging a come back. On the other hand, there is a strong possibility that carrying on any further business would result into further losses which would not be for the benefit of the creditors as a whole.
14. On the last date, Mr. Narula, learned counsel for the respondent company had stated that the company was willing to pay the outstanding dues by 30th April, 2003. Hence, I had deferred passing of the order and listed the matter again for further hearing today. Today, Mr. Narula learned counsel for the respondent company stated that the company is not in a position to pay immediately the outstanding amount of the petitioner amounting to Rs. 1,12,60,675/- all of which has become due under the consent decree. Learned counsel however submitted that the respondent company was willing to clear the instalments which had fallen due up to date and would further pay the two future instalments on their respective due dates. Mr. Narula further submitted that the respondent company has already filed an application for condonation of the previous defaults. By way of concession, I am inclined to pass only conditional order of appointment of the official liquidator as the provisional liquidator though 1 am satisfied that on the facts and circumstances of the case, the official liquidator can be appointed as the provisional liquidator presently. Hence, I pass the conditional order as follows :
The official liquidator is appointed as the provisional liquidator of the respondent company. The official liquidator shall appoint Mr. Shashi Gopal, Chairman and Managing Director of the respondent company as its agent in the event the respondent company deposits the two defaulted instalments of Rs. 16,82,000/- which were due on 31st March, 2002 and 28th April, 2003 forthwith and undertakes to further pay the balance due instalment of Rs. 39,24,000/- each on their respective due dates i.e. 30th August, 2003 and 31st October, 2003. If all the instalments are paid on due date, the official liquidator shall stand discharged. In the event respondent company fails to pay the 3rd or 4th instalment on their original due dates as per the consent terms in Summary Suit No. 1873 of 2002, the official liquidator shall forthwith terminate the agency agreement granted to Mr. Shashi Gopal and take possession of the assets of the company. The respondent is granted one week’s time for making the payment of the two already defaulted instalments of Rs. 16,82,000/- each. If instalments are not paid within one week, the official liquidator shall take possession of the assets and properties of the company. In the meanwhile, the company shall not dispose of any of its assets and properties except in the usual course of business.
Request of the learned counsel for the respondent company, for stay of the order is rejected. All concerned to act on a copy of the order authenticated by the Company Registrar.