Delhi High Court
M/S European Metal Recycling ... vs M/S Blue Precision Limited on 22 December, 2009
Author: Sudershan Kumar Misra
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ COMPANY PETITION NO. 153 OF 2009
AND
COMPANY APPLICATION NO. 466 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 PRECISION LIMITED
......Respondents
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
Precision Limited, 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 Precision Limited, having its
registered office at 46, Shardanand Marg, Delhi - 110046, is a
company that was incorporated under the Companies Act, 1956 on or
around 21st March, 1995.
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. The contracts in question are
Contract No. 25442 and Contract No. 25716, details of whose invoices
are given as under, annexed as Annexure N to the petition:
S.No Invoice Amount Price Total Price Total Price
. no., stated supplie quoted value of quoted value of differenti
to be d (in by sale to by sale to 3rd al
evidence MT) petition responde petition party
of debt er (in nt er to 3rd
USD) party
(in USD)
1. 25442/01 45 2450 110,250 1305 58,725 51,525
2. 25442/02 15 2450 36,750 1305 19,575 17,175
3. 25716/01 11.64 2550 29682 1305 15,190.20 14,491.80
4. 257162/02 15.76 2550 40188 1305 20,566.80 19,621.20
5. 25716/03 15.09 2550 38,479.50 1305 19,692.45 18,787.05
6. 25716/04 15.09 2550 38,352 1305 19,627.20 18,724.80
5. 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, 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 26th December, 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 Pvt Ltd.
6. On receiving no reply to the notice dated 26th December,
2008, the Petitioner contracted to sell the goods to a third party buyer,
i.e. M/s Century Metal Recycling Private Limited and issued invoices
No. 25442/01, 25442/02, 25442/02, 25716/