2014 (3) TMI 1232 - HC - Companies Law

Winding up of the respondent company - inability to pay debts owed to the petitioner - Section 433(e) 434 and 439 of the Companies Act 1956 - whether the defence raised by the respondent is bonafide or a sham defence? - HELD THAT - A reasonable and legitimate excuse to withhold payment would undoubtedly constitute a bonafide dispute. However the stage at which such dispute is raised is usually a good indicator as to whether the dispute is bonafide. In the present case the payments were due before 22.05.2011 and there was no legitimate excuse for the respondent to withhold payment at that material time. As discussed above the only excuse that the respondent had provided to the petitioner at the material time for non- payment of its dues was lack of funds. The respondent had repeatedly asked the petitioner to have patience and had assured that arrangements were being made for discharge of its debts. None of the emails sent by the respondent indicates any dispute by the parties. There is a serious controversy with regard to the genuineness and veracity of the letters dated 22.09.2011 25.11.2011 and 10.12.2011 which have been produced for the first time in February 2014. It is also important to note that none of the aforesaid letters indicates the name or designation of the person who has signed the letter - The respondent also did not respond to the notice under Section 434(1)(a) of the Act. In the event that there was any dispute as to the payment of dues to the petitioner the petitioner ought to have been confronted with the same when a demand was made by the petitioner. And in any event the notice under Section 434(1)(a) of the Act must be confronted by presenting the dispute sought to be raised. Absence of a response at the relevant stage indicating a dispute as to the payments being demanded is an indicator of the lack of bonafides. In the case of Asian Steels 2012 (4) TMI 835 - DELHI HIGH COURT the Court came to the conclusion that the case involved disputed questions of fact as the documents relied upon by both the parties were alleged as forged and fabricated. It is relevant to note that in that case the petitioner relied upon a Statement of confirmation of accounts. The said Statement was produced for the first time in the petition and was not relied upon by the petitioner in any of the contemporaneous correspondence. Even the statutory notice sent by the petitioner did not refer to the said confirmation. In the case of Zhuhai Hansen Technology Co Ltd. 2013 (3) TMI 529 - DELHI HIGH COURT the goods dispatched by the petitioner were not accepted by the respondent and were not cleared from customs. This itself indicates that the disputes involved in the matter were substantial and the payment for the said goods could not be accepted as a dent admitted by the respondent therein. The petitioner is directed to publish the advertisement of this petition in The Statesman (English) and Jansatta (Hindi) for a hearing to be held on 24.07.2014. The citation be published in the Delhi Gazette also - Petition admitted.

Summary

Issues Involved:

1. Whether the respondent company's defence against the petition for winding up is bona fide or a sham.
2. Whether there is a legitimate dispute regarding the quality of goods supplied by the petitioner.
3. Whether the respondent's claim of defective goods constitutes a substantial ground for withholding payment.
4. Whether the respondent's failure to pay indicates an inability to pay its debts under the Companies Act, 1956.

Detailed Analysis:

1. Bona Fide or Sham Defence:

The primary issue addressed in the judgment is whether the defence raised by the respondent is bona fide or merely a sham. The court examined the timing and nature of the respondent's claims regarding the quality of goods supplied by the petitioner. The petitioner had supplied chemicals to the respondent, which were allegedly defective according to the respondent. However, the court noted that the respondent had not raised any quality issues contemporaneously with the supply or during the initial demands for payment. The court found that the respondent's claims of defective goods surfaced only after the petitioner initiated legal proceedings, casting doubt on the genuineness of the defence.

2. Dispute Regarding Quality of Goods:

The court scrutinized the respondent's assertion that the chemicals supplied were defective, leading to the rejection of products by the respondent's customer. The respondent relied on letters allegedly sent to the petitioner, which purportedly documented these issues. However, the court found these letters to be questionable, as they were produced for the first time during the proceedings and lacked contemporaneous corroboration. The court emphasized that none of the respondent's prior communications, including emails, mentioned any dispute over the quality of goods, undermining the credibility of the respondent's claims.

3. Substantial Ground for Withholding Payment:

The court evaluated whether the respondent had a substantial and legitimate reason to withhold payment. The judgment highlighted that a bona fide dispute must be genuine and not merely a pretext to avoid payment. The court concluded that the respondent's defence lacked substance, as the alleged quality issues were not raised at the appropriate time and were inconsistent with the respondent's earlier communications, which acknowledged the debt and cited financial constraints as the reason for non-payment.

4. Inability to Pay Debts:

Under the Companies Act, 1956, the inability to pay debts is a ground for winding up a company. The court considered whether the respondent's refusal to pay the petitioner indicated an inability to pay its debts. The judgment noted that the respondent had acknowledged the debt in various communications and had promised to arrange payment, suggesting that the refusal to pay was not due to a genuine dispute but rather financial difficulties. Consequently, the court found that the respondent's failure to pay constituted an inability to pay its debts, justifying the petition for winding up.

Conclusion:

The court concluded that the respondent's defence was not bona fide and that there was no substantial dispute regarding the debt owed to the petitioner. The judgment admitted the petition for winding up, directed the publication of the petition, and appointed a Provisional Liquidator to take charge of the respondent company's assets. However, the court provided a three-week window for the parties to potentially settle the matter amicably before implementing the winding-up proceedings.