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TMI Blog1998 (10) TMI 440X X X X Extracts X X X X X X X X Extracts X X X X ..... questions of fact and questions of law and the Court would have there after proceeded to deal with the same. However, Mr. A.S. Vakil for the respondent-company has raised an important question of law which arises in a number of company petitions and, therefore, the Court has thought if fit to set out the legal perspective with which the Court proposes to examine the questions of fact arising in the present case. Statutory provisions 3. For winding up petitions on the ground that the company has not paid its debt to the petitioner creditor, the following statutory provisions are relevent: "433. Circumstances in which company may be wound up by Court- (a) to (d )****** (e)if the company is unable to pay its debts;" "434. Company when deemed unable to pay its debts.- (1) A company shall be deemed to be unable to pay its debts- (a)if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or other wise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks there aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay the debt but the company chooses not to pay that particular debt. Where, however, there is no doubt that the company owes the creditor a debt entitling him to a winding up order but the exact amount of the debt is disputed the court will make a winding up order without requiring the creditor to quantify the debt precisely. The principles on which the court acts are first that the defence of the company is in good faith and one of substance, secondly, the defence is likely to succeed in point of law, and, thirdly, the company adduces prime facie proof of the facts on which the defence depends. Another rule which the court follows is that if there is opposition to the making of the winding up order by the creditors the court will consider their wishes and may decline to make the winding up order. Under section 337 of the Companies Act, 1956, in all matters relating to the winding up of the company the court may ascertain the wishes of the creditors. The wishes of the shareholders are also considered, though, perhaps, the court may attach greatest weight to the views of the creditors... ****** The wishes of the creditors will however be tested by the court on the grounds as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to admit and advertise the petition and the inquiry into the company's commercial insolvency is to be undertaken only after admitting and advertising the petition. Mr. Soparkar has relied on the following authorities : Hrinagar Sugar Mills Co. Ltd. v. M.W. Paradhan, Court Receiver AIR 1966 SC 1707, Madhusudan Gordhandas & Co. 's case (supra), T.P. Shau&Sons (P.) Ltd, In re [1982] 52 Comp. Cas. 182 (Cal.), Reechem (P.) Ltd. In re [1985] 57 Comp. Cas. 200 (AP), Unisystems (P.) Ltd. v. Stepan Chemical Ltd. [1986] 60 Comp. Cas. 753 (Punj. & Har.), Joti Prasad Bala Prasad v. ACT. Developers (P.) Ltd. [1990] 68 Comp. Cas. 601 (Delhi), Airwings (P.) Ltd. v. Viktoria Air Cargo Gmbh Langer Kornweg AIR 1995 Kar. 69, Straw Board Mfg. Co. Ltd. v. Mahalakshmi Sugar Mills Co. Ltd. [1991] 71 Comp. Cas. 544 (Punj. & Har.) and 83 Comp. Cas. 703. Broad Principles 8. Having heard the learned counsel for the parties and having considered the various authorities, it appears to the Court that the following principles emerge from an analysis of the decided cases where the company asserts that it has the ability to pay its debts, but disputes the particular debts of the petitioner: I.Summary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the pleas and the circumstances which will be peculiar to each case will have to be considered. IV.Court's findings on bona fides of company's defence and orders which may be passed upon such findings (1 )After considering the material on record, if the Court comes to the conclusion that the defence raised by the company is not only not bona fide, but the defence is reeking with mala fides or the company's conduct leading to the dispute (in respect of which the company's defence is found to be not bona fide) was dishonest, the Court would admit the petition and pass an order for advertisement. (2)Where the Court comes to the conclusion that the defence is not bona fide (as distinguished from the conclusion that the defence is mala fide), the Court may give the company an1 opportunity to pay the debt to the petitioner within the stipulated time limit. If the debt is not paid, the Court would ordinarily admit the petition, unless a strong case is made out for not admitting the petition. The Court may, in its discretion, even pass a conditional order of admission without an order for advertisement while giving the finding that the company's defence is not bona fide. (3 )Where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y court may hold prior to admission and advertisement of the company petition by hearing the petitioner and the respondent company on notice stage the court is called upon to satisfy itself that it is a case for admission and advertisement and nothing more. For arriving at that conclusion the court necessarily will have to be prima facie find out whether any fixed amount of debt or ascertained amount of debt is due by the Company to the petitioning creditor, whether the debt is within limitation and whether the defence put forward by company for not paying the debt to the petitioning creditor is a valid one or is a mere moonshine and also to find out whether the company appears to be commercially insolvent. Meaning thereby, it is unable to pay all its debts and not necessarily debts of petitioning creditor alone." (p.85) 10. On the other hand, Mr. Soparkar for the petitioning creditor has submitted that once the Court comes to the conclusion that the dispute raised by the company is not bona fide, the Court is required to admit the petition and advertise the same and the question whether the company is commercially insolvent or otherwise is a matter to be decided at the final hear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as hereinafter. 