TMI Blog2000 (3) TMI 920X X X X Extracts X X X X X X X X Extracts X X X X ..... admitted along with the direction of publication of advertisement is questioned by both the original petitioner and the original respondent. The petitioning-company has filed O.J. Appeal No. 1 of 2000 for the limited challenge against the rejection of its request for appointment of provisional liquidator during the pendency of the winding up petition after admission, whereas, OJ Appeal No. 5 of 2000 is filed by the original respondent Micro Forge Co. Needless to reiterate that both the appeals arise out of one common order of the learned company judge recorded on 22-12-1999, in company petitioner No. 134 of 1999. 2. By virtue of an agreement, dated 20-6-1996, original petitioner and the original respondent-companies agreed for sale of 1500 metric tons non-alloy steel billets at Rs. 8,420 per metric ton CIF LO Kandla on High Seas sales basis, as per the version of the Tata company. The goods were being carried on in the ship M.V. Stavros Kapetan, at the time, when the sale took place. Incidentally, it may be mentioned that there was one more agreement between the parties with regard to consultancy and service charges, which, of course, would not figure in the controversy between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ues by September 1996, and again by letter, dated 8-10-1996, the company sought time to make the payment. Thus, there was exchange of schedule for the payment between the parties. 7. Upon failure to honour the outstanding dues, the petitioner-company gave a statutory notice, dated 17-3-1999, demanding due payment towards principal amount for the value of the goods supplied with interest at the rate of 24 per cent per annum, from 6-6-1995, amounting to Rs. 69,99,824. The Micro Forge Company neither replied nor complied with the notice, as a result of which, the Tata company, was led to file the company petition for winding up under section 433( e ) of the Companies Act, 1956 ( the Act ) in May 1999. The version and defence of the respondent-company, Micro Forge 8. The respondent Micro Forge Co. has raised various contentions against the winding petition, which will be highlighted : hereinbelow : ( 1 )That the company had written a letter, on 5-8-1995, to Tata company and in reply to which the Tata company sent a fax message. The letter dated 5-8-1995 and the fax reply dated 7-8-1995 are produced. ( 2 )That the petitioner Tata company was informed by letter dated 4-8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two appeals against the order of the learned company judge. 11. We have, dispassionately, heard the learned counsels appearing for the parties. We have also examined, threadbare, the documentary evidence relied on by the parties and considered by the learned Company Judge. We have also been taken through the relevant case law, to which reference will be made by us as and when required, at an appropriate stage, hereinafter. 12. Before we embark upon the evaluation of the facts and the rival submissions raised before us at a marathon length, we would like to highlight the concept and philosophy of the winding up of the companies and the statutory setting prescribed in the Companies Act. Part VII of the Companies Act, deals with the provisions of winding up, whereas, in Chapter I of this part deals with the modes of winding up. Section 425 prescribes modes of winding up as per which a company can be wound up either by the Court or voluntary or subject to the supervision of the Court. Section 426 prescribes the liability as contributories of present and past members, in the event of a company being wound up. In sections 427 to 432 of the Act, different provisions are made in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge of the company and the company remains under his control. He collects its assets and dues and pays the debts and liabilities and finally distributes any surplus amongst its members in accordance with the respective legal rights of the concerned parties. This is highlighted to show that once an order of winding up is recorded by the competent Court on any one of the grounds enumerated in section 433 the outcome would be like death of an individual. Once winding up order is passed, the entire managerial functioning and decision making authority is shifted and, ordinarily, entrusted to the Official Liquidator or an administrator. No doubt, the impugned order radiates an imprint of only an admission of winding up petition and directing the publication of the advertisement in leading daily newspapers. It, also, cannot be gainsaid that an order of admitting a winding up petition and the resultant order for the publication of an advertisement inviting claims from respective parties by a public notice is, in many cases, from commercial point of view, business point of view, from marketability point of view, no less injurious than winding up. This proposition could, hardly, be questioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deliberate or designed action or mere temporary shock and effect of economy and market. In a given case, it may happen that a party may become unable to pay its debts for a while, but that by itself is not a criterion for exercise the power to wind up, ipso facto. (4)It is necessary for the Company Court to consider the financial status, strength and substratum of the company, in overall context. It is possible, at times, there may be a cash crunch. It may be also, possible, at times, the temporary cash crisis despite high sale and heavy turnover and, therefore, in such a situation, mere disability or only on the ground of inability to pay would not constitute a ground empowering the Court to wind up the company. (5)If the company is an ongoing concern having regular business and employment of employees, the Court cannot remain oblivious to this aspect. The effect of winding up would be of putting an end of the business or an industry or an entrepreneurship and, in turn, resulting into loss of employment to the several employees and loss of production and effect on the larger interest of the society. (6)Even dividend declared by the company regularly and having profit in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in general. (14)The Court is also obliged to consider that it would be in the interest of justice to give the company sometime to come out of the momentary financial crisis or any other temporary difficulty as winding up is a measure of last resort. (15)Winding up course cannot be adopted as a recourse to recovery of the debt. (16)The Court must bear in mind one more celebrated principle and consider whether the company has reached a stage where