High Court dismisses winding up application

In a recent company matter, the petitioner sought winding up of the respondent company on the ground of fraud and alleged fraudulent diversion of revenue, invoking the "just and equitable" clause under section 241(vi) of the Companies Act, 1994, and additionally claiming standing as a contingent/prospective creditor of the company.

CHAMBERS NOTE: The Respondent No.1 Company & Respondent No.3 was represented by Avon Chambers, who successfully resisted the winding up petition on both the fraud ground and the contingent creditor claim securing dismissal of the petition and saving the company from being wound up. The petition was accordingly dismissed with costs of Tk. 1,00,000/-, to be paid out of the bank guarantee earlier furnished as security under section 245(d) of the Act.

The matter was handled by Avon Chambers, led by Barrister Asif Bin Anwar, together with Barrister Farha Binte Azad Etu & Barrister Shafqat Aziz

SUMMARY OF JUDGMENT:

Fact in short:

The dispute originated from the departure of certain employees from a garments-sector company, who thereafter went on to incorporate and operate a separate company in a related line of business. The Petitioner/ Former employer alleged that the new company was nothing but a sham vehicle, fraudulently floated by its own employees to divert its revenue and business, and sought the winding up of the new company on the ground that it was just and equitable to do so further claiming to be a contingent creditor entitled to the revenue accumulated by the new company

Respondent No. 3, an RMG businesswoman, was introduced to Respondent No. 2 (then an employee of the Petitioner's Dhaka liaison office), who told her she was resigning because the Petitioner's Hong Kong head office had stopped funding the Dhaka office leaving rent, salaries, and factory dues unpaid despite buyers having already advanced payment. Believing Respondent No. 2 had genuinely resigned, Respondent No. 3 incorporated Perfect Fit Co. Limited on 26.06.2024, with herself and Respondent No. 2 as first directors (later swapped by board resolution so Respondent No. 2 became Managing Director and Respondent No. 3, Chairman).

Respondent’s objects were deliberately broader than RMG alone. In August 2024, Respondent No. 2 brought in Daffah (a Saudi retail buyer) as a client, telling Respondent No. 3 that Daffah was independently dissatisfied with the Petitioner and no longer wished to deal with it. The petitioner characterised this as a fraudulent diversion of its business and escalated the matter into a company winding-up petition before the High Court Division, invoking the just-and-equitable ground under the Companies Act, 1994 and additionally asserting status as a contingent creditor of the newly incorporated company.

The proceedings raised important questions concerning the availability of fraud as an independent ground for winding up a company under the Companies Act, 1994, as distinct from more recent statutory regimes such as the Companies Act, 2013 of India, as well as the proper legal threshold for establishing status as a contingent or prospective creditor for the purposes of a winding up petition.

Having been served with the application and an order to show cause as to why a provisional liquidator should not be appointed pending disposal of the matter, the respondents contested the petition denying any diversion of revenue and contending that the underlying grievance, being alleged breaches of employment obligations by former employees, was a private contractual matter falling outside the winding-up jurisdiction of the Company Court altogether.

Held:

The court dismissed an application for winding up of a company filed under section 241(vi) of the Companies Act, 1994, holding that:

(1) fraud is not an explicit ground for winding up under section 241(vi) of the Companies Act, 1994;

(2) the petitioner had not established status as a contingent creditor; A contingent creditor needs to establish that there remains an existing obligation to pay;

(3) the petitioner failed to demonstrate that it was just and equitable to wind up the company; and

(4) where a bonafide dispute exists regarding the existence of an alleged debt, winding up proceedings are not the appropriate mechanism to resolve such disputes.

Fraud as a ground for winding up under section 241(vi)

The judgment examined sections 241 and 245 of the Companies Act, 1994 and concluded:

"On a plain reading of section 241 along with section 245 of the act, it appears that winding up petition by a person on the ground of fraud is alien to section 241 of the act."

The court noted that while fraud may be considered indirectly through investigation provisions under sections 195, 197, and 204 (encapsulated under the heading "Inspection and Audit"), it does not feature as a direct ground for winding up under section 241.

