M/S European Metal Recycling ... vs M/S Blue Engineering Private ...
2009 Latest Caselaw 5347 Del

*              IN THE HIGH COURT OF DELHI AT NEW DELHI


+                    COMPANY PETITION NO. 154 OF 2009

                                     AND

                COMPANY APPLICATION NO. 467 OF 2009



                                           Reserved on : October 26, 2009
                                     Date of Decision : December 22, 2009


M/S EUROPEAN METAL RECYCLING LIMITED
                                                           ........Petitioner

                           Through Mr. Rajiv Nayyar, Sr. Advocate with
                           Ms. Smarika Singh, Advocate & Ms. Binsy
                           Susan, Advocate


                                    Versus


M/S BLUE ENGINEERING PRIVATE LIMTED
                                                          ......Respondent
                      Through :   None.


CORAM :
HON'BLE MR. JUSTICE SUDERSHAN KUMAR MISRA


1.     Whether Reporters of local papers may be allowed to see the
       judgment?

2.     To be referred to the Reporter or not ?

3.     Whether the judgment should be reported in the Digest ?


SUDERSHAN KUMAR MISRA, J.

1. This is a petition under S.433 and S.434 of the Companies

Act, 1956, for winding up the respondent company i.e M/s Blue

Engineering Pvt Ltd, along with an application under S.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 - 110046, is a

company that was incorporated under the Companies Act, 1956 on or

around 3rd January, 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:

S.     Invoice       Amount     Price        Total      Price      Total        Price
No.       no.,       supplie   quoted      value of    quoted      value      differenti
        stated       d (MT)      by         sale to       by      of sale         al
         to be                 petition   responde    petitione    to 3rd
       evidenc                  er (in        nt       r to 3rd    party
          e of                  USD)                  party (in
         debt                                           USD)
 1.     24876/01      25.75     2200       56,650       1000      25,750       30,900
 2.     25375/03      28.68     2500       71,700       1305      37,427.40   34,272.6
 3.     25671/01      16.95     2000       33,900       1000      16,950       16,950
 4.     25671/02      16.9      2000       33,800       1000      16,900       16,900
 5.     25671/03      16.54     2000       33,080       1000      16,540       16,540
 6.     25671/04      15.68     2000       31,360       1000      15,680       15,680
 7.     25671/05      19.16     2000       38,320       1000      19,160       19,160
 8.     25743/01      16.84     2030      34,185.20     1000      16,840      17,345.20
 9.     25743/02      22.16     2030      44,984.80     1000      22,160      22,824.80
10.     25743/03       20       2030       40,600       1000      20,000       20,600
11.     25743/04      20.74     2030      42,102.20     1000      20,740      21,362.20
12.     25743/05      22.75     2030      46,182.50     1000      22,750      23,432.50
13.     25935/01      18.02     1940      34,958.80     1000      18,020      16,938.80
14.     25935/02      18.50     1940       35,890       1000      18,500       17,390


 15.     25935/03     19.94   1940      38,683    1000   19,940    18,743.60
16.     25935/04     20.71   1940    40,177.40   1000   20,710    19,467.40
17.     25935/05     20.36   1940    39,498.40   1000   20,360    19,138.40
18.     26063/01     17.98   1850      33,263    1000   17,980      15,283
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 USD129,044.85, 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 26th December, 2008 to the

Respondent company, calling upon them to confirm their intention to

make payment for the contracted goods within 7 days of receipt of the

legal notice and 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. However, it is noticed that

the copy of this notice, annexed as „Annexure LL" to this petition, is in

the name of „Blue Precision Ltd‟ and not in the name of the respondent

in the present proceedings, i.e „Blue Engineering Pvt Ltd.‟

7. On receiving no reply to the said, the Petitioner contracted

to sell the goods to a third party buyer, i.e. M/s Century Metal

Recycling Private Limited on 14th January, 2009 and issued invoices No.

25375/03, 25936/01, 25935/02, 25935/03, 25935/04, 25935/05,

25743/01, 25743/02, 25743/03, 25743/04, 25743/05, 26063/01,

26063/02, 26063/03, 26063/04, 25671/01, 25671/02, 25671/03,

25671/04, 25671/05, 24876/01 and 40477 in respect of the same.

