2013 (3) TMI 529 - HC - Companies Law

Winding up petition - Petitioner is a company incorporated in People s Republic of China seeking the winding up of the Respondent, Shilpi Cable Technologies Ltd. - Respondent purchase cables and accessories from the Petitioner - whether there is any admission of liability by the Respondent and if there is no such admission, whether the denial by the Respondent of its liability constitutes a sham defence? - Held that - For seeking the winding up of the Respondent company there must be an undisputed debt and that the Respondent company is unable to pay the debt. Section 434 of the Act gives instances where the company is deemed to be unable to pay its debts. Even if it is proved to the satisfaction of the Court that the Respondent company is unable to pay its debts, the Petitioner would also have to show that the company neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the Petitioner. It has time and again been emphasized by the Supreme Court that the machinery of winding up should not be utilized for recovery of money. See Pradeshiya Industrial & Investment Corporation of U.P. v. North India Petrochemicals Ltd. (1994 (2) TMI 267 - SUPREME COURT OF INDIA) . The mere refusal to pay debts should not be understood as inability of the Respondent to pay its debts. In the present case, there were undoubtedly three separate contracts entered into between the parties, i.e. supply of cables, supply of accessories like Jumpers, Connectors and Surge Arrestors. Both the parties have been dealing with each other for over seven years. The Petitioner itself being the manufacturer of cables and accessories knew that for the purpose of the business of the Respondent the mere supply of cables without the accessories could not be sufficient. The Respondent was in turn supplying cables and accessories to the telecom service providers including Tata Tele Services Limited ( TTL ). The mere supply of cables to TTL would not have constituted a complete delivery of goods. The peak period in the telecom industry for the supply of cables was the first three months of the year. Therefore, the failure on the part of the Petitioner to supply the accessories would adversely affect the corresponding obligations of the Respondent to its customers. For some reason the Petitioner has in its narration of facts not referred to two emails, the first dated 26th March 2009 whereby the Respondent asked for reasons why it had not received Jumpers, Surge Arrestors and Connectors by that date. The second was the email dated 3rd April 2009 again adverting to the above issue. This explains the emails dated 9th May 2009 and 22nd May 2009 by which the Respondent asked the Petitioner to stop despatching further cables. It is apparent that there were disputes between the parties on whether the supplies by the Petitioner were complete and whether the Respondent was justified in not accepting delivery of the consignments. It is difficult, in the circumstances, and at this stage, to conclude that the defence of the Respondent is a sham one. In the present case the seller had itself imposed the conditions of opening of L/C. The B/L for the five shipments was made to the order of IOB which was no longer a banker of the Respondent. This was a CIF contract and as explained by the Supreme Court in Phulchand Exports Limited v. O.O.O. Patriot 2013 (3) TMI 493 - SUPREME COURT one of the requirements was that the shipping documents had to accompany the despatch of the consignments. These include the invoices, B/L and the policy of insurance. With the documents accompanying the consignments not in order, they had to necessarily be amended as requested by the Respondent to facilitate the payment even on DP basis. For some reason this was not facilitated by the Petitioner. The contention of the Respondent that the above facts do not reflect any deliberate failure to make payment cannot in the circumstances be rejected as a sham defence. For the purposes of Sections 55 and 56 SGA, the Petitioner would have to show that the neglect or refusal by the Respondent to pay for the goods was wrongful. This would require the examination of evidence to find out whether the buyer was justified in refusing to pay for the goods. The minutes of meeting dated 20th August 2009 of the Petitioner and the Respondent discussing about defective quality. Subsequently on 24th May 2010 the Respondent raised the issue of defective quality of the cables and attached photographs of the damaged lengths of the cables with nail marks. Thus, it appears that it was not the first time that this objection was raised. Yet, the complete picture will become clear only when the evidence that may be adduced by both parties is examined in detail in the civil suit stated to be pending. It is not possible for this Court to conclude at this stage that the refusal by the Respondent to make payment for the goods was deliberate or wrong. While the pendency of a suit will not per se preclude the exercise of the winding up jurisdiction of the Company Court, on the facts of the present case, the Court is not persuaded to hold that the Respondent is unable to pay its debts and is, therefore, required to be wound up under Sections 433(e) and 434 of the Act. Consequently, the petition is dismissed with costs of Rs. 20,000 which will be paid by the Petitioner to the Respondent within four weeks from today.

Summary

Issues Involved:
1. Admission of liability by the Respondent.
2. Incomplete documentation.
3. Defects in quality.

Issue-wise Detailed Analysis:

1. Admission of liability by the Respondent:
The Court first examined whether there was any admission of liability by the Respondent and if the denial of liability constituted a sham defense. It emphasized that for Section 433(e) of the Companies Act, 1956, the Petitioner must demonstrate an undisputed debt and the Respondent's inability to pay. The Court noted that there were three separate contracts between the parties for the supply of cables and accessories. The Petitioner, being a manufacturer, knew that the supply of cables alone was insufficient for the Respondent's business. The Court found that there were disputes over whether the supplies were complete and whether the Respondent was justified in not accepting delivery. Therefore, the Court could not conclude that the Respondent's defense was a sham.

2. Incomplete documentation:
The second issue concerned the documents accompanying the shipment. The Court noted that the B/L was made to the order of IOB, which was no longer the Respondent's banker. The Respondent had requested amendments to the B/L to facilitate payment, which the Petitioner did not manage to do. The Court referenced Section 25 of the Sale of Goods Act, 1930, which states that property in goods does not pass to the buyer until the seller's conditions are fulfilled. The Court found that the documents accompanying the consignments were not in order, and the Petitioner did not facilitate the necessary amendments. Thus, the Respondent's contention that there was no deliberate failure to make payment was not rejected as a sham defense.

3. Defects in quality:
The third issue was the alleged defects in the quality of goods supplied. The Court noted that under Section 55 of the Sale of Goods Act, the seller may sue the buyer for the price of goods if the property in the goods has passed to the buyer and the buyer has wrongfully neglected or refused to pay. The Court found that the five shipments were never delivered to the Respondent and were sold off by the port authorities. The Court also referenced the minutes of a meeting and subsequent correspondence indicating that the Respondent had raised issues about the quality of the goods. The Court concluded that it was not possible to determine at this stage whether the Respondent's refusal to pay was deliberate or wrongful.

Conclusion:
The Court concluded that the Respondent was not unable to pay its debts and should not be wound up under Sections 433(e) and 434 of the Companies Act. The petition was dismissed with costs of Rs. 20,000 to be paid by the Petitioner to the Respondent within four weeks. The decision was limited to the context of the winding-up petition and did not prejudice the parties' contentions in the pending suit.