TMI Blog1998 (10) TMI 440X X X X Extracts X X X X X X X X Extracts X X X X ..... rties both on questions of fact and questions of law and the Court would have there after proceeded to deal with the same. However, Mr. A.S. Vakil for the respondent-company has raised an important question of law which arises in a number of company petitions and, therefore, the Court has thought if fit to set out the legal perspective with which the Court proposes to examine the questions of fact arising in the present case. Statutory provisions 3. For winding up petitions on the ground that the company has not paid its debt to the petitioner creditor, the following statutory provisions are relevent: " 433. Circumstances in which company may be wound up by Court ( a ) to ( d ) ****** ( e )if the company is unable to pay its debts;" "434. Company when deemed unable to pay its debts. (1) A company shall be deemed to be unable to pay its debts ( a )if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or other wise, a demand under his hand requiring the company to pay the sum so due and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 quantify the debt precisely. 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 prime facie proof of the facts on which the defence depends. Another rule which the court follows is that if there is 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 337 of the Companies Act, 1956, 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 greatest weight to the views of the creditors... **** ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Core Healthcare Ltd. [1998] 15 SCL 363 (Guj.). 7. On the other hand, Mr. Soparkar for the petitioner has submitted that once the Court holds that the company's defence to the petitioning creditor's claim is not bona fide, the Court is required to admit and advertise the petition and the inquiry into the company's commercial insolvency is to be undertaken only after admitting and advertising the petition. Mr. Soparkar has relied on the following authorities : Hrinagar Sugar Mills Co. Ltd. v. M.W. Paradhan, Court Receiver AIR 1966 SC 1707, Madhusudan Gordhandas Co. 's case ( supra ) , T.P. Shau Sons (P.) Ltd, In re [1982] 52 Comp. Cas. 182 (Cal.), Reechem (P.) Ltd. In re [1985] 57 Comp. Cas. 200 (AP), Unisystems (P.) Ltd. v. Stepan Chemical Ltd. [1986] 60 Comp. Cas. 753 (Punj. Har.), Joti Prasad Bala Prasad v. ACT. Developers (P.) Ltd. [1990] 68 Comp. Cas. 601 (Delhi), Airwings (P.) Ltd. v. Viktoria Air Cargo Gmbh Langer Kornweg AIR 1995 Kar. 69, Straw Board Mfg. Co. Ltd. v. Mahalakshmi Sugar Mills Co. Ltd. [1991] 71 Comp. Cas. 544 (Punj. Har.) and 83 Comp. Cas. 703. Broad Principles 8. Having heard the learned counsel for the parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility or refusal to pay. Adverse inference may also have to be drawn where the cheque/s issued by the company for the debt in question or a part thereof is/are dishounoured. For determining whether a debt is disputed bona fide or not, the conduct of the parties in relation to the transaction in question, the character of the pleas and the circumstances which will be peculiar to each case will have to be considered. IV. Court's findings on bona fides of company's defence and orders which may be passed upon such findings ( 1 )After considering the material on record, if the Court comes to the conclusion that the defence raised by the company is not only not bona fide, but the defence is reeking with mala fides or the company's conduct leading to the dispute (in respect of which the company's defence is found to be not bona fide) was dishonest, the Court would admit the petition and pass an order for advertisement. ( 2 )Where the Court comes to the conclusion that the defence is not bona fide (as distinguished from the conclusion that the defence is mala fide), the Court may give the company an1 opportunity to pay the debt to the petitioner within the stipulated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not is a question which is required to be prima facie decided before the winding up petition is admitted because admission of the petition and its advertisement would have serious consequences on a going concern, Mr. Vakil has particularly relied on the following observa-tions in the said judgment: "It must, therefore, be held that at the stage of summary enquiry which the company court may hold prior to admission and advertisement of the company petition by hearing the petitioner and the respondent company on notice stage the court is called upon to satisfy itself that it is a case for admission and advertisement and nothing more. For arriving at that conclusion the court necessarily will have to be prima facie find out whether any fixed amount of debt or ascertained amount of debt is due by the Company to the petitioning creditor, whether the debt is within limitation and whether the defence put forward by company for not paying the debt to the petitioning creditor is a valid one or is a mere moonshine and also to find out whether the company appears to be commercially insolvent. Meaning thereby, it is unable to pay all its debts and not necessarily debts of petitioning cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e observed that in this category of cases it would not be necessary for the company court to give the company any opportunity to pay the debt before admitting the petition, because the company's defence is found to be false to the company's knowledge, as that is the essence of the finding that the defence is mala fide. In such a case, the creditor would also be entitle to press into service the reasoning given in paras hereinafter. 