Company Law | Claim Based on Waived Debt Cannot Be Ground for Winding Up: Allahabad High Court Dismisses Company Petition

“Assignment of Non-Existent Debt Cannot Sustain Winding Up Plea”:  In a significant judgment dismissed a winding up petition filed by the creditor company. The Court held that the petitioner's claim—primarily based on an assignment of a waived debt—was not an undisputed recoverable claim and thus could not justify the invocation of winding up under Sections 433(e) or (f) of the Companies Act, 1956. However, the Court directed the respondent to repay an admitted unsecured loan of ₹64.30 lakh with 11% interest, recognizing this as a legally recoverable obligation.

The petitioner, Zaitek Polyblends Pvt. Ltd., had moved the Court under Sections 433(e) and (f), 434(1)(a), and 439(1)(b) of the Companies Act, 1956, read with Section 20(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, seeking winding up of Sri Durga Bansal Fertilizer Ltd. on grounds of inability to pay its debts. The petitioner claimed a sum of ₹21.55 crore, including amounts purportedly assigned by IDBI Bank and other financial institutions, as well as an unsecured loan.

The respondent, a defunct fertilizer company, had been declared sick by the BIFR in 1996 and the winding up recommendation was affirmed by the AAIFR and Delhi High Court. However, subsequent recovery proceedings were settled through one-time settlements (OTS) with financial institutions. The petitioner claimed that it acquired debt rights via an assignment deed from IDBI Bank and had also provided an unsecured loan for settling other liabilities.

The key questions before the Court were whether the company was genuinely unable to pay its debts, and whether the grounds raised made it just and equitable to wind up the company.

Justice Pankaj Bhatia rejected the petitioner’s reliance on the assignment deed from IDBI Bank, holding that: “The debt owed to IDBI Bank stood extinguished even prior to the assignment in favour of the petitioner... A waived debt leaves the lender with no debt which can be said to be assigned.”

He emphasized that only legally recoverable debts can form the basis of a winding up petition: “The claim of the petitioner/company based upon the ‘assignment deed’ cannot be a foundation for seeking winding up.”

The Court noted that the assigned debt had already been discharged under a one-time settlement and the assignment took place eleven months after this discharge, making it ineffective. As a result, the petitioner’s demand based on the assignment was found to be “not an undisputed claim and is a contentious issue.”

With regard to the unsecured loan of ₹64.30 lakh, which the respondent admitted as due, the Court accepted this as a valid claim but ruled that mere default without proper statutory notice under Section 434(1)(a) was insufficient to invoke winding up provisions.

“It cannot be said that the company has failed and neglected to pay the amount which is ‘sine qua non’ for invoking Section 433(c) and 434(1)(a) of the Act.”

Addressing the “just and equitable” ground under Section 433(f), the Court stated: “No such material exists to form a view that the company, if not wound up, would be a threat to the commercial world and/or can lead to further defrauding of creditors.”

While refusing to wind up the company, the Court acknowledged the legitimacy of a part of the petitioner’s claim and issued specific directions:

1. The respondent shall pay ₹64.30 lakh with 11% interest from the date of disbursement until realization, within two months.

2. The respondent shall clear dues to the Provident Fund Department within four weeks.

3. Any other outstanding dues owed to creditors must also be paid.

The Court added that the petitioner’s omission to plead for relief under Section 433(c) was fatal to that ground, observing: “The petition lacking a prayer for winding up of a company under Section 433(c) of the Act cannot be considered in view of the lack of prayer.”

The Court also found that the winding up petition was not maintainable in view of the disputed nature of the bulk of the claim and the respondent’s willingness to settle admitted dues.

The Allahabad High Court's judgment underscores that a winding up petition must be rooted in clear, undisputed debt and cannot rely on extinguished or waived obligations. While directing repayment of an admitted unsecured loan, the Court refused to grant the extreme relief of winding up on the basis of a contested and legally untenable assignment. The ruling reiterates that winding up is a drastic remedy, reserved only for companies that are demonstrably and irreversibly unable to meet their financial obligations.

Date of Decision: May 22, 2025