8. Thereafter, the Petitioner issued a notice of winding up

dated 12th March, 2009 under S.433 and S.434 of the Companies Act,

1956, again calling upon the Respondent to make a payment of USD

477,606.35, which was the amount due to the Petitioner, within three

weeks of the deemed receipt of the notice of winding up. By way of

this notice, the Petitioner informed the Respondent that the goods had

been sold to a new buyer/third party, in order to mitigate the

Petitioner‟s loss and to avoid paying further demurrage and

warehousing charges, and that the amount claimed in the said notice

by the Petitioner was the total differential price of the goods, i.e the

difference between the purchase price, as per the contract with the

Respondent, and the price at which the goods were sold to the third

party buyer.

9. This petition was filed on 6th April, 2009, praying for an

order of winding up to be passed in respect of the Respondent, along

with an application under S.450 of the Companies Act, 1956 for the

appointment of a provisional liquidator. A further prayer for costs

amounting to USD 477,606.35 is also made, this being equal to the

total price differential of the contracted goods, as calculated by the

Petitioner.

10. Notice was issued to the respondent to show cause as to

why winding up proceedings be not initiated against it on 15th April,

2009 and is stated to have been served on 18th September, 2009. The

affidavit of service in this regard is also on record. There 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 S.433(e) and

S.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, 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 the need for a trial. For example, where the contract itself

provides for liquidated damages, or where the party in breach has

admitted his liability to pay the damages.

13. 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 12th March, 2009 does not mean that winding up orders must

invariably be passed, as this Court has held in Resham Singh & Co

Pvt Ltd v Daewoo Motors India Ltd, [2003] 116 CompCas 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 that its defense to the possible far-reaching and fatal

winding-up orders can be considered. The admission of the Petition at

its first hearing is possible because, by virtue of Section 434 of the

Companies Act, a presumption of the indebtness can be legitimately

drawn by the Court where no Reply to the statutory notice is

forthcoming. The risk of the admission of the Petition, as well as the

appointment of a Provisional Liquidator is thus broodingly and

ominously present in all those cases where the Respondent Company

neglects to send any Reply to the winding-up notice. But this is as far

as the danger extends."

14. In Mediquip Systems Pvt. Ltd v Proxima Medical

System GmBH, (2005) 7 SCC 42, the Supreme Court has held in

paragraph 18 thereof, as follows;

"An order under Section 433(e) of the Companies Act is discretionary. There must be a debt due and the company must be unable to pay the same. A debt under this section must be a determined or a definite sum of money payable immediately or at a future date and that the inability referred to in the expression 'unable to pay its dues' in Section 433(e) of the Companies Act 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."

15. The court in the Mediquip Systems Pvt. Ltd v Proxima

Medical System GmBH (supra) also referred to a decision of the

Madras High Court in Tube Investments of India Ltd. v. Rim and

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 of 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 resort to both the remedies of filing of a civil suit as well as filing of a petition for winding-up of the company."

16. These principles have been reiterated in Vijay Industries

v NATL Technologies Limited, reported as (2009) 3 SCC 527. In the

landmark decision of Madhusudan Gordhandas & Co. v. Madhu

Woollen Industries Pvt. 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 and Anr, (1994) 2 CompLJ 50 (SC), and in

Amalgamated Commercial Traders (P) Ltd v Krishnaswami,

(1965) 35 CompCas 456 (SC) support the same proposition.

17. 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 he is entitled, by selling the goods in the open

market and then deducting the price from the contracted amount due

to him. What remains to be seen is whether an action under contract

law, i.e. the claim of the petitioner if entitled to sue, which may be a

claim for unpaid principal towards the sale of goods, or a claim for

unrealized damages after having resorted to the sale of goods whose

delivery wasn‟t taken towards mitigation of damage, would amount to

„debt‟ in terms of S.433 of the Companies Act, 1956 for winding up

purposes.

18. In Union of India v Raman Iron Foundry, (1974) 2 SCC

231, in para 6 & 7 thereof, the Supreme Court held as under;

"..The classical definition of 'debt' is to be found in Webb v. Stenton [1883] 11 Q.B.D. 518 where Lindley, L.J., said :"... a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation". There must be debitum in praesenti; solvendum may be in praesenti or in future- that is immaterial. There must be an existing obligation to pay a sum of money now or in future. The following passage from the judgment of the Supreme Court of California in People v. Arguello [1869] 37 Calif. 524 which was approved by this Court in Kesoram Industries v. Commissioner of Wealth Tax, [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."

