2013 (3) TMI 346 - HC - Companies Law

Winding up petition - as per the appellant the respondent company did not come forward and make payment of the third installment of 60% and the balance 40%, as agreed upon as per the agreement entered - Held that - If the case in hand and the facts as available on record are evaluated it would be seen that after the statutory notice was sent by the petitioner company to the respondent on 17.5.2011, and when a demand was made for payment of the aforesaid amount of Rs. 61,85,951 90, the respondent company submitted its objection on 14.6.2011 and disputed its liability to pay the amount and raised various objections. It was pointed out that the petitioner company wrongly represented about its business, made false claim and the respondent company has raised various grounds with regard to breach of agreement by the petitioner company as a result it is stated that no amount is to be paid and it has denied its liability to pay the debt and have disputed the claim. If the claim made by the petitioner and the reply submitted by the respondent in response to the statutory notice is meticulously scrutinized, it would be seen that there is serious disputed questions of fact between the parties and by giving various justifiable reasons, respondent company has stated that they are not liable to make payment and even breach of agreement on the part of the petitioner company is raised as a ground for denying the payment. It is, therefore, a case where the debt in question is disputed and it is not a case where debt is admitted or acknowledged by the respondent. On the contrary, it is a case where the debt is bonafidely disputed by the respondent company and they have substantively made out a defence, thus this Court cannot direct the winding up of the company in question as seeked as a procedure for winding up cannot be used as a substitute for proceeding with recovery of a debt in accordance to the common law nor is it be used to pressurize, coerce or enforce payment of a debt, which is bonafidely disputed by the respondent company. A winding up petition cannot be used as a substitute for a civil suit. If the company petition for winding up is filed with oblique motive and only to put pressure on the respondent company, the same should be dismissed. This is the principle of law laid down as it emerges on a complete reading of various judgments on the question. It is only when a legitimate claim is made out and the material available shows that the company is unable to pay the debts and its financial position is so precarious that it would not be able to meet the demand that action should be taken in a company petition else it is liable to be dismissed.

Summary

Issues Involved:
1. Claim of debt owed by the respondent company to the petitioner company.
2. Statutory notice under Section 433 of the Companies Act, 1956.
3. Dispute over the debt and breach of agreement.
4. Legal principles for winding up a company.
5. Discretionary power of the court in winding up proceedings.

Detailed Analysis:

1. Claim of Debt Owed by the Respondent Company to the Petitioner Company:
The petitioner company, registered under the Companies Act and based in Bangalore, filed a petition seeking the winding up of the respondent company, M/s Netlink Software Group Private Limited, which is also incorporated under the Companies Act and based in Bhopal. The petitioner claimed that the respondent company owed them Rs. 61,85,951.90, comprising principal and interest, as per an agreement dated 7.4.2009. The agreement was for identifying potential opportunities for the respondent's services to designated customers, particularly in Thailand.

2. Statutory Notice Under Section 433 of the Companies Act, 1956:
The petitioner company alleged that the respondent failed to pay the third installment of 60% and the balance 40% as agreed upon, leading to the issuance of a statutory notice under Section 433(1)(a) of the Companies Act. Despite the notice, the respondent company neglected to clear the debt, prompting the petitioner to seek winding up proceedings.

3. Dispute Over the Debt and Breach of Agreement:
The respondent company disputed the debt, claiming that the petitioner made false representations about its business and breached the agreement. The respondent raised various objections and denied liability to pay the debt, leading to a bona fide dispute over the claim. The court meticulously scrutinized the claim and the respondent's reply, noting serious disputed questions of fact and justifiable reasons for denying the payment.

4. Legal Principles for Winding Up a Company:
The court referred to several legal principles and precedents, including:
- Amalgamated Commercial Traders Private Limited Vs. A.C.K. Krishnaswami: A winding up petition is not a legitimate means of enforcing payment of a bona fide disputed debt.
- Madhusudan Gordhandas and Company Vs. Madhu Woollen Industries Private Limited: If the debt is bona fide disputed and the defense is substantial, the court will not wind up the company.
- Cotton Corporation of India Limited Vs. United Industrial Bank Limited: The statutory rules provide safeguards against initiating winding up proceedings without sufficient material.
- Pradeshiya Industrial and Investment Corporation of UP Vs. North India Petro Chemical Limited: A winding up petition should not be used to pressurize or coerce payment of a disputed debt.

5. Discretionary Power of the Court in Winding Up Proceedings:
The court emphasized that the power to initiate winding up under Section 433(e) of the Companies Act is discretionary. It must be proved that:
- There is a debt.
- The respondent company is unable to pay the debt.
Even if these conditions are met, the court must be satisfied that the company is commercially insolvent and unable to meet its liabilities. In this case, the petitioner failed to provide material evidence of the respondent's financial insolvency. The court noted that the respondent had raised a bona fide dispute and provided a detailed defense against the statutory notice.

Conclusion:
The court concluded that the petitioner company did not establish a sufficient ground for winding up the respondent company. The petition was dismissed, with the court advising the petitioner to seek remedy through common law procedures rather than resorting to winding up proceedings under Section 434 of the Companies Act. The court exercised its discretion to dismiss the petition at the pre-admission stage, finding no prima facie case for winding up.