13. What consequences should follow if the company's defence is found to be not bona fide. 14. If the court comes to the conclusion that the defence raised by the company is not bona fide (as distinguished from a mala fide defence) it may be unfair to the company to straightaway pass an order of admission and advertisement of winding up petition without giving the company an opportunity to pay up its debt to the petitioning creditor. The Court can take judicial notice of the tendency which has grown over the last many years, if not decades, that debtors consider it profitable to raise even untenable defenses in civil suits as well as in winding up petitions. They are familiar with the proverbial delays in disposal of civil cases and, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts." and then went on to observe "This view is supported by the decisions in Bowes v. Hope Life Insurance and Guarantee Co. [1865] 11 HLC389; Re. General Company for Promotion of Land Credit [1870] 5 Ch. A 363 (380) and Re. National Permanent Building Society [1869] 5 Ch. A 309. It is true that 'a winding up order is not a normal alternative in the case of a company to the ordinary procedure for the realization of the debts due to it'; but nonetheless it is a form of equitable execution. Properiety does not affect the power but only its exercise." 17. The provisions of the Companies Act, 1956 were modelled on the basis of the provisions of the Companies Act, 1948 in England. In his Principles of Modern Company Law 5th edn., Prof. Gower has made the following pertinent observations: "Company legislation has two main functions : ( i ) enabling and ( ii ) regulatory. The enabling function empowers people to do what they could not otherwise achieve - namely to create a body with a distinct corporate personality. The regulatory function prescribes the conditions which have to be complied with to obtain incorporation and the rules that thereafter have to be observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as never been held to be a legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the company, but once the Court comes to the conclusion that the dispute is not bona fide, the observations in Pradeshiya Industrial Investment Corpn. of U.P's case ( supra ) do not take away the power of the Court to admit the winding up petition. It is also pertinent to note that in the facts of Pradeshiya Industrial Investment Corpn. of U.P's case ( supra ) , the Court found that the defence raised by the company (PIICUP), a Government undertaking, was a substantial one and not mere moon- shine and that the sum claimed was the subject-matter of arbitration which was pending adjudication. PIICUP as a financial institution had merely agreed to subscribe to shares of a particular amount in a public issue and, therefore, the PIICUP had a substantial defence that such promoters' agreement did not create a debt and that even if it was a debt, in the facts and circumstances of the case, PIICUP cannot be said to have either neglected or failed to pay the same. There was, therefore, a substantial bona fide dispute whether there was a debt for a determinate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dmit the petition because even though the defence may not be substantial the debt is also not found to be a just one. 22. Mr. Vakil's reliance on the decision of this court in American Express Banks s case ( supra ) on the question of discretion of the court not to admit a winding up petition is misconceived. That was a case where the company admitted the dues of the Bank, but pleaded temporary inability to pay its debts. As against the petitioning creditor's dues of Rs. 15 crores, the secured creditor-ICICI Ltd., whose dues were Rs. 850 crores, was support-ing the company and opposing the prayer for winding up and, therefore, this court dismissed the petition. As already indicated earlier, the present discussion is confined to only that category of winding up petitions where the company asserts that it is able to pay its debts, but disputes the particular debt of the petitioner. Karnataka decision in Airwings (P.) Ltd. 23. As regards the decision of the Division Bench of the Karnataka High Court in Airwings (P.) Ltd.'s case ( supra ) relied on by Mr. Vakil, the following conclusion indicates that the court may be justified in admitting a winding up petition even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of money or substantially ascertained sum of money. ( ii )Whether the said debt is within limitation. ( iii )Whether the defence of the Company is valid or bona fide or whether it is mere moonshine. The aforesaid three point will have direct bearing on the competence of the petitioning creditor to maintain such a petition. ( iv )Whether from the material on record at this stage, a presumption arises that Company is unable to pay its debts as contemplated