2012 (8) TMI 475 - HC - Companies Law

Winding up alleged that company unable to pay its debts - appellant supplied certain goods to a company Agreement provided for a guarantee clause that defective goods were to be replaced by appellant - Some of goods were rejected by respondent and appellant agreed to replace same but goods were not returned and a balance amount was due to respondent Held that - Before service of statutory notice when the company raised dispute with regard to the quality and quantity the same is good enough not to pass an order of winding up - since agreement provided for replacement of inferior quality goods but in instant case after rejection of goods there was no demand for replacement of same, respondent could not take advantage of its own breach and withhold balance amount on plea of loss and damages having been incurred Company shall furnish security by way of bank guarantee

Issues Involved:
1. Whether the dispute regarding the quality of supplied materials constitutes a bona fide dispute.
2. Whether the petitioning-creditor was given an opportunity to replace the rejected materials as per the guarantee clause.
3. Whether the company's actions in purchasing materials from a third party without returning the rejected goods were justified.
4. Whether the winding up petition should be granted based on the alleged unpaid dues and incurred expenses.

Issue-wise Detailed Analysis:

1. Bona Fide Dispute Regarding Quality of Materials:
The petitioning-creditor supplied Heat Resistant Cast Iron Castings (HRCI) to the respondent company, which were later rejected by the company's customer, ISMT Ltd., due to non-conformance to the stipulated metallic composition. The company contended that this rejection constituted a bona fide dispute, making the winding up petition incompetent. The trial judge agreed, noting that the dispute was raised before the statutory notice was served, indicating a bona fide issue regarding the quality of the materials.

2. Opportunity for Replacement as per Guarantee Clause:
The petitioning-creditor argued that they were not given a chance to replace the rejected materials as required by the guarantee clause. The clause stipulated that faulty or inferior quality goods should be returned for rectification or replacement. However, the company refused to return the goods and instead purchased replacements from a third party. The court found that this refusal to return the goods and allow for replacement was a breach of the guarantee clause.

3. Justification for Purchasing from Third Party:
The company justified its actions by claiming that it needed to maintain its reputation and meet time-bound commitments, which necessitated purchasing materials from a third party. The court, however, noted that the company did not return the rejected goods to the petitioning-creditor and did not wait for a reasonable time for replacement, which was required under the terms of the contract. This action was deemed unjustified and in breach of the agreement.

4. Winding Up Petition Based on Unpaid Dues and Expenses:
The court observed that the company admitted to owing Rs. 24 lakhs and odd to the petitioning-creditor but withheld this amount citing incurred expenses due to purchasing from a third party. The court held that the company could not take advantage of its own breach and withhold the balance amount. The relationship between the company and its customer (ISMT Ltd.) did not affect the petitioning-creditor's claim once the goods were accepted upon inspection and compliance with the terms and conditions.

Conclusion:
The court concluded that the dispute raised by the company was not bona fide to resist the winding up petition. The company's actions in purchasing from a third party without returning the rejected goods and without giving the petitioning-creditor a chance to replace them were in breach of the guarantee clause. The court modified the trial judge's order, directing the company to furnish security for the amount owed within a specified period, failing which the original order would revive.

Separate Judgments:
Joymalya Bagchi J. concurred with the judgment delivered by Kalyan Jyoti Sengupta J., indicating agreement with the analysis and conclusions reached.

← Previous Next →