2015 (12) TMI 1037 - HC - Companies Law

Winding up petition - argument regarding equitable set off - Held that - The company has been able to prima facie establish a strong case that the goods that the petitioning creditor shipped were in fact in lieu of payment for the goods shipped to them by Concast Bengal in 2009. Both the shipments have been proved by invoices, delivery, payment of VAT and so on. But there is no evidence of either party making payment of the price. There is also strong evidence produced by the company to show that each of the companies of the Concast Group was a part of one entity and carried on business as one entity. Shipment of goods by the petitioning creditor in 2011 was sufficient to extinguish its liability for the goods that it received in 2009. The argument regarding equitable set off is premature. It has to be seen, upon scrutiny of the evidence at the trial whether the arrangement between the parties was such that the setting off took place at the time of the transaction or was it pleaded for the first time in the affidavits in opposition. That would determine whether the set off was legal or equitable and whether it could be claimed. Having advanced a substantial defence there is no question of a winding up order being passed. The defence is so substantial that is not even inclined to ask the company to provide security. This winding up applications are disposed of, by refusing to admit the same and relegating the petitioning creditor to a civil remedy as available to it. The period during which these winding up applications have been pending in this Court may be excluded to compute limitation under Section 14 of the Limitation Act, 1963.

Issues Involved:
1. Validity of the winding up applications under Sections 433, 434, and 439 of the Companies Act, 1956.
2. Determination of the liability of the Company to pay the debt claimed by the petitioning creditor.
3. Consideration of the defense raised by the Company regarding set-off and group company transactions.
4. Applicability of the doctrine of "lifting the corporate veil."
5. Assessment of the legal principles governing summary judgments and defenses in winding up applications.

Detailed Analysis:

1. Validity of the Winding Up Applications:
The winding up applications were filed under Sections 433, 434, and 439 of the Companies Act, 1956, based on a sale transaction between the parties from July 2011 to August 2011. The petitioning creditor claimed that the Company failed to pay the invoice value of Rs. 6,18,91,744/- for the iron and steel materials delivered. A statutory notice dated 11th December 2013 was issued under Section 434, demanding payment with interest within three weeks, which the Company neither paid nor replied to, leading to a presumption of insolvency under Section 434(1)(a).

2. Determination of Liability:
The petitioning creditor claimed a total amount of Rs. 10,41,13,301.99, including interest. The Company admitted the transaction in its Affidavit in Opposition but argued that the amount payable was set off against a previous transaction from 2009. The Company provided evidence of cross-transactions, showing that Concast Bengal Industries Ltd. had sold goods worth Rs. 31,19,08,705/- to the petitioning creditor's group, which had sold goods worth Rs. 29,01,91,266/- to the Concast Group. The Company argued that the price payable was adjusted, resulting in a net amount due from the petitioning creditor to the Company.

3. Defense of Set-Off and Group Company Transactions:
The Company contended that the transactions should be viewed as part of a larger arrangement between the Concast and Ram Swarup groups, both controlled by specific individuals. The petitioning creditor denied this, arguing that the transactions with Concast Exim Ltd. were separate from those with Concast Bengal Industries Ltd. The Court noted that the defense of equitable set-off requires the same transaction, which was not clearly established in this case. The Court found prima facie evidence that the companies were part of the same group and that the set-off might be valid.

4. Lifting the Corporate Veil:
The Court discussed the doctrine of "lifting the corporate veil" to determine whether the companies within the Concast group should be treated as a single entity. The Court cited previous judgments, emphasizing the need to examine the controlling mind behind the companies. The Court found prima facie evidence that the Concast companies were controlled by the same individual, which justified considering them as a single entity for the purpose of the transactions.

5. Legal Principles Governing Summary Judgments and Defenses:
The Court referred to the Supreme Court's judgment in M/s. Mechalec Engineers & Manufacturers v. M/s Basic Equipment Corporation, outlining the circumstances for granting summary judgments or leave to defend. The principles include granting unconditional leave if the defendant raises a bona fide defense, and conditional leave if the defense is not positively clear but indicates a triable issue. The Court also cited the judgment in Madhusudan Gordhandas and Co. Vs. Madhu Woollen Industries (P) Ltd., which held that a winding up application would fail if the Company raised a defense in good faith.

Conclusion:
The Court concluded that the Company had established a prima facie strong defense that the goods shipped by the petitioning creditor in 2011 were in lieu of payment for goods received in 2009. The evidence indicated that the transactions between the Concast and Ram Swarup groups were real and that the set-off might be valid. The Court found the defense substantial enough to refuse the winding up order and relegated the petitioning creditor to seek civil remedies. The period during which the winding up applications were pending would be excluded for computing limitation under Section 14 of the Limitation Act, 1963. All findings and observations were deemed prima facie.

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