Madhya Pradesh Iron And Steel ... vs Sikands Ltd.
2004 Latest Caselaw 1146 Del

JUDGMENT

A.K. Sikri, J.

1. This is a petition seeking winding up of the respondent company filed by the petitioner who claims itself to be a creditor of the respondent company and also contends that the respondent company is unable to pay the debts. The petition is filed under the provisions of Sections 433(e), 434 and 439 of the Companies Act, 1956 (hereinafter referred to as `the Act'). The basis for the aforesaid plea of being creditor of the respondent company and the circumstances under which it is alleged that the respondent company is unable to pay the debts, may first be noted in brief.

2.According to the petitioner, the respondent company (hereinafter called as `the company') approached the petitioner from time to time with the request to supply the Steel Wire Rods according to the required specifications and agreed rates, which were supplied to the company in due course of business. Although details of the invoices/bills vide which these supplies were made are allegedly given in Annexure-A to the petitioner, Annexure-A is in fact the power of attorney executed by the petitioner in favor of Mr. K.C. Khajanchi, an officer of the company who has filed these proceedings (It may however, be mentioned that reading of reply filed by the company would give an indication that there is no specific denial about the supplies and the main defense of the respondent is that goods supplied were defective and excess rates were charged in the bills). According to the petitioner, when the company failed and neglected to make the payments, payments were demanded vide letters dated 29th October, 3rd December, 1998, 19th January, 20th January, 1st February, 18th February, 25th February and 11th March, 1999. Still no payment was forthcoming. Instead in reply to the letter dated 29th October, 1998, the company sent the letter dated 30th October, 1998 acknowledging the liability and agreeing to pay the outstanding amount and undertook to release the payment in the month of November, 1998. Relevant portion of this letter reads as under:

'' This has reference to your letter No. MISC/HO/MKTG/BMP?F, dated 29.10.1998. It is true no payment could be made to you, since October being a festival month, the Industries remained closed for about 35% of the month thereby affecting the operations as well as cash flow. However, we plan to release the following amounts in your favor in November, 1998:-

01 -07.11.1998 App. Rs.: 2.5 lacs. 20-30.11.1998 App. Rs: 3.5 lacs

------------------------ App. Rs. 6.0 lacs.

----------------------- .

If an improvement is possible, we shall definitely advise you accordingly. Indication for December shall be given in November-end, but your outstanding shall decrease. During this month also, your outstanding have not increased since no material could be supplied to us against our schedules. Details of outstanding bills as given in your letters under reply tally with our record except that interest element is not included therein and certain amounts have to be recovered by us against rejections as communicated to you already. In the meantime , we thank you for the cooperation extended.''.

3.Thereafter, another letter dated 19th December, 1998 was written by the company again acknowledging liability wherein it was stated that pending bills of the petitioner were being liquidated-may be the pace was slow but the outstanding were coming down every month and the position would likely to improve in the coming months. Some discussion was there in this letter about issuance of certain debit as well as credit notes and about certain rejections and after giving these letters, it was pointed out as under:

''After doing all the above exercise, the position emerges as under:-

 (a) Payable against Invoices as per statement       Rs. 34,28,523.00
    enclosed as on 7.12.98 
(b)  Our Cr. Note as per 3 above                    Rs. 4,770.52
                                                ---------------------- 
                                                   Rs. 34,33,293.52 
                                                ---------------------
LESS 
(c) Our Cr. Note as per 4 above -                     2025.00 
(d) Our Dr. Note as per 4 above -                    14225.00 
(e) Dr. Note enclosed -52909.00                  Rs. 69,159.00
                                 --------------------------------------- 
Payable as on date                              Rs. 33,64,134.52 
R/o                                             Rs. 33,64,134.00 
Please confirm the above figures as on date and/or discuss in case of variation.'' 
 

