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TMI Blog2014 (7) TMI 1392X X X X Extracts X X X X X X X X Extracts X X X X ..... el for the respondent is as to whether the liability would stand as against VLMS or the respondent. Here is a clear case of goods sold and delivered and debt acknowledged prior to 15.3.13 by the respondent. The question is whether the respondent herein, viz., ETA, or the transferee VLMS is liable. The agreement of transfer slump sale by the respondent to VLMS does not in any way affect the rights of the petitioner, governed by the terms of NAAC. Clause (3) of the NAAC agreement very clearly provides that the parties agree that the respondent - ETA's obligation is not discharged and an indemnity is also provided by the respondent and there is nothing in the agreement, which discharges ETA of its obligations. In such view of the matter, I do not find any justification to non-suit the petitioner on the ground that they have filed a petition before the High Court of Karnataka as against VLMS. 17. In view of the reasons as stated above, all the plea taken by the respondents appears to be a mirage. In view of the clear admission of liability by acknowledgement of debts on various dates as stated above and the NAAC dated 15.3.13, the non-response to the statutory notice, goes to sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hree rakes between December 2009 and June 2010 amounted to Rs. 26,42,69,343/- stood lawfully extinguished on account of the Novation and Transfer Agreement dated 16.05.2012 and the subsequent Business Transfer Agreement and Novation Agreement dated 15.03.2013. 8. The Learned Senior Counsel for the Appellant contends that by virtue of Clause 3 of the first Novation Agreement dated 16.05.2012, the liability got extinguished and added further, a similar clause for extinguishment of liability is also contained in the second agreement dated 15.03.2013. 9. At this stage, the Learned Senior Counsel for the Appellant projects a plea that Clause 1.2 of the second agreement dated 15.03.2013 cannot be interpreted as constituting a continuing liability and in fact, Clause 1.2 of the second Novation Agreement dated 15.03.2013 became redundant because both the Business Transfer Agreement as well as Novation Agreement got executed on the same day viz., 15.03.2013 which was the "Closing Date" as per the agreement. 10. The Learned Senior Counsel for the Appellant submits that Clause 3 of the Business Transfer Agreement dated 15.03.2013 providing that the Appellant (ETA) had not discharged any of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll obligations towards the purchase of the rakes by ETA from the Petitioner; - The various instances of acknowledgement by ETA as regards the non-payment of debt due to the Petitioner are additionally fastened upon the Respondent Company as being obligations subject to full and effective discharge in favour of the Petitioner; and - Absence of payment of the outstandings by the Respondent Company to the Petitioner results in a breach by the Respondent of the express covenants of the Novation Agreement for Assumed Contracts, for which the Respondent alone is liable." and contends that the Respondent/Petitioner had sought to mulct the whole liability on VLMS alone. 14. Further, the Learned Senior Counsel for the Appellant takes a stand that the pleadings of the Respondent/Petitioner, in C.P.No.10 of 2014 on the file of the Hon'ble High Court of Karnataka, categorically points out that the Respondent/Petitioner believed that the liability of the Appellant (ETA) stood extinguished and legally transferred to the buyer viz., VLMS and that the said Company Petition was to enforce that debt only. 15. The Learned Senior Counsel for the Appellant/Respondent contends that the C.P.No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2014 on the file of the Hon'ble High Court of Karnataka, the Respondent/Petitioner admits that there was a settlement which failed and this transaction between VLMS and the Respondent/Petitioner without involving the Appellant (ETA) in any manner further extinguishes any joint and several liability even assuming without admitting the same. 22. The Learned Senior Counsel for the Appellant contends that the non-issuance of any reply to the statutory notice cannot be a ground for admitting a Company Petition or winding up a company. In this regard, it is the stand of the Appellant/Respondent that non furnishing of reply cannot ipso facto lead to any adverse conclusions if the party otherwise provides a bona fide defence to the liability as in the instant case of the Appellant/Respondent. 