2014 (2) TMI 924 - HC - Companies Law

Winding up of company - Inability to pay debts - Respondent has failed and neglected to pay the invoices raised by the petitioner for the goods supplied by the petitioner to the respondent - Held that - in the present case there was no corresponding credit note issued by the petitioner and therefore the debit note which has been issued by the respondent could not be stated to have been accepted. It is common accounting knowledge that a debit note only represents a debit entry made by a party in the account of another party maintained in its books of account. In other words a party who decides to debit an account of another party would issue a debit note to enable the other party to pass a corresponding entry in its books. Similarly a credit note is issued if the account of the other party is credited. Both credit notes and debit notes are primary vouchers representing entries in the books of accounts. A unilateral issue of debit note would, obviously, not by itself extinguish a debt. However, a debit note would indicate that the party issuing the debit note has debited the account of the other party in its books. The debit note issued in the present case represents a claim that had been made by the respondent on account of alleged defective goods. It is not disputed that it is a contemporaneous document, which had been issued much prior to the filing of the present petition or the issuance of notice under Section 433(1)(a) - Decided against Petitioner.

Summary

Issues Involved:
Petition under Section 433 (e) of the Companies Act, 1956 alleging inability to pay debts, dispute over invoices for goods supplied, claim of due amount, dispute over quality of goods supplied, settlement of claim by customer, issuance of notice under Section 434 (1) (a), contention of disputed debt, reliance on legal precedents, difference between credit note and debit note, consideration of real dispute, dismissal of petition.

Analysis:

1. The petitioner filed a petition under Section 433 (e) of the Companies Act, 1956, alleging that the respondent company failed to pay invoices for goods supplied, claiming a due amount of Rs. 5,60,562. The respondent disputed the amount, citing defective dyes supplied by the petitioner which led to a settlement of Rs. 6,00,000 with a customer due to color loss in dyed yarn. The respondent debited the petitioner's account for this settlement amount.

2. The petitioner acknowledged a quality dispute but claimed to have addressed it, disputing the defective goods allegation. The respondent raised the dispute before the petitioner's notice under Section 434(1)(a), providing documents showing the settlement with the customer, indicating a pre-existing dispute over the debt claimed.

3. The court noted that the debt claimed was disputed, emphasizing that winding-up proceedings are for unpaid admitted debts, not for resolving contentious issues. The petitioner argued that a mere debit note does not dispute a debt, citing a legal precedent where a debit note was deemed insufficient to dispute a debt due to acknowledgment and absence of a real dispute, unlike the present case.

4. The petitioner also highlighted the absence of a corresponding credit note, challenging the acceptance of the debit note issued by the respondent. The court clarified the accounting significance of debit notes and credit notes, stating that a unilateral debit note does not extinguish a debt, but signifies a claim made by the issuing party.

5. The court concluded that the dispute raised by the respondent was real, not illusory, dismissing the petition due to the existence of a genuine dispute over the debt claimed. The petitioner was granted liberty to pursue appropriate legal proceedings for adjudication and recovery of the disputed amounts.

In summary, the court dismissed the petition under Section 433 of the Companies Act, emphasizing the existence of a genuine dispute over the claimed debt, which could not be resolved through winding-up proceedings. The judgment underscored the importance of distinguishing between disputed and admitted debts, highlighting the need for proper legal recourse to address contentious issues in such cases.