Elite Vessels vs Flex Engineering Ltd.
2004 Latest Caselaw 1149 Del

JUDGMENT

A.K. Sikri, J.

1. The facts which are emerging from the petition filed by the petitioner for winding up of the respondent company are to this effect:

2. The respondent company placed an order dated 16th January, 2001 for supply of Fabricated Steel Channel Sleeper with riveting and galvanizing. This order was duly executed by supplying the material from time to time and the account was agreed between the parties as running one. Payments were to be made within 25-30 days as mentioned in the purchase order. Against the goods supplied the respondent company made part payments from time to time leaving a balance of Rs. 5,57,339.20 paise as on 20th June, 20 1. The respondent company never disputed this liability and it even issued the declaration certificate dated 17th September, 2001; C-Forms under the Sales Tax Act. According to the petitioner, even the respondent company showed the amount as balance ue to the petitioner. The petitioner has filed this statement of accounts as well as of the respondent company. The respondent company even admitted the liability vide letter dated 17th September, 2001 and promised to clear the same by 25th September 2001. However, the amount was not paid and therefore statutory notice dated 2nd October, 2002 demanded the admitted amount within the stipulated period of 21 days from the receipt of the notice was issued. In the reply dated 12th November, 2002, the respondent company took an after thought plea and raised a vexatious dispute at belated stage with sole object of delaying the payment and hence the petitioner.

3. In this petition interest of Rs. 1,50,462/- calculated at the rate of 18 per cent per annum up to 15th December, 2002 is also demanded apart from cost of legal notice amounting to Rs. 5,500/- and thus total demand made is in the sum of Rs. 7,13,321.20 paise. .

4. In the reply filed by the respondent company, it is stated that the petition is not maintainable as there are complicated disputes between the parties which involve a detailed analysis and the remedy for the petitioner is to file a civil suit as it is only the civil court which can adjudicate upon such serious disputes. It is also stated that the supplies made by the petitioner were meant for South Central Railways and the petitioner knew this fact very well. South Central Railways had awarded the contract to the respondent company and the respondent company in turn entered into back to back agreement dated 16th January, 2001 for supply of 316 Fabricated Steel Channel Sleepers. However, 109 sleepers supplied by the petitioner did not conform to quality and hence the South Central Railways rejected the same. Thus there was no occasion for release of payment for the material rejected. It is also contended that the respondent company is in sound financial condition and is in a position to meet the demand of the creditors. It is functioning profitably, having regular on going business employing large number of employees and thus winding up of the respondent company shall not only put an end to prospering business but result in loss of employment f several employees and loss of production and affect the larger interest of the society. Dismissal of the petition is sought on this ground as well.

5. Submission of learned counsel for the petitioner is that the supplies are not disputed; the debt is acknowledged; the respondent company had also issued C-Form and therefore it was clear case of indebtedness to the petitioner. It was also submitted t hat the petitioner was neither a party to the alleged contract between the respondent company and the South Central Railways nor the respondent company had informed the petitioner about any such contract and the defense taken in this behalf is an after thought . More so, when the contract between the respondent company and the South Central Railways was not in existence on the date when purchase order was dated 16th January, 2001 was issued. As the said contract is dated 9th February, 2001 and there ore awarded subsequently. It is also stated that the defense raised by the respondent company about rejection of the material by the South Central Railways is an after though and moonshine inasmuch as the agreement between the petitioner and the respondent company is dated 16th January, 2001 and on the date the respondent company did not have any contract with the railways as alleged. The alleged contract with the South Central Railways is dated 9th February, 2001.