23. The Learned Senior Counsel for the Appellant proceeds to submit that the ingredients of Sections 433 and 434 of the Companies Act, 1956 speak of a 'Summary Proceeding', as it is not intended to substitute a trial and in fact, the Appellant/Respondent is required to show only a reasonable defence to the liability. 24. The Learned Senior Counsel for the Appellant contends that the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... winding-up petition as a means of forcing the company to pay a bona fide disputed debt. A dispute would be substantial and genuine if it is bona fide and not spurious, speculative, illusory or misconceived. The Company Court, at the stage of a winding-up petition is not expected to hold a full trial of the matter. It must decide whether the grounds appear to be substantial." 29. Further, in the aforesaid decision, at page 554 and at special page 555, it is observed as follows: "If the debt is bona fide disputed, there cannot be "neglect to pay" within the meaning of Section 433(1)(a) of the Companies Act, 1956. If there is no neglect, the deeming provision does not come into play and the winding up on the ground that the company is unable to pay its debts is not substantiated and non-payment of the amount of such a bona fide disputed debt cannot be termed as "neglect to pay" so as to incur the liability under Section 433(e) read with Section 434(1)(a) of the Companies Act, 1956." 30. That apart, in the aforesaid decision, at page 555, it is laid down as follows: "A party to the dispute should not be allowed to use the threat of winding-up petition as a means of enforcing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ishes of creditors so long as these appear to be justified. (v) The machinery of winding-up should not be allowed to be utilised merely as a means of Realizing its debts. [For the above propositions see Pradeshiya Industrial and Investment Corporation of Uttar Pradesh v. North India Petro-Chemical Ltd. and Another, (1994) 2 Comp LJ 50 (SC) in which the observation in Amalgamated Commercial Traders (P) Ltd. v. Krishnaswami, [1965] 35 Comp. Case 456 (SC) and Gordhandas and Co. v. Madhu Woollen Industries (P) Ltd., [1972] 42 Comp. Cas. 125 (SC) have been paraphrased]. (vi) If the stance of the adversaries hangs in balance it is always open to the Company Court to order the Respondent Company to deposit the disputed amount. This amount may be retained by the Court and be held to the credit of the suit, if any. [see Civil Appeal No. 720 of 1999 arising out of SLP (C)No. 14096 of1998 - M/s. Nishal Enterprises v. Apte Amalgamations Ltd., decided on February 5, 1999]. It appears to me that the following point may be added to the foregoing considerations. (vii) Generally speaking, an admission of debt should be available and/or the defense that has been adopted should appear to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mer Ltd. 5. 1978 (48) Company Cases 378. (Bombay) United Western Bank Ltd., 6. Goodwill India Ltd. v. P.S.B. Paper Mills Pvt. Ltd. 3. I shall first deal with the consequences of the Respondent's failure to send a Rely to the Statutory Notice. The reliance of Mr. Valmiki Mehta, learned Senior Advocate appearing for the Petitioner on the above-mentioned decisions of my Learned Sister Usha Mehra, J. is somewhat exaggerated. The decisions do not inexorably lead to the conclusion that Winding-up orders must unvariably be passed where no response to a Statutory Notice has been made. From my understanding of the judgment my Learned Sister had taken the failure to reply to the notice as an important factor in determining whether a bona fide defense had been put forward. In the circumstances of both the cases, she preferred to view the defense as an afterthought and as being bereft bona fide. In CP 220/2001 entitled H.B. Stock Holdings Ltd. v. Associated Infotech Ltd., I have favored the opinion that where no response had been made to the statutory notice the Respondent Company runs the risk of a winding-up petition being admitted for hearing at the threshold stage itself. Normall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Respondent and letter dated 20.01.2011 of the Appellant, emails of the Appellant dated 28.22.2011, 08.03.2012, 22.08.2012, 27.04.2013, 30.05.2013 and 21.06.2013 respectively. 36. The Learned Senior Counsel for the Respondent/Petitioner brings it to the notice of this Court that pursuant to a restructuring plan made by the Appellant/ETA Group, it was proposed that the Appellant's logistics business, being conducted under the tradename 'Freightstar' be hived off to a separate entity, M/s Freightstar Private Limited, which a third party investor, M/s. Vikram Logistic and Maritime Services Private Limited (VLMS) would take over, which would enable payment of the Respondent's debt. Accordingly, a "Novation and Transfer Agreement" dated 16.05.2012 was entered into between the Appellant, Respondent and Frieghtstar Private Limited which reflected clearly the acknowledgement of the outstandings due to the Respondent. 37. The Learned Senior Counsel for the Respondent submits that the restructuring scheme based on the aforesaid Novation and Transfer Agreement, dated 16.05.2012, could not be implemented and that the parties had agreed to change certain terms of the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as VLMS. 43. As a matter of fact, the Learned Senior Counsel for the Respondent proceeds to add that correspondence was exchanged with Sathianathan post on 15.03.2013 with regard to the outstanding liability both on his ETA email address ([email protected]) and his VLMS email address ('[email protected]) which, along with the content of the mails shown that notwithstanding the business transfer agreement, he held dual capacities both with ETA and VLMS. 44. The Learned Senior Counsel for the Respondent submits that because of the continued defalut in payment both by VLMS and ETA, a statutory notice in terms of Section 434(1)(a) of the Companies Act, 1956 was issued by the Respondent on 20.11.2013 both to the Appellant and also to VLMS calling for payment of the outstanding dues of Rs. 47,09,66,236 (inclusive of interest as of 16.10.2013), together with additional interest at the rate of 13.75% till date of payment. There was no response for the statutory notice issued and even after issuance of the statutory notice, the liability was once again acknowledged through email dated 02.12.2013 and the email was addressed from Sathianathan's ETA emal id ks@etafreig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stics Business by the Appellant to VLMS. Further, this is borne out by the fact that Ex.C. to the amended and restated Business Transfer Agreement executed between the Appellant, VLMS and freightstar which provided the general format for such Novation Agreements to be executed with different vendors/suppliers. As such, the contention of the Appellant that it cannot be held liable for the debt pursuant to the business transfer in favour of VLMS is contrary to the contractual terms and the principles embodied in Section 43 of the Contract Act, 1872 which rendered both ETA and VLMS jointly and severally liable for repayment of the debt due to the Respondent (Vide Pollock & Mulla, the Indian Contract and Specific Relief Act, 14th edn., Pgs 805-807). 51. The Learned Senior Counsel for the Respondent contends that apart from the joint cause of action both Appellant and VLMS the Respondent/Petitioner has independent causes of action against each of VLMS and the Appellant to the entire extent of an admitted and unpaid amount. In effect, the stand of the Respondent/Petitioner is that the Respondent/Petitioner is well within its rights to initiate separate winding up proceedings before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of the outstandings by the Respondent Company to the Petitioner results in a breach by the Respondent of the express covenants of the Novation Agreement for Assumed Contracts, for which the Respondent alone is liable', is a misplaced one and meant only to mislead this Court. Furthermore, the said point was neither specifically raised in the counter to the winding up petition nor argued by the Appellant before the Learned Single Judge in C.P.No.52 of 2014 on the file of this Court. Moreover, the same is to be read and understood in conjunction with the averments of paragraph 55 in C.P.No.52 of 2014 on the file of this Court and a reading of the aforesaid contents of paragraphs in two Company Petitions mentioned supra are quite in tune with the understanding of the joint and several liability created by the terms of the Novation Agreement For Agreed Contracts dated 15.03.2013 whereby the VLMS assumes the liability under the said agreement and the Appellant/ETA remains liable under the terms of the Purchase Order. As such, there is no contradiction in the stand taken by the Respondent. 56. The Learned Senior Counsel for the Respondent vehemently contends that the company p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Single Judge will necessarily consider the other creditors' views etc. and the larger public interest considerations in determining whether or not the Appellant Company deserves to be wound up or not and the said considerations therefore, do not mandate any interference with the impugned order. 61. The Learned Senior Counsel for the Respondent cites the decision of the Hon'ble Supreme Court in Wander Limited and another V. Antox India P. Limited, 1990 (Supp) Supreme Court Cases 727, at special page 728 & 729, whereby and whereunder, it is observed and held as follows: "The appellate court will not interfere with the exercise of discretion of the court of first instance and substitute its own discretion except where the discretion has been shown to have been exercised arbitrarily, or capriciously or perversely or where the court had ignored the settled principles of law regulating grant or refusal of interlocutary injunctions. An appeal against exercise of discretion is said to be an appeal on principle. Appellate court will not reassess the material and seek to reach a conclusion different from the one reached by the court below solely on the ground that if it had consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1970 Mad 337. The learned Chief Justice in B. R. Nagendra Iyer's case observed that a promisee has a cause of action against all the joint promisors. He can, if he chooses, file a suit impleading all the joint and several promisors as co-defendants or he can file a suit against any one of them and obtain judgment against him. It is further observed that unless that judgment is satisfied it does not operate as a bar to his claim against the other joint promisors and he has his right of action against them. To the same effect are the observations in T. Radhakrishna Chettiar's case. Further, the Patna High court has also taken the same view in Traders Cooperative Bank Ltd. v. A. K. Mallick, AIR 1934 Pat 2. 8. Pollock and Mulla in their commentary on the Indian Contract Act (9th edn.), while dealing with Section 43 of the Act, at page 364, noticed the conflict between the views of the Indian and English authorities and observed as follows : "We think it the better opinion that the enactment should be carried out to its natural consequences, and that notwithstanding the English authorities founded on a different substantive rule, such a judgment, remaining unsatisfied, ough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rary to the legislative intent. Its proposition just encourages litigation." 65. The Learned Senior Counsel for the Respondent seeks in aid of the decision of this Court in NEPC India Limited (Formerly NEPC Micon Limited V. Atlantic Bridge Aviation Limited, (2008) 1 MLJ 76, wherein, it is held as follows: "Where the debt is undisputed the Court will not act upon a defence that the company has the ability to pay the debt and stay the company petition. Company proceedings could be initiated if Court prima facie comes to the conclusion regarding the existence of debt and neglect on the part of the company to pay such amount in spite of the statutory notice." Discussions: 66. At the outset, it is to be pertinently pointed out by this Court in C.P.No.52 of 2014 (filed by the Respondent/Petitioner against the Appellant/Respondent before this Court), the Respondent/Petitioner had averred that the Purchase Order dated 07.06.2008 and the subsequent amendments thereto along with the Novation Agreement For Assumed Contracts constitute a valid subsisting and binding contract between the Respondent/Petitioner and the Appellant/ Respondent Company. Further, it is the stand of the Responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivotal contention of the Appellant/Respondent is that in C.P.No.10 of 2014 on the file of the Hon'ble High Court of Karnataka, the Respondent/Petitioner sought a relief of winding up the VLMS and in fact, in para 50 & 51 of the aforesaid Company Petition, the Respondent had clearly averred for the breach of the express covenants of the Novation Agreement For Assumed Contracts, the Respondent (VLMS) alone is liable. 72. At this stage, this Court worth recalls and recollects the decision in T.Srinivasa V. Flemming (India) Apotheke Private Limited, (1990) Vol.68 Comp. Cases 506, wherein it is held as follows: "It is well-settled that a creditor may seek the assistance of the company court under section 433 of the Companies Act, 1956, to compel payment of moneys due to him. But, where a debt is bona fide disputed and where the claim appears to the court as not just, it is open to the court to refuse the request for a winding up order and refer the parties to a competent civil court having jurisdiction, to have their claims adjudicated. It is not for the court hearing a petition for winding up under Section 433(e) of the Companies Act, 1956, to assess evidence and refuse a decr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dhandas and Company V. Madhu Woollen Industries P. Ltd., AIR 1971 SC 2600; [1972] 42 Comp Cas 125, it is held as follows: 'If the debt is bona fide disputed and the defence is a substantial one, the court will not wind up the company. The principles on which the court acts are: (i) that the defence of the company is in good faith and one of substance; (ii) the defence is likely to succeed in point of law; and (iii) the company adduces, prima facie proof of the facts on which the defence depends." 77. Further, in the decision of the Hon'ble Supreme Court in Mediqup Systems P. Ltd. V. Proxima Medical System GmbH [2005] 124 Comp Cas 473, at special page 481 to 483, the Hon'ble Supreme Court has held thus: "This court in catena of decisions held that an order under Section 433(e) of the Companies Act is discretionary. There must be a debt due and the company must be unable to pay the same. A debt under this section must be a determined or a definite sum of money payable immediately or at a future date and that the inability referred to in the expression 'unable to pay its dues' in section 433(e) of the Companies Act should be taken in the commercial sense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over 95 persons and relied upon its statement of account as well as balance-sheet and profit and loss accounts and that the claims of the petitioner were disputed and exaggerated:" Further, while dismissing the petition, it is also held that 'a genuine and bona fide dispute had been raised by the respondent-company. The petitioner's claim merely consisted of interest charged at the rate of 24 per cent. Per annum and for some period even at 30 per cent. Per annum. The claim also consisted of higher commission charges. There was no agreement with regard to charging of interest between the parties. The figure of outstanding amount increased only because of the interest charged at the rate of 24 per cent. and 30 per cent. The petitioner had not been able to establish its case before the court that the debt was undisputed and that there was no genuine or bona fide dispute or defence available to the respondent-company. The determination of the issue required a full-fledged trial. (The respondent-company was directed to pay the amount due to the petitioner as per its account within one month from the date of receipt of the order and the petitioner was at liberty to file a civil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it should not make up a winding up order based upon such debt. 'Bona fide' dispute implies the existence of a substantial ground for the dispute raised. Where the company has a bona fide/genuine dispute, the Petitioner cannot be regarded as a creditor of the company for the purposes of winding up. 85. Indeed, the power of winding up is to be exercised judicially and with most circumspection. No wonder, the proceedings under Section 433 and 434 are not the proceedings to recover debts due from any particular company. 86. It is to be noted that the ingredients of Section 434 of the Companies Act, 1956 enjoins that when a notice is served in that Section in the manner specified and if the payment is not made within a period of three weeks, it will be presumed that the company is unable to pay its debts, but, in the considered opinion of this Court, this gives only a presumption that the company is unable to pay debts. However, the said presumption is a rebuttable one in the manner known to law and in accordance with law. As such, the nonissuance of reply to a statutory notice of the Respondent by the Appellant cannot be considered as an adverse circumstance against the Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.10 of 2014, it was clearly mentioned that the Purchase Order stood completely novated. Therefore, this Court holds that the Appellant/Respondent has raised a substantial and tangible defences by raising contentious factual and legal issues which required detail investigation. Also that, the defences raised by the Appellant/ Respondent are not a mere cover or empty disputes with a view to cover up its real inability. In short, this Court is subjectively satisfied that the defences raised by the Appellant/Respondent in the present case are bona fide and genuine one. As a matter of fact, these contested mixed questions of Facts and Law are to be adjudicated only by a Civil Court. As such, the proper remedy for the Respondent/ Petitioner is to approach the competent Civil Court for resolving the mixed questions of Facts and Law in regard to the bona fide dispute of Debt and its liability. Further, in a summary proceedings, under Section 433 of the Companies Act, 1956, the divergent stand taken by the respective parties cannot be gone into and bona fide disputes being raised by them. Therefore, this Court directs the Respondent/ Petitioner to approach the competent civil forum for rec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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