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TMI Blog2009 (12) TMI 524X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under section 450 of the Companies Act, 1956 praying for the appointment of a provisional liquidator in the matter. The petitioner s claim is based on certain invoices issued in respect of contracts stated to have been entered into with the respondent company. 2. The petitioner is a company incorporated under the laws of the United Kingdom, having its registered office at Sirius House, Delta Crescent, Westbrook, Warrington, WAS 7NS, UK. It is engaged in the business of recycling metal-rich waste streams arising from end-of-life vehicles/consumer products, industry and construction/demolition, resulting in sales of recycled commodities. 3. The respondent M/s. Blue Engineering Ltd., having its registered office at 46, Shardanand Marg, Delhi - 110 046, is a company that was incorporated under the Companies Act, 1956 on or around 3-1-2007. 4. According to the petitioner, various Cost and Freight contracts were entered into by it with the respondent company for the sale and purchase of non-ferrous scrap. Details of the-relevant invoices are given below: Sl. No. Invoice No., stated to be evidence of debt Amount supplied (MT) Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19. 26063/02 18.7 1850 34,595 1000 18,700 15,895 20. 26063/03 20.92 1850 38,702 1000 20,920 17,782 In addition to the above contracts, there was also a Contract No. 75522, having an initial purchase price of USD 129,044.85, which was then resold for USD 65,000 to the new buyer/third party, leading to a price differential of USD 64,044.85. 5. Thus, the petitioner s total claim against the respondent company for the contracted goods amounts to USD 477,606.35, as is reflected from the invoices annexed to the petition. All the invoices and Bills of Lading are in the name of the respondent company herein. 6. The petitioner avers that it purchased the contracted goods for the respondent and shipped them to India, and that on arrival of the contracted goods in India, the respondent failed to take possession and make payments for the same. It is further averred that because of the respondent s failure to take delivery of the goods, the petitioner issued a legal notice dated 26-12-2008 to the respondent company, calling upon them to confirm their intention to make payment for the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has been no appearance on behalf of the respondent. 11. The petitioner has also relied on various communications that were exchanged between the petitioner and the respondent-company, with regard to the contracts in question. It is further submitted that there is no bona fide dispute with regard to the liability of the respondent company to pay the amount due to the petitioner, and the respondent s non-payment of such amount due leaves an unequivocal statutory presumption that the respondent company is commercially insolvent and is unable to repay its debt to the petitioner. Hence, the petitioner contends that the Respondent company is liable to be wound up by this Court under the provisions of section 433( e ) and section 434 of the Companies Act, 1956. 12. What remains to be seen, thus, is whether the petitioner has made out a prima facie case that the respondent is unable to pay its debts. The issue that arises is, what is the nature of the amount that is claimed to be an unpaid debt ? Is it the balance principal amount due on a contract, i.e., the balance consideration that was payable towards the sale of goods under the contract as undertaken by the respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be taken in the commercial sense and that the machinery for winding up will not be allowed to be utilized merely as a means for realising debts due from a company...." (p. 49) 15. The court in the Mediquip Systems (P.) Ltd. s ( supra ) also referred to a decision of the Madras High Court in Tube Investments of India Ltd. v. Rim Accessories (P.) Ltd. [1990] 3 Comp. LJ 322 , where the following principles relating to bona fide dispute had been evolved: "(1) If there is a dispute as regards the payment of the sum towards principal, however small that sum may be, a petition for winding up is not maintainable and the necessary forum for determination of such a dispute existing between the parties is the Civil Court; (2) The existence of a dispute with regard to payment of interest cannot at all be construed as existence of a bona fide dispute relegating the parties to decide such a dispute before the Civil Court and in such an eventuality, the Company Court itself is competent to decide such a dispute in the winding up proceedings; and (3) If there is no bona fide dispute with regard to the sum payable towards the principal, it is open to the creditor to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court of California in People v. Arguello [1869] 37 Calif. 524 which was approved by this Court in Kesoram Industries v. CWT [1966] 59 ITR 767 (SC) clearly brings out the essential characteristics of a debt: Standing alone, the word debt is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is debt due. This passage indicates that when there is an obligation to pay a sum of money at a future date, it is a debt owing but when the obligation is to pay a sum of money in praesenti, it is a debt due. A sum due would, therefore, mean a sum for which there is an existing obligation to pay in praesenti or in other words, which is presently payable...." (p. 1271) 19. It was further held, in paragraph 9 of the Raman Iron Foundry s case ( supra ), that "...the law is well-settled that a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority. When there is a breach of con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s wrong and these steps are successful, the defendant is entitled to the benefit accruing from the plaintiff s action and is liable only