Therefore, the agreement between the petitioner and the respondent company had nothing to do with the contract with the respondent and the South Central Railways . The agreement dated 16th January, 2001 mentions that 147+ 169= 316 pcs, 100% payment of the first dispatch of 316 piece within 25-30 days of the said dispatch. The respondent company is trying to incorporate a fresh condition that the payment to the petitioner would be subject to approval by the South Central Railways or payment received by the respondent company. This condition was never ever agreed to between the parties as is evident from the agreement/purchase order dated 16th January, 2001. The conditions to be fulfillled by the petitioner were that 316 pieces of Fabricated Steel Channel Sleepers were to be supplied to the respondent company at the site of the respondent company's customer. The respondent company gave the site address of the South Central Railways, the material was dispatched at the address given. The material was checked by the respondent company's inspection team and only after their full satisfaction the material was dispatched. The purchase order placed by the respondent company was subject to the terms and conditions of the agreement executed between the respondent company and the South central Railways. The contract between the respondent company and the South Central Railways is dated 9th February, 2001 i.e. subsequent to the agreement/purchase order dated 16th January, 2001 between the petitioner and the respondent company. It is lso stated that the petitioner cannot sue the South Central Railways for the outstanding money since it was not privy to the contract between the petitioner and the respondent company. Likewise, the respondent company cannot bind the petitioner with the terms and conditions of some contract entered into between the respondent company and the South Central Railways. In the contract between these two there is no term or clause mentioning any onus or responsibility upon the petitioner. However, the respondent company kept on delaying and deferring the payment to the petitioner and only after a gap of 9-10 months informed the petitioner of the alleged rejection.

6. Learned counsel for the petitioner also relied upon the following judgments in support of this submission: .

(i) Rama Tube Co. V. Jay Rapid Roller Ltd., .

(ii) Madhya Pradesh Iron and Steel Co. V. G.B. Springs (P) Ltd., 102 (2003) DLT 120.

7. On the other hand, learned counsel for the respondent company gave stress to the submissions made in the reply by submitting that by the very nature of the goods, it would be clear that the same would be meant for South Central Railways and could not be consumed by the respondent company. Therefore, the petitioner had the knowledge about the contract between the respondent company and the South Central Railways. In support of this submission, agreement dated 9th February, 2001 entered into with th South Central Railways is placed on record. The respondent company has also placed on record purchase order dated 16th January, 2001 as well as the bills raised by the petitioner itself showing Central Railways. The respondent has also placed on record letter dated 18th July, 2003 evidencing rejection of 109 numbers of galvanized steel channel sleepers and stating that the respondent company was asked to take the same back from that the petitioner had the knowledge that the goods were meant for South the site.

8. The contention of learned counsel that the petitioner was not informed about the contract of the respondent company with South Central Railways cannot be accepted. That apart order dated 16th January, 2001 clearly stipulates that `material will be directly decided to the customer. Form E-1 is to be issued by you.' Customer here was the South Central Railways only as would be clear from the bills issued by the petitioner itself. We may take bill No. 002 dated 31st January, 2002 as an example for demonstrating this. In this bill it is stated that the bill is issued to the respondent company and the consignee is `Noida Divisional Manager, South Central Railways, Vijaywada (AP).' In the page of the bill where particulars are stated, it is also mentioned:

'' Government material

For Railways.''

9. The plea that the order dated 9th February, 2001 by the South Central Railways to the respondent company is after order dated 16th January, 2001 placed by the respondent company to the petitioner and therefore order to the petitioner is not based on th e award of contract by South Central Railways to the respondent company, is clearly untenable. It is a matter of common knowledge that the Railways would invite tenders entering into contract. Even after the acceptance of the tender of a particular par y, formal agreement may be executed later. Therefore, it cannot be said that for the first time arrangement was entered into between the South Central Railways and the respondent company only when agreement dated 9th February, 2001 was signed as it must have been preceded by the aforesaid events and having those antecedents. In any case, order dated 16th January, 2001 placed by the respondent company on the petitioner coupled with the bills raised and dispatch of material directly to the South Central always by the petitioner would clearly show that the petitioner had full knowledge that the goods were meant for the Railways.

10. On the supply of goods, when the bills are raised, naturally the respondent company would enter the same in its books of accounts and show the amount payable. That would explain the acknowledgment of the amount in books of accounts. That would also explain that on the delivery of these goods, C-Forms were issued. If the goods are ultimately rejected by the South Central Railways and the Railways because of such rejection does not make payment to the respondent company, the respondent company may have legitimate reason for not making the payment to the petitioner and the dispute raised would be a bonafide dispute which cannot be termed as an after though or sham. The respondent company has produced on record the evidence to show rejection of 109 alvanized steel channel sleepers by Railways and has also produced on record intimating this fact to the petitioner. I am, therefore, of the opinion that the dispute raised by the respondent company is a bonafide dispute. Further in order to substantiate its claim that the respondent company is a viable and profit making company, balance sheets for the years 2002-03 as well as 2003-04 are placed on record which confirm such a claim. Therefore, it is not a case where this court should exercise its discretion in favor of the petitioner by ordering winding up of the respondent company.