13. What consequences should follow if the company's defence is found to be not bona fide. 14. If the court comes to the conclusion that the defence raised by the company is not bona fide (as distinguished from a mala fide defence) it may be unfair to the company to straightaway pass an order of admission and advertisement of winding up petition without giving the company an opportunity to pay up its debt to the petitioning creditor. The Court can take judicial notice of the tendency which has grown over the last many years, if not decades, that debtors consider it profitable to raise even untenable defenses in civil suits as well as in winding up petitions. They are familiar with the proverbial delays in disposal of civil cases and, therefore, it would be advantageous to the debtors to raise defences which may ultimately be turned down but they would be buying long time before the long drawn out process of adjudication of the creditors' claim and the process of execution of decree can bear fruits. The defence raised by the company in a winding up petition (which is found to be not bona fide even at the admission stage) might, therefore, have been pleaded on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is a form of equitable execution. Properiety does not affect the power but only its exercise." 17. The provisions of the Companies Act, 1956 were modelled on the basis of the provisions of the Companies Act, 1948 in England. In his Principles of Modern Company Law 5th edn., Prof. Gower has made the following pertinent observations: "Company legislation has two main functions : (i) enabling and (ii) regulatory. The enabling function empowers people to do what they could not otherwise achieve - namely to create a body with a distinct corporate personality. The regulatory function prescribes the conditions which have to be complied with to obtain incorporation and the rules that thereafter have to be observed to protect members, creditors and the public against the dangers inherent in such a body. In respect of neither function, and particularly the second, is the company Act, 1985, despite its vast size, complete codification of English company Law. It is merely a consolidation of statutory provisions in the former principle Act of 1948 and in four subsequent major companies Acts and other legislation. Behind it is a residual body of law and equity where some of the fundamental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny (PIICUP), a Government undertaking, was a substantial one and not mere moon- shine and that the sum claimed was the subject-matter of arbitration which was pending adjudication. PIICUP as a financial institution had merely agreed to subscribe to shares of a particular amount in a public issue and, therefore, the PIICUP had a substantial defence that such promoters' agreement did not create a debt and that even if it was a debt, in the facts and circumstances of the case, PIICUP cannot be said to have either neglected or failed to pay the same. There was, therefore, a substantial bona fide dispute whether there was a debt for a determinate or a definite sum of money. The Supreme Court accepted the contention of the learned Solicitor General that no winding up petition can be admitted unless the Court comes to the conclusion that the defence put up is moonshine. It may not be out of place to state here that the learned counsel for the company was not in a position to cite a single authority laying down that even if the court finds that the company's defence is not bona fide, the Court must dismiss the petition at the admission stage if the company can show that it is commercially ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny and opposing the prayer for winding up and, therefore, this court dismissed the petition. As already indicated earlier, the present discussion is confined to only that category of winding up petitions where the company asserts that it is able to pay its debts, but disputes the particular debt of the petitioner. Karnataka decision in Airwings (P.) Ltd. 23. As regards the decision of the Division Bench of the Karnataka High Court in Airwings (P.) Ltd.'s case (supra) relied on by Mr. Vakil, the following conclusion indicates that the court may be justified in admitting a winding up petition even without considering the question about the company's commercial insolvency at the admission stage : "Even in case of a company which is a going concern, if the court finds after hearing the petitioning creditor and the evidence led by it that there is an ascertained amount of debt which is due by the company to the petitioning creditor and such a debt is not time barred and that presumption arises under section 434(1)(d) or (b) that the company is unable to pay its debts, then in such case, the court may admit the petition ex parte without issuing notice to the company. However, as a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntem-plated under section 434(1)(c)." (p. 87) 25. The emphasis