19. It was further held, in paragraph 9 of the Raman Iron

Foundry 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 contract, the party who commits 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 all upon the defendant."

20. McGregor on Damages (13th Edition, 1972, Sweet and

Maxwell) says that "the principal meaning of the term „mitigation‟

comprises three different, although closely interrelated, rules:

1) The first and most important rule is that the plaintiff must take all reasonable steps to mitigate the loss to him consequent upon the defendant‟s wrong and cannot recover damages for any such loss which he could thus have avoided, but has failed, though unreasonable action or inaction, to avoid. Put shortly, the plaintiff cannot recover for avoidable loss.

2) The second rule is the corollary of the first and is that where the plaintiff does take reasonable steps to mitigate the loss to him consequent upon the defendant‟s wrong, he can recover for loss incurred in so doing; this is so even although the resulting damage is in the event greater than it would have been had the mitigating steps not been taken. Put shortly, the plaintiff can recover for loss incurred in reasonable attempts to avoid loss.

3) The third rule is that where the plaintiff does take steps to mitigate the loss to him consequent upon the defendant‟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 athough 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 neglect to take such steps."

Following this decision, the Delhi High Court in Highway Engineering Pvt Ltd v Union of India and Anr, 63 (1996) 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.

22. 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.

23. Chitty on Contracts, 30th Edition, 2008, Vol I, p.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 to the sale of goods...

An instance of mitigation arises where the defendant in breach of contract refuses to accept goods which he has agreed to buy, but (where) the claimant is able to sell the goods at the same price to a third person, if the state of the market is such that demand exceeds supply, so that the claimant can always finds a purchaser, he is entitled to only nominal damages, not his loss of profit on the repudiated sale, as he sold the same number of articles and made the same amount of fixed profits as he would have done if the defendant had duly performed his contract."

24. In that view of the matter, the Respondent company, had it

put in an appearance, may well have taken the defence that the

Petitioner did not take „reasonable steps‟ to mitigate its loss. This

would have had an impact on the price differential claimed by the

Petitioner as due and payable by the Respondent. While no such point

has been raised in the present proceedings, it may well be a ground for

dispute over the amount due to the Petitioner. It is a fundamental

principle in such cases that the petitioner was bound to try and obtain

the best price for the goods 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, 17th

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 S.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 Sale

of Goods Act, 1940 does not apply to the contracts in question. Thus, if

the Sale of Goods Act, 1940 were held applicable to the contracts in

question, then S.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 S.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

S.54(2) and the claim to recover the deficiency on resale would not be

sustainable..."

27. The Supreme Court has affirmed this position in P.S.N.S.

Ambalavana Chettiar & Co. v Express Newspapers Ltd.,

Bombay, AIR 1968 SC 741.

28. Further, as per the provisions of S.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 S.54(2) of

the Sale of Goods Act. This has not been done in the present case.

29. In the instant case, there is also nothing on record to

indicate the financial position of the Respondent company. Admission

of the petition, as prayed for, and the consequent advertisement itself

does not amount to a direction regarding liquidation. Yet, as a Division

Bench of the Madras High Court has held in NEPC India Limited v

Atlantic Bridge Aviation Limited, [2009] 94 SCL 296 (Mad), it is an

"initial, albeit an important step." In the same case, it has further been

held that "At the stage of considering these aspects, obviously, the

Court is only required to come to a prima facie conclusion regarding

the existence of debt and neglect on the part of the Company to pay

such amount inspite of statutory notice. It is no doubt true that by

publication of the advertisement the company's reputation is likely to

be tarnished and, therefore, the Company Court requires existence of a

strong enough prima facie case for initiating such proceedings".

30. A Division Bench of the Bombay High Court in Pfizer

Ltd v Usan Laboratories Pvt Ltd, [1985] 57 Com Cas 236 (Bom),

the company judge is "required to consider the claim of the petitioners

in respect 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 Courts 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.

SUDERSHAN KUMAR MISRA, J.

DECEMBER 22, 2009 sl