it is obviously and plainly and commercially insolvent, that is to say, that its assets are such and its existing liabilities are such as to make the Court feel clearly satisfied that current assets would be insufficient to meet the current liabilities, along with other principles. (17)It is also necessary to consider whether the respondent-company has become defunct or has closed its business for quite sometime, whether it is commercially insolvent. For the purpose of finding commercial insolvency, a mere look into the financial data is relevant to examine about its soundness. In all matters relating to winding up, the Court may have regard, to the wishes of the creditors and contributories and may, if necessary, ascertain their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f fact. The expression bona fide would mean genuine, in good faith and when dispute is based on substantial grounds or when defence is probable and with some substance, it is a bona fide dispute. It must be strictly noted that winding up petition is not an alternate to civil suit. 18. In the light of the above position, let us examine the financial position of the original respondent Micro Forge Co. from the documents placed on record of the last three years and summarised in a letter. In our opinion, it would be just and proper to reproduce the same to understand the financial status of the respondent-company of last 3 years. It is as per the audited balance sheet, about which there is no dispute. It is as follows : (Rs. in lacs) Particulars 1996-97 1997-98 1998-99 Turnover Domestic 555.77 923.12 882.90 Export 496.84 176.33 352.92 Total 1052.61 77 1099.45 1239.82 Profit before Depreciation 104.06 90.49 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired to be adjudicated upon in a civil suit when the parties would be leading documentary as well as oral evidence and also because Deepayan Mohanty has not filed any affidavit to controvert his authorship of the fax letter purporting to be dated 7-8-1995 (Annexure II) from the petitioner to the Company, though Dilip S. Kumar, Area Sales Manager of the petitioner, has stated in para 4 of the rejoinder that the fax message was shown to Deepayan Mohanty and he has denied his signature as also the sending of such letter to the respondent." 22. It can be, very well, visualised from the above observations that the proposition of law and, observations that the proposition of law that requiring investigation of facts and examination of witnesses and documents, it would be advisable for the parties to go the Civil Court is the accepted proposition. 23. The serious controversy is about the liability for payment of duty. Both the companies have divergent pleas. Whether it was a High-sea sale or Ex-Kandla sale, is also, in dispute. The version of the petitioning-company is that the contract was on the basis of High-sea sale, whereas, the contention of the respondent-company is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores and after meeting its financial liabilities, Rs. 2.78 crores." (p. 356) 26. It was, therefore, submitted that in the light of the facts and circumstances, as in the present case, in that case also it was found that there was no justification whatsoever for admitting the winding up petition and accordingly, the winding up order was quashed and set aside. We find much substance in the aforesaid contention. 27. In the light of the aforesaid facts and circumstances of the present case, we have not been able to convince ourselves to uphold the finding that the dispute raised by the respondent-company or the defence propounded by it is dishonest or mala fide. In the circumstances, when bona fide dispute of debt is raised, it is not the company Court but the competent civil Court which should adjudicate the controversy as an original court after undergoing full-fledged trial. 28. There is nothing on record to even, remotely, indicate that the dispute propounded about the liability and the nature of contract, whether it was high-sea sale or Ex-Kandla sale was not a bona fide dispute, more so, when a copy of the fax message is replied on by the respondent-company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is something which ought to be tried either before the Court, itself or in an action or by some other proceedings. 31. There are various factors and facts, contours and chronicles emerging from the facts of the case requiring consideration before adjudicating upon the plea of winding up by the Court. When the petitioner is forcing payment of debt, which it knows to be in substantial dispute the evidence may support an action by the company against the petitioner for the tort of malicious prosecution. No monetary loss or special damage to the company need be proved for the presentation of the petition is, from its very nature, calculated to injure the credit of the company. It will be interesting to refer to a decision in A-Company (No. 003729 of 1982), (1984) 1 WLR 1090, that even in a case where the company in good faith and on substantial grounds disputed the debt and could not know the sum due but was willing to pay a lesser amount, its omission to pay either the statutory demand or the lesser amount did not constitute neglect within the meaning of section 123(1)( i ) of the Insolvency Act, 1986, which is applicable in case of an issue of winding up of a company in En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al or staying of the petition can only be a matter for the discretion of the Court, albeit that its exercise may have been narrowed by authority. So, there may be two categories of cases, one disputed debt category and another cross-claim case category. 35. In the present case, there is a bona fide dispute of debt and also substantial dispute of counter-claim. The principles, which we have enunciated hereinabove, are extensively, explored in catena of judicial pronouncements. For short, we cannot resist the temptation of referring the following decided cases : "1. Madhusudan Gordhandas Co. v. Madhu Woollen Industries (P.) Ltd. [1972] 42 Comp. Cas. 125 (SC), wherein, it is held that one act of dishonesty on the part of the petitioner is sufficient for rejection of petition. 2. Harinagar Sugar Mills Co. Ltd. v. M.W. Pradhan Court Receiver AIR 1966 SC 1707, wherein it has been observed, relying on Palmer s Company Precedents that a winding up order is not a normal alternative. 3. Pradeshiya Industrial Investment Corpn. s case ( supra ) wherein it is held that mere inability to pay debt without any other evidence itself is not always sufficient to exercise dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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