4. Thus final position as stated by the company itself was that after adjustment of the accounts, a sum of Rs. 33,43,134/- was due and payable to the petitioner. However, the payment was not made and, therefore, further reminders followed. Ultimately, legal notice dated 5th July, 1999 was issued under Section 434 of the Act calling upon the company to pay a sum of Rs. 32,73,606.14 paise as principal amount and Rs. 5,10,295.17 paise as interest which accrued thereon till 30th June, 1999. The company was asked to pay a sum of Rs. 37,83,902.31 paise within three weeks of the receipt of the notice. Reply dated 27th July, 1999 was received in which it was, inter alia, stated that the supplies were not effected strictly in terms of the orders but the same w re not refused as the petitioner assured some adjustment in the rates of material; the company accepted the invoices raised after pointing out excess rates charged; issuance of letter dated 30th October, 1998 was denied and it was stated that liability as never acknowledged; receipt of certain letters was also denied and it was stated that at the end that the company was ready to reconcile the accounts and whatever amount is due, shall be paid. Not satisfied with the reply, the petitioner filed the instant petition.

5. In the reply filed to the petition, the defense is the same as noted in brief above which is highlighted in some detail in the reply. It is mentioned that the company had many times rejected the material being defective and not in accordance with specifications. It is pointed out that since the fundamental characteristics of the material i.e. cold heading quality was not fully guaranteed and the wire cracked repeatedly during of its use on the machines, several complaints were sent to the petitioner and the petitioner's quality control personnel along with the marketing persons visited the company's premises on a number of occasions and confirmed cracking of their material thereby accepting the poor quality thereof. On some occasions, the rejected material was sold at the request of the petitioner. However, numerous rejections were received by the company from its customers, reflecting at the poor quality of the raw material used in the product. Several letters were sent to the petitioner ap rising them of the huge losses suffered by the company on account of supply of poor quality of material resulting in plant rejection as well as rejection at customers' end. It is also stated that the present petition is misuse and abuse of the process o law. In any case, the discretionary order of winding up be not passed as the company, in view of the aforesaid disputes and also that the company is a flourishing concern having its business dealings with leading industrial houses of the country such a Tata Engineering and Locomotive Company Limited, Bajaj Auto Limited, LML Limited, Escorts Limited, HMT Limited, Mahindra and Mahindra etc. It is further mentioned that the company is having a manpower of around 150 employees in its plant and has a regula inflow and outflow of funds, each to the tune of Rs. 50 lacs (approximately) per month. It is stated that the company has been rigorously pursuing with the petitioner to reconcile the accounts and pay off its legitimate dues after adjusting the bonafide claim owing to the poor quality of raw material supplied by the petitioner, the petitioner has not responded.

6. On the basis of aforesaid pleadings, whereas the argument of learned counsel for the company was that the company owed the debt to the petitioner which was even acknowledged, learned counsel for the company argued that there were serious and bonafide disputes raised by the company which related to the defective supplies made because of which the company was entitled to reduction in rates and there was no question of acknowledging any debt and the company was ready to pay the amount after reconciliation of accounts. It was also argued that the company had paid a sum of Rs. 16 lacs during the pendency of these proceedings and as the petitioner had filed a suit for recovery of the amount in question, the present petition should be dismissed.

7. Before proceeding to discuss and deal with the respective contentions, some developments which took place in these proceedings, may be noted as they are of some relevance. The company has also taken the objection to the effect that Mr. K.C. Khajanchi who signed, verified and filed the petition on behalf of the petitioner was not legally authorised. When this matter came up for hearing in November, 2001, arguments were heard on this aspect and vide order dated 20th November, 2001, this preliminary objection of the company was upheld and the company petition was dismissed. However, at the same time the company was asked to pay a sum of Rs. 16 lacs, as this liability was admitted by the company. During the proceedings thereafter i.e. on 23rd November, 2001 and 2nd April, 2002 this amount was paid in the Installments of Rs. 1,60,000/- and Rs. 14,40,000/- respectively. Vide order dated 6th May, 2002, this court allowed the petitioner to withdraw this amount. However, against the order dated 20th November, 2001 dismissing the petition as not maintainable, the petitioner filed an appeal and the Division Bench vide order dated 27th August, 2003 set aside that order, inter alia, on the ground that a defect in the pleadings or verification was only an irregularity in procedure and does not constitute a ground for rejection of the petition and, therefore, an opportunity should have been given to the petitioner to remove this defect. The matter was accordingly remanded back to this court. The petitioner thereafter filed certified copy of resolution dated 1st June, 2000 and issue of power of attorney executed in favor of Mr. K.C. Khajanchi on record taking care of the preliminary submissions.