under section 434(1)( a ) or ( b ) as the case may be, or ( v )Whether from the material on record the Court is prima facie satisfied that the Company is commercially insolvent as contem-plated under section 434(1)( c )." (p. 87) 25. The emphasis on the expression 'or' in section 434(1) quoted hereinabove and also in the above quoted para 23 in the Karnataka High Court judgment in Airwings (P.) Ltd. case ( supra ) is to show that once the petitioning creditor is able to persuade the Court to raise the deeming fiction under section 434(1)( a ) or 434(1)( b ) conclusively (and not merely tentatively) at the admission stage itself, it is not necessary for the Court to examine at the admission stage the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Principle (5) - Grey Area cases 27. What order the Court should pass in its discretion would naturally depend upon the facts and circumstances of each such case and parti- cularly as to in which shade of grey the case falls- closer to black or closer to white and also the assessment which the court may venture to make about the commercial solvency of the company in future, i.e., the period within which the subordinate Civil Courts are known to decide the suits. 28. Mr. Vakil's objection to the Company Court undertaking this exercise which the Civil Court may very well undertake at the hearing of the summons for judgment in the summary suit overlooks the fact that the company Court having already invested the time and energy for deciding whether the company's defence is bona fide or not would only be unnecessarily adding to the burden on the over burdened civil court without any corresponding advantage, since the material to be considered in the two different proceedings is normally the same (affidavits and documents) and the test to be applied in the winding up proceedings and at the hearing of summons for judgment in a summary suit is held to be the same - [ Divya Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The parties should not be relegated to yet another litigation. It is held that the question of entitlement of the petitioning creditor to pay- ment of interest should not be considered to be such a disputed question as could not fall within the ambit of adjudication of a winding up petition under section 434(1)( a ). 33. This Court is of the view that in appropriate cases the Court may consider the petitioner's claim for interest and the rate of interest after the Court gives a finding that the company's defence to the principal amount of the debt was mala fide. Without laying down any hard and fast rule. It may also be said that the question could also be considered in an appropriate case if the company's defence is found to be not substantial (as distinguished from mala fide) Factual controversy 34. In light of the aforesaid legal perspective, the Court now proceeds to deal with the controversy between the parties as to whether the respon- dent-company's defence to the petitioning creditor's claim for a sum of Rs. 16,27,422.15 ps. is bona fide or not. Before giving a finding on this question, the principle is required to be borne in mind that where there is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk 2,33,571 652 23-8-1996 717050 14-11-1996 -do- 2,33,571 799 28-9-1996 590821 11-12-1996 Punjab National Bank 2,33,571 Relying on the above post-dated cheques, the petitioner agreed to supply the material to the respondent inspite of the fact that its earlier bills were still outstanding. 35.3 However, by its letter dated 11-9-1996, the respondent requested the petitioner not to deposit, inter alia, the aforesaid first two cheques without giving any reason therefor. By its letter dated 5-10-1996 the respondent requested the petitioner not to deposit cheque No. 590821 also. Thereupon the petitioner strongly protested against the respondent's aforesaid con- duct and called upon the respondent to honour its commitment on the due dates of the aforesaid cheques. The respondent promised the petitioner that the cheques will be duly honoured on the respective dues dates. However, all the aforesaid three cheques when deposited by the petitioner with its bankers were dishonored on the ground that the respondent had issued stop payment instructions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of Rs. 16,42,589. A copy of the minutes of the said meeting drawn by the petitioner, though not signed by the representative of the respondent is produced at Annexure 'E' to the affidavit. This brings out the agreement between the parties. It was under these circumstances that when the petitioner supplied the goods on 3-8-1996 under Invoice Nos. 582 and 583, the petitioner had insisted for and received cheque for Rs. 4,77,000 payable on 14-10-1996. Thereupon, the respondent wanted fur-ther supply which was effected on 23-8-1996 against which two cheques bearing Nos. 717049 and 717050 both draw in Indian Overseas Bank payable on 14-11 -1996, were issued to the petitioner. Even the last supply effect on 28-9-1996 was against cheque bearing No. 590821. 