Distinction from Indian Law:

The court examined Indian case law, particularly the landmark decision in Devas Multimedia Private Ltd. v Antrix Corporation Ltd. and Others (Supreme Court of India, 2022), which established fraud as a direct ground for winding up under the Companies Act, 2013.

However, the court distinguished this authority, observing:

"Like clause (c) of Section 271 of the Indian Companies Act, 2013 there is no such explicit provision for winding up directly on the ground of fraud in Companies Act, 1994 as applicable in Bangladesh. Fraud as a ground and route of winding up in Bangladesh is only possible under the provisions of sections 195, 197 and 204 as encapsulated under the heading "Inspection and Audit'."

The ground of fraud as taken for winding up in the present case does not stand.

Petitioner’s status as contingent creditor

The court examined the definition of a "contingent creditor" by reference to the English case of Re William Hockley Ltd. (1962) 1 WLR 555, wherein it was held:

"A contingent creditor" is "a person towards whom, under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date."

The court identified that the definition of a contingent creditor requires:

An existing obligation on the part of the company to make payments to the contingent creditor; AND

Contingent status depends upon a future event whose occurrence is uncertain.

The judgment noted: "No such existing obligation is present in the instant matter."

The court relied upon Johanna Magrieta Susanna Botha v 4D Health (PTY) Ltd., High Court of South Africa, Gauteng Division, Pretoria, Case No. 18976/2019, which established:

"Winding-up proceedings should not be resorted to as a means to enforce the payment of a debt whose existence is bona fide disputed by the company concerned...Where an alleged debt is genuinely disputed on reasonable grounds, our courts hold that it would be wrong to allow such a dispute to be resolved by utilizing the machinery designed for winding up proceedings rather than ordinary litigation."

The petitioner cannot be treated as a contingent/prospective creditor in the given facts.

Applicability of Indian Case law

The petitioner heavily relied upon two major Indian Supreme Court decisions:

Moolchand Gupta v Jagannath Gupta and Co. (Supreme Court of India, 1956 Companies Act)

Devas Multimedia Private Ltd. v Antrix Corporation Ltd. and Others (Supreme Court of India, 2022, Companies Act 2013)

The court held that these Indian precedents are distinguishable and not directly applicable to Bangladesh company law.

• The Moolchand Gupta case involved the old Indian Companies Act, 1956, where fraud was not an explicit ground for winding up (similar to Bangladesh Act), yet the court's observations were made in the context of a specific investigation provision.
• The Devas Multimedia decision, while establishing fraud as a direct ground under the Indian Companies Act, 2013 (Section 271), represents a fundamentally different statutory regime than the Companies Act, 1994 of Bangladesh.

"The main departure of the 2013 Act from the statutory regime of the 1956 Act, is the specific inclusion of fraud, directly as one of the circumstances in which a company could be wound up."

The judgment further noted that the Companies Act, 2013 specifically provides two routes for fraud-based winding up: (i) under Clause (c) of Section 271 (directly on the ground of fraud); and (ii) under Clause (e) of Section 271 read with Section 224(2)(a) (on the ground that it is just and equitable to wind up), whereas no such explicit provision exists in the Bangladesh Companies Act, 1994.

Bonafide Dispute of Debt and Winding up

The judgment applied the well-established principle from Bangladesh jurisprudence cited with approval from English and South African law:

• Ameneh Ispahani v Free School Street, 3 BLC (AD) page 212:

"A winding up petition is not a legitimate means of seeking to enforce payment of a liability the nature of which is Bonafide disputed by the company as its defence is not a cloak to evade the payment of the alleged loan."

• Ambala Cold Storage (Pvt) Ltd v Prime Insurance Co. Ltd., 56 DLR page 422:

"Winding up of a company by Court for debt is not called for where there is a Bonafide dispute relating to the existence of the debt."

• Atuar Rahman (Md) and Another v Edruc Limited, 57 DLR page 337:

"The term 'debt' within the meaning of sub section (v) of section 241 of the Act must be a definite amount payable in presenti or in futuro." 

The court found that the petitioner's claim regarding alleged diversion of revenue was genuinely disputed by the respondent company on reasonable grounds, and therefore, winding up proceedings were inappropriate. The proper remedy, if any, lay in ordinary civil litigation for recovery of damages or account of profits