for the loss as lessened; this is so even although the plaintiff would not have been debarred under the first rule from recovering the whole loss, which would have accrued in the absence of his successful mitigating steps, by reason of these steps not being the ones which were required of him under the first rule. Put shortly, the plaintiff cannot recover for avoided loss." 21. Two principles with regard to compensation for loss of damage caused by breach of contract, as envisaged by section 73 of the Indian Contract Act, 1872 have been explained by the Supreme Court in Murlidhar Chiranjilal v. Harishchandra Dwarkadas AIR 1962 SC 366, as follows : "( i )As far as possible he who has proved a breach of bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed, but ( ii )that there is a duty on him of taking all reasonable steps to mitigate the loss consequent on the breach and debars him from claiming any part of the damage which is due to his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the open market. The onus of proving that this was the best price available would be on the petitioner, to be discharged in a Civil Court. Referring to McGregor on Damages, 17 Edition, 2003, (para 212 in the 13th Edition) the Bombay High Court in Maharashtra State Electricity Distribution v. DSL Enterprises Pvt. Ltd. 2009 (111) Bom. LR 1246, has held that the onus of proof of mitigation is on the defendant, and that "if he fails to show that the claimant ought reasonably to have taken certain mitigating steps, then the normal measure will apply." 25. The other question that arises but is not answered in this petition is as follows : "( a )If the Sale of Goods Act, 1940 applies to the contracts in question, whether the petitioner/seller had a statutory right to resell at all, in view of not having given a notice of resale to the respondent/buyer, which is statutorily required by section 54(2) of the Sale of Goods Act, 1940 in order to claim the difference between the purchase price and the price at which the goods were resold ?" 26. The petition and its annexures do not indicate the terms of the contracts, or the intention of the parties, to the effect that the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of the principal amount and to come to a conclusion whether or not there was any real and substantial dispute with regard to the said claim. If there was a genuine and bona fide dispute, then certainly it was within his discretion and jurisdiction to dismiss the petition and regulate the petitioner to claim the amount by regular suit." 31. In the present petition, the respondent has not challenged the petitioner s claims so far. The amount claimed by the petitioner may be disputed, and thus does not amount to a debt for the purposes of winding up proceedings, as the term has been interpreted by the Supreme Court and various High Courts. The petition and the application are not maintainable in this Court at this stage and are, therefore, dismissed, without prejudice to the right of the petitioner to recover the amount it claims as due in a civil court. ANNEXURE HIGH COURT OF DELHI European Metal Recycling Ltd. Versus Blue Engg. (P.) Ltd. SUDERSHAN KUMAR MISRA, J. COMPANY PETITION NO. 153 OF 2009 AND COMPANY APPLICATION NO. 466 OF 2009 DECEMBER 22, 2009 Rajiv Nayyar, Ms. Smarika Singh and Ms. Binsy Susan for the Applicant. 1. This is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shipped them to India, and that on arrival of the contracted goods in India, the respondent failed to take possession and make payments for the same. It is further averred that, because of the respondent s failure to take delivery of the goods, the petitioner issued a legal notice dated 26-12-2008 to the respondent company, informing them that the petitioner had taken delivery of the goods and was storing them at a warehouse close to the port in order to avoid paying port detention fines. The said notice also called upon the respondent to confirm their intention to make payment for the contracted goods within 7 days of receipt of the legal notice, for a total amount of USD 1,171,000. It may be noted here that this notice dated 26-12-2008 was addressed to the respondent, and referred to a total of 7 contracts in support of its claim, out of which only two contracts, namely, Contract No. 25442 and Contract No. 25716, were entered into with the respondent company, and the remaining 5 contracts mentioned in this notice addressed to the respondent were entered into between the petitioner and another company, namely, Blue Engineering (P.) Ltd. 6. On receiving no reply to the notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 433 and section 434 of the Companies Act, 1956. 11. What remains to be seen, thus, is whether the petitioner has made out a prima facie case that the respondent is unable to pay its debts. The issue that arises is, what is the nature of the amount that is claimed to be an unpaid debt ? Is it the balance principal amount due on a contract, i.e., the balance consideration that was payable towards the sale of goods under the contract as undertaken by the respondent, or is it a measure of damages payable to a party on account of breach by the other party? If it is the latter, then the liability to pay can only arise once there is a judicial determination of the quantum. The only instances in which the Company Court would exercise jurisdiction are where damages can be said to be quantified without need for a trial. For example, where the contract itself provides for liquidated damages or the party in breach has admitted his liability to pay the damages. 