8. What follows from these developments is that the company has already paid a sum of Rs. 16 lacs to the petitioner and for remaining amount, suit is filed by the petitioner which is pending adjudication.

9. It may be that in the letter dated 30th October, 1998 the company has acknowledged the amount payable and thereafter in the letter dated 19th December, 1998 it has again given the accounting position stating the balance amount payable. However, according to the respondents, the goods were found defective and not according to specifications and, therefore, some adjustments were necessary. Correspondence in this regard is filed along with the reply which would show that some kind of dispute is raise by the company and it is not an after thought dispute. It may not be necessary for me to go into this issue any further inasmuch as, in the facts of this case, following factors are determinative of my decision that it is not a fit case to exercise any discretionary jurisdiction in passing winding up order:

(a) The company admitted the liability to the extent of Rs. 16 lacs and paid the same during the proceedings.

(b) For balance amount, suit for recovery has been filed by the petitioner which is pending adjudication.

(c) There are some disputes about the quality of goods, prices charged and reconciliation of accounts which should be settled by the civil court in the facts of this case.

(d)The company has been able to demonstrate that it is a viable and profit making company dealing with leading industrial houses employing around 150 employees as good outflow of funds. Therefore, it would not be in public interest to pass an order of winding up against such a company.

(e) In case a decree is ultimately passed in the civil suit against the company, it will be able to honour the same.

10. No doubt mere filing of the civil suit is no bar to continue the winding up proceedings. However, when all the aforesaid factors are taken into consideration, cumulative effect thereof persuades me not to entertain these winding up proceedings any further. Needless to mention, it is also open for the petitioner to file appropriate application in the civil suit which is pending before the civil court for passing of the decree on the basis of purported admission contained in letters dated 30th October, 1998 and 19th December, 1998 and if such an application is filed, the same can be considered in accordance with law by the court where the proceeding are pending. It may also be stated that the petitioner can also file necessary application in those roceedings for securing the balance amount in question. What is stressed is that the petitioner is not remedyless. The winding up proceedings are not in the nature of recovery proceedings and in the facts of this case, it would not be justified to pass an order under Section 433(e) of the Act.

11. Section 433(e) of the Act gives a ground to a creditor to file a winding up petition if a company is ''unable to pay its debt''. Therefore, pre-requisite of a petition filed under this provision is that there must be a ''debt'' payable by the company. When the amount payable is established only then it would be termed as a ''debt''. In the case of Pradeshiya Industrial and Investment Corporation of U.P. V. North India PetroChemicals Ltd. and Anr. while interpreting Section 433(e) of the Act the court held that following ingredients had to be proved:

1. There must be a debt; and

2. The company must be unable to pay the same.

12. The court held that '' a debt under this section must be clear or a definite sum of money payable immediately or at a future date''. Insofar as the requirement of inability to pay the debt is concerned, the court held that that should be taken in t he commercial sense i.e. the company was unable to meet current demands and for this proposition the court quoted following observations of William James V.C. from the judgment in the case of European Life Assurance Society, Re: LR(1869) 9 Eq 122: '' plainly and commercially insolvent-that is to say, that its assets are such, and its existing liabilities are such, as to make it reasonably certain-as to make the Court feel satisfied-that the existing and probable assets would be insufficient to meet the existing liabilities''.

13. It was also held that if there was a bona fide dispute about the debt and the defense was a substantial one, the court would not wind up the company. It was also pointed out that an order under clause (e) is discretionary. Thus even if two ingredients are established still in a given case court could refuse order of winding up if circumstances warranted that it was not proper or just or equitable to exercise such a discretion.

14. This petition is accordingly dismissed with the aforesaid observations.

15. There shall, however, be no order as to costs.