on the expression 'or' in section 434(1) quoted hereinabove and also in the above quoted para 23 in the Karnataka High Court judgment in Airwings (P.) Ltd. case (supra) is to show that once the petitioning creditor is able to persuade the Court to raise the deeming fiction under section 434(1)(a) or 434(1)(b) conclusively (and not merely tentatively) at the admission stage itself, it is not necessary for the Court to examine at the admission stage the question of the company's insolven- cy under section 434(1)(c). Really speaking, once the Court conclusively finds at the admission stage itself that the presumption under section 434(1)(a) or 434(1)(b) applies, what the Court would then consider at the final hearing stage would be, inter alia, wishes of the creditors under section 337 of the Act (as explained in the case of Madhusudan Gordhandas & Co. ( supra) and in the process the Court would examine the various aspects including the question whether the company's assets are suffi- cient to meet all its liabilities - actual and contingent. It is, therefore, only where the Court gives prima facie findings on the above f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invested the time and energy for deciding whether the company's defence is bona fide or not would only be unnecessarily adding to the burden on the over burdened civil court without any corresponding advantage, since the material to be considered in the two different proceedings is normally the same (affidavits and documents) and the test to be applied in the winding up proceedings and at the hearing of summons for judgment in a summary suit is held to be the same - [Divya Export Enterprises' case ( supra) hence, this court sees no reason not to exercise the discretionary equitable jurisdiction which inheres in this court as indicated in Prof. Grover's Principles of Modern Company Law (para 13.2) hereinabove]. This would certainly help in eliminating one round of litigation in the Civil Suit just as the Company Court's tentative finding that the company's defence is a bona fide one would also eliminate for all practical purposes the stage of summons for judgment in a summary suit and make it a long cause suit. 29. One contention of Mr. Vakil is required to be considered at this stage. Mr. Vakil has relied on the two decisions of this Court in 1992 GLH(UJ) 7 and 1985 GLH (UJ)2 for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al (as distinguished from mala fide) Factual controversy 34. In light of the aforesaid legal perspective, the Court now proceeds to deal with the controversy between the parties as to whether the respon- dent-company's defence to the petitioning creditor's claim for a sum of Rs. 16,27,422.15 ps. is bona fide or not. Before giving a finding on this question, the principle is required to be borne in mind that where there is no doubt that the company owes the creditor a debt entitling him to a winding up order, but the exact amount of the debt is disputed the Court can make a winding up order without requiring the creditor to quantify the debt precisely. Hence, even if the company has a bona fide dispute about the interest claimed by the petitioner or the rate of interest or a part of the petitioner's claim, the Court can proceed to examine whether the company's defence to a substantial portion of the petitioner's claim is bona fide or not. In the instant case, there is admittedly no dispute on the score of limitation. 35. The facts giving rise to the present petition, as averred by the petitioner in the petition and subsequent affidavits, are as under :- 35.1 Pursuant to the purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, served notice dated 2-12-1996 (Annexure 'E') upon the respondent under section 138 of the Negotiable Instruments Act, 1881 ('the NI Act'). In reply to the said notice, the respondent served its reply dated 9-12-1996 (Annexure 'F') alleging that since the petitioner had failed to settle certain disputes as to the quality, delivery schedule and the price, the respondent had requested the petitioner not to deposit the said cheques and that the respondent was, therefore, not responsible for non-payment of the said cheques. The petitioner thereupon sent its rejoinder dated 27-12-1996 (Annexure 'G') refuting the allegations made by the respondent in the aforesaid letter dated 9-12-1996 which were reiterated by the respondent in its letter dated 4-1-1997 (Annexure 'H'). 35.4 The respondent had been irregular in making payment of the dues. As on 1-4-1996 the dues were to the tune of Rs. 30 lakhs. The respondent made certain payments to the petitioner in April and May, 1996. The covering letter dated 17-5-1996 (Annexure 'A' to the affidavit) along with three cheques issued by the respondent did not refer to any dispute. On 11-6-1996 the petitioner sent a fax message to the respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner. 35.7 When the petitioner insisted for payment, the respondent had agreed that it had to recover a sum of Rs. 3,50,000 from one Sun Star Chemicals to which the petitioner was liable to pay Rs. 3,50,000. On 2-1-1997 the respondent addressed a fax message (Annexure 'F' to the affidavit) to the petitioner authorizing the petitioner to debit the account of Sun Star Chemicals against the amount was not payable by the respondent. If, as on that date, amount was not payable by the respondent, question of any such authorization would not have arisen. On 20-2-1997, when the representative of the petitioner approached the respondent for recovery of the amount, the respondent had given statement of accounts (though unsigned) of the petitioner as appearing in its books of account where even after taking credit for Rs. 3,50,000 being adjustment against Sun Star Chemicals, the respondent was shown to be owing to the petitioner a sum of Rs. 12,89,608. 