35.6 After receiving letter dated 11-9-1996, the petitioner had taken up the matter with the respondent and on 1-10-1996 a cheque for Rs. 3,50,180 issued by the respondent in favour of the petitioner for other bills which are not subject-matter of controversy had also been cleared. The cheque for Rs. 4,77,000 against invoice Nos. 582 and 589 was also cleared on 14-10-1996. Even at this stage, the respondent had not made any grie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the material supplied by the petitioner. It is further stated that the cheques which were dishonoured, were issued as post-dated cheques towards the material supplied under two invoices dated 23-8-1996 and the third invoice dated 28-6-1996. Since the material supplied was a sub-standard quality, the company had written letters dated 11-9-1996 and 5-10-1996 not to present the three cheques against the aforesaid invoices. If the company were acting mala fide, the company would have written such letters November, 1996 and not in September, 1996 after receiving the material. It is further submitted that an account of delay in delivery of the goods supplied under invoices dated 20-5-1996,28-5-1996,4-6-1996 and 15-6-1996, the company had to purchase the material from Sunshield Chemicals Ltd. which has already been paid price for the material. 37 . As regards the reliance placed by the petitioner on the statement of accounts, it is submitted on behalf of the respondent-company that the statement of accounts being unsigned did not carry any weight and that in any case it was subject to the finalization of the disputes to the satisfaction of the petitioner and the respondent with r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business transacted between the parties since 1993 is almost Rs. 2.50 crores. The respon-dent did not, therefore, want of adopt a very rigid stand and permitted the petitioner to debit the account of Sunstar Chemicals against the amount that may ultimately and if at all be found payable by the respondent to the petitioner and also subject to finalization of deputes to the satisfaction of the petitioner and the respondent. It may, therefore, be noted that Rs. 3,50,000 is not adjusted against any particular invoice/invoices. However, the respondent denies that by permitting such adjustment, the respondent had admitted any liabil-ity/dues under the disputed invoice. ( iii )The statement of account being unsigned does not carry any weight. However, the same was always subject to finalization of the disputes to the satisfaction of the petitioner and the respondent with respect to the invoices which are the subject matter of the present petition. It may also be noted that the petitioner has not approached the Court with clean hands. In the petition it has been stated on oath that an amount of Rs. 16,27,422,15 is due and payable by the respondent to the petitioner. The petition is file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at such a defence was never pleaded earlier prior to the reply to the statutory notice under section 138 the company has not produced any material even to prima facie show that the quantity of the material supplied by the petitioner was less than the quantity mentioned in the invoices. Except a bare assertion, even figures of the alleged shortfall in the quantity delivered are not given in the affidavits filed on behalf of the respondent-company. 44. As far as the disputes about the quality is concerned, here also apart from the fact that the respondent had not made any such complaint to the petitioner prior to the reply to the statutory notice under section 138 the company has not produced any material to show even prima facie that the company had made any complaint to the petitioner about the quality of the material or any other material in support of its defence. 45. The defence of the company that the company's representatives were making complaints to the petitioner's representatives orally cannot be accepted because even while writing letters dated 11-9-1996 and 5-10-1996, the respondent-company did not give any reason for request- ing the company not to deposit t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing adjustment against the dues payable by the petitioner to Sunstar Chemicals, which is even borne out by the fax message dated 2-1-1997 from the respondent-company to the petitioner authorizing the petitioner to debit the account of Sunstar Chemicals against the amount payable by the respondent. If as on that date, the amount was not payable by the respondent, question of the respondent giving any such authorization to the petitioner would not arise. 48. In view of the aforesaid facts and circumstances which clearly stare in the face of the respondent-company, it must be held that the dispute raised by the respondent-company to the petitioner's claim is not bona fide. Even if the respondent-company has any defence in respect of the sum of Rs. 3,50,000 which, according to the respondent-company, is payable by the petitioner to Sunstar Chemicals and for which the respon-dent-company had wanted the petitioner to adjust the same against the dues payable by the respondent-company to the petitioner, there is no defence to the petitioner's claim for the balance amount of Rs. 12,89,608 which is even the amount mentioned in the statement of accounts which the respondent-company had ..... X X X X Extracts X X X X X X X X Extracts X X X X
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