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. In Resham Singh and Co. P. Ltd. V. Daewoo Motors India Ltd. reported as 102 (2003) DLT 188, a learned Single Judge of this court, after scanning through the case law on the point, distilled the following principles which are to be kept in mind while dealing with winding up proceedings:

'' (i) If there is a bona fide dispute and the defense is a substantial one, the Court will not wind-up the company.

(ii) Where the debt is undisputed the Court will not act upon a defense that the company has the ability to pay the debt but the company chooses not to pay it.

(iii) Where the defense of the company is in good faith and one of substance, and the defense is likely to succeed in point of law, and the company adduces prima facie proof of the facts on which the defense depends, the petition should be rejected.

(iv) The Court may consider the wishes of creditors so long as these appear to be justified.

(v) The machinery of winding up should not be allowed to be utilised merely as means of Realizing its debts.

[For the above propositions see Pradeshiya Industrial and Investment Corporation of Uttar Pradesh v. North India Petro-Chemical Ltd. and Anr. (1994) 2 Comp. L.J.50 (SC), in which the observation in Amalgamated Commercial Traders (P) Ltd. v. Krishnaswami, 1965) 35 Comp. Cas. 456 (SC) and Madhusudan Gordhandas and Co. v. Madhu Woollen Industries (P) Ltd. (1972) 42 Comp. Cas. 125 (SC), have been paraphrased].

(vi) If the stance of the adversaries hangs in balance it is always open to the Company Court to order the respondent company to deposit the disputed amount. This amount may be retained by the Court and be held to the credit of suit, if any is pending, r likely to be filed in the immediate future. [See Civil Appeal No. 720 of 1999 arising out of SLP No. 14096 of 1998-M/s Nishal Enterprises v. Apte Amalgamations Ltd., decided by the Hon'ble Supreme Court on February 5, 1999].

It appears to me that the following point may be added to the foregoing considerations.

(vii) Generally speaking, an admission of debt should be available and/or the defense that has been adopted should appear to the Court not to be dishonest and/or a moonshine, for proceedings to continue. If there is insufficient material in favor of th petitioners, such disputes can be properly adjudicated in a regular civil suit. It is extremely helpful to drawn upon the analogy of a summary suit under Order xxxvII of the Code of Civil Procedure. If the Company Court reaches the conclusion that, ha it been exercising ordinary original civil jurisdiction it would have granted unconditional leave to defend, it must dismiss the winding up petition.''

15. In the present case, applying those principles and after coming to the conclusion that the dispute raised is bonafide and defense is a substantial one and holding that principle (i) stated above is applicable, in the fact situation before us, this court would not wound up the respondent company and would relegate the petitioner to the civil proceedings. Though the principle laid down in Madhya Pradesh Iron and Steel Co (supra) and Resham Singh and Co. P. Ltd.(supra) is acceptable, the course adopted in hose cases cannot be followed in the present case as the facts of this case persuade me otherwise. It may be noted that even in Madhya Pradesh Iron and Steel Co (supra), the court was of the opinion that delivery of C-forms would not always lead to the conclusion that there was an outstanding amount. It may be mentioned that once C-forms are delivered, presumption has to be drawn in favor of the petitioner that goods were in fact delivered. However, if the respondent company is able to satisfactorily e plain that the amount is not payable inspite of delivering C-forms either because the goods delivered were ultimately found to be defective or were validly rejected or any other plausible defense then merely on the basis of C-forms the court cannot treat that the amount is payable and may come to the conclusion that the dispute raised is bonafide and its defense is substantial which conclusion has been arrived at in the facts of the present case.

16. This petition is, therefore, dismissed without any order as to costs.