12. On an evaluation of Annexure "N", wherein the petitioner has submitted a tabulated form of the details of the abovementioned contracts entered into between the petitioner and the respondent company, there are as m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only invoice in the name of the respondent Blue Precision Ltd. i.e., No. 25716/03 is for an amount of USD 38, 479.50, which was resold to the new buyer for an amount of USD 19,692.45, resulting in a price differential of USD 18,787.05. This leads to a prima facie conclusion that the amount payable by the respondent company, i.e., M/s. Blue Precision (P.) Ltd., is USD 18,787.05, as against the amount of USD 140,324.85 claimed by the petitioner. 15. Since there has also been no appearance on behalf of the respondent, the petitioner s averments remain unrebutted. The respondent s failure to respond to the statutory notice of winding up sent on 12-3-2009 does not mean that winding up orders must invariably be passed, as this Court has held in Resham Singh Co. (P.) Ltd. v. Daewoo Motors India Ltd. [2003] 116 Comp. Cas. 529 (Delhi), that "where no response had been made to the statutory notice the Respondent Company runs the risk of a winding up petition being admitted for hearing at the threshold stage itself." It has further been held, in the same case, that "Normally, the Company Judge considers it prudent in the first instance to issue notice to the respondent so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l suit as well as filing of a petition for winding up of the company." 18. These principles have been reiterated in Vijay Industries v. NATL Technologies Limited [2009] 3 SCC 527. In the landmark decision of Madhu Sudan Gordhandas Co. v. Madhu Woollen Industries (P.) Ltd. [1972] 2 SCR 201, regarding a petition for winding up that dealt with a disputed debt, it was held that if the debt is bona fide disputed and the defence is a substantial one, the Court will not wind up the company. The decisions in Pradeshiya Industrial and Investment Corporation of Uttar Pradesh v. North India Petro Chemical Ltd. [1994] 2 Comp. LJ 50 (SC), and in Amalgamated Commercial Traders (P.) Ltd. v. Krishnaswami [1965] 35 Comp. Cas. 456 (SC) support the same proposition. 19. The parties entered into a contract for the sale of certain goods, which were procured and shipped. The buyer, i.e., the respondent herein, did not take delivery of the goods, for reasons unknown as there has been no appearance on behalf of the respondent in the present proceedings. The petitioner then sold the goods to a third party. In essence, the petitioner has tried to mitigate the damages to which h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts the breach does not eo instanti incur any pecuniary obligation, nor does the party complaining of the breach becomes entitled to a debt due from the other party. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages. ...As already stated, the only right which he has is the right to go to a Court of law and recover damages. Now, damages are the compensation which a Court of law gives to a party for the injury which he has sustained. But, and this is most important to note, he does not get damages or compensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation as a result of the fiat of the Court. Therefore, no pecuniary liability arises till the Court has determined that the party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the Court is doing is ascertaining a pecuniary liability which already existed. The Court in the first place must decide that the defendant is liable and then it proceeds to assess what that liability is. But till that determination there is no liability at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng this decision, the Delhi High Court in Highway Engineering (P.) Ltd. v. Union of India (1996) 63 DLT 833, held that the non-defaulting party was required to show that it not only suffered loss due to the failure on the part of the defaulting party to performs its obligations under the contract, but it had also to show that it had taken every possible step to mitigate the loss consequent on the breach of the contract. 24. The Supreme Court has also held in M. Lachia Setty Sons Ltd. v. Coffee Board, Bangalore AIR 1981 SC 162, that "the principle of mitigation of loss does not give any right to the defaulting party, but the concept has to be borne in mind by the Court while awarding damages." In the facts of that case, the court did not accept the contention of the defendant that the auctioneer had deliberately resold at a lower price. 25. Chitty on Contracts . 30th Edition, 2008, Vol. I, pp. 26-110, says that "In contracts for the sale of goods, the normal rule for the measure of damages assumes that the innocent party should act immediately upon the breach, and buy and sell in the market, if there is an available market. The market price rule is fundamental t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot apply to the contracts in question. Thus, if the Sale of Goods Act, 1940 were held applicable to the contracts in question, then section 54 of the said Act would deal with the rights of an unpaid seller against the goods. Mulla on the Sale of Goods Act , 6th Edition, Butterworths India [2002] states that, "The statutory power for resale under sub-section (2) of section 54 arises only when property in the goods has passed to the buyer.... The seller can claim as damages the difference between the contract price and the amount realized on resale of the goods where he has a right of resale. Where property in the goods has not passed, the seller has no right of resale under section 54(2) and the claim to recover the deficiency on resale would not be sustainable. . . ." 29. The Supreme Court has affirmed this position in P.S.N.S. Ambalavana Chettiar Co. v Express Newspapers Ltd., Bombay AIR 1968 SC 741. 30. Further, as per the provisions of section 54(2) of the Sale of Goods Act, 1940, the petitioner s statutory right to resale would arise only when a notice of resale was served on the buyer, as per section 54(2) of the Sale of Goods Act. This has not been done in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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