35.8 In view of the above, the petitioner served notice dated 14-2-1997 (Annexure "I") on the respondent-company calling upon the respondent to pay the sum of Rs. 16,27,428.15 together with further interest thereon at 24% p.a. Although the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition. 38. On behalf of the petitioner, its Secretary A.K. Rai has filed affidavit in rejoinder dated 6-4-1998 and additional affidavit dated 17-7-1998 denying the allegations made in the reply affidavit about the alleged disputes as to delivery schedule, quantity and quality of the goods supplied. No negoti-ations were ever held by the respondent-company with the petitioner as regards any failure on the part of the petitioner as to delivery schedule, quality or quantity. All the invoices were issued at the same rate and the respondent had also made payments of two invoices (Nos. 582 and 583 dated 3-8-1996) at the same rate. It is asserted that the respondent had issued post-dated cheques mala fide. It is also denied that there was any dispute as regards quantity, quality or time schedule and that the said alleged dispute is nothing but an afterthought. 39. It is further submitted that the sale under the three invoices (Nos. 517, 647 and 642) was already made in the month of July and August, 1996 and, therefore, there was no question of the petitioner being satisfied about the respondent's capacity to make payment because the advance cheques given earlier were not deposited by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment of Rs. 3,50,000 towards the alleged dues. According to the petitioner in the additional affidavit dated 17-7-1998, the amount due to the petitioner is Rs. 12,89,608. This itself shows that the defences raised by the respondent are bona fide and that the disputes raised by the respondent are genuine and this Court would not exercise its discre-tionary power under the provisions of the Companies Act, in favour of the petitioner. (iv)The petitioner and the respondent had business transactions as under:- Year Total purchases Rs. in lakhs 1993-94 30.72 1994-95 104.37 1995-96 102.90 1996-97 47.14 Except the disputed amounts which are subject-matter of the present petition, other amounts have been paid by the respondent to the petitioner. Hence, this Court, may not exercise its discretionary power to wind up the respondent-company and the petition may be dismissed. Findings on factual controversy 41. Having heard the learned counsel for the parties, for the reasons recorded hereunder, it is clear that the defence raised by the respondent-company about the delay in delivery and about quantity, quality and price of the material supplied by the petitioner is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand insisting for supply of the goods and was also requesting the petitioner to reduce the price. Letters and fax messages are produced on record by the petitioner in support of the aforesaid aver- ments and the respondent-company has not only not disputed the said documents but has admitted that it was on account of the market situation that the respondent-company was requesting the petitioner to reduce the prices. Hence, there is no substance in the complaint regarding price also. 46. The averment made on behalf of the petitioner-company in the affidavit dated 13-7-1996 that a meeting took place between the petition-er's General Manager (Finance) and the Executive Director of the respon-dent-company wherein the respondent requested the petitioner to contin- ue to supply the goods and the petitioner was showing its unwillingness to supply the goods unless the respondent cleared an amount of Rs. 16,40,000 which was then overdue - is not denied in the affidavit dated 28-7-1998 filed on behalf of the respondent-company, but it is merely stated that the minutes of the meeting dated 13-7-1996 were not signed and that it would be a matter of evidence. 47. Even the statement made on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, if, within one month from today, the respondent-company gives the petitioner an original letter from Sunstar Chemicals agreeing to the petitioner adjusting the sum of Rs. 3,50,000 payable by the petitioner to Sunstar Chemicals against the amount payable by the respondent company to the petitioner, the respondent-company shall pay the petitioner a sum of Rs. 12,89,608 instead of the aforesaid sum of Rs. 16,27,422.15. 49A. It is clarified that the payment of the amount by the respondent-company to the petitioner as aforesaid shall not come in the way of the petitioner enforcing its claim for interest on the aforesaid amount in appropriate proceedings. In case the respondent-company fails to pay the petitioner the aforesaid sum by 30-11 -1998, the matter shall be placed before the Court for passing appropriate orders regarding admission of the petition and for advertise-ment of the notice of the petition. Hence, S.O. 3-12-1998. 50. At this stage, Mr. Vakil, learned counsel for the respondent Company prays for stay of operation of this order in order to enable the respondent Company to have further recourse in accordance with law. In view of the fact that the Court has al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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