2008 (12) TMI 404 - SC - Companies Law

Whether interest payable on the sum due would be a debt so as to attract the provisions of sections 433 and 434 of the Companies Act, 1956? Held that - Appeal allowed. The findings of the High Court, with respect, are not correct for more than one reason; firstly, because the Division Bench did not hold that the invoices were not proved by cogent evidence; secondly, question of leading evidence would arise only after the company petition is admitted and, thirdly, issuance of invoices and signature of the respondent thereon is not disputed. The judgment of the Division Bench also contains a legal flaw insofar as it failed to take into consideration that the appellant had in fact issued three notices being dated 6-1-2003, 8-9-2003 and legal notice dated 23-12-2003 specifically mentioning that the payments had been adjusted towards interest first and balance, if any, shall be adjusted towards the principal. Thus, a prima face case was made out. Interest of justice would be subserved if we in exercise of our jurisdiction under Article 142 of the Constitution of India direct that the respondent to pay simple interest on the admitted sum at the rate of 12 per cent p.a. on the balance amount instead of 24 per cent per annum within eight weeks from the date of amount became due till it is paid failing which the consequences provided in law shall ensue.

Summary

Issues Involved:
1. Whether interest payable on the sum due constitutes a debt under sections 433 and 434 of the Companies Act, 1956.
2. The validity of the respondent's defense against the payment of interest.
3. The applicability of interest provisions under various laws and precedents.

Detailed Analysis:

1. Whether interest payable on the sum due constitutes a debt under sections 433 and 434 of the Companies Act, 1956:
The core issue revolves around whether the interest on the principal amount due can be considered a "debt" under sections 433 and 434 of the Companies Act, 1956. The Supreme Court observed that the term "debt" includes not only the principal but also the interest due, provided there is an agreement or statutory obligation to pay such interest. The Court cited various precedents, including Stephen Chemical Ltd. v. Innosearch Ltd. [1986] 60 Comp. Cas. 702, where it was held that interest could be included in the debt even if not explicitly agreed upon, if it arises from usage or custom. The Court noted that the invoices signed by the respondent included a clause for interest on delayed payments, thereby creating an obligation to pay interest.

2. The validity of the respondent's defense against the payment of interest:
The respondent's primary defenses were that there was no agreement to pay interest and that they were not informed about the adjustment of payments towards interest. The Supreme Court rejected these defenses, noting that the respondent had signed the invoices containing the interest clause and had not disputed the interest in their initial responses. The Court emphasized that the defense must be bona fide and substantial. The Court referred to Amalgamated Commercial Traders (P.) Ltd. v. A.C.K. Krishnaswami [1965] 35 Comp. Cas. 456, which established that a winding-up petition is not a means to enforce a disputed debt unless the dispute is bona fide and substantial. The Court found that the respondent's dispute over interest was neither bona fide nor substantial.

3. The applicability of interest provisions under various laws and precedents:
The Supreme Court examined the applicability of interest under various laws, including the Interest Act, 1978, and the Sale of Goods Act, 1930. The Court cited Meka Venkatadri Appa Rao Bahadur Zamindar Garu v. Raja Parthasarathy Appa Rao Bahadur Zamindar Garu AIR 1922 PC 233, which established that payments are first applied to interest before the principal. The Court also referred to Krishna Chemicals v. Orient Paper and Industries Ltd. [2005] 128 Comp. Cas. 721, where it was held that the exact amount of interest need not be precisely quantified if the liability to pay interest exists. The Court concluded that the respondent was liable to pay interest as per the invoices and trade practice, and the failure to pay such interest constituted neglect to pay a debt under section 434(1)(a) of the Companies Act.

Conclusion:
The Supreme Court set aside the judgment of the High Court, holding that the respondent was liable to pay interest on the principal amount due. The Court directed the respondent to pay simple interest at the rate of 12% per annum on the balance amount within eight weeks, failing which the consequences provided in law would ensue. This decision was made to avoid multiplicity of proceedings and unnecessary delays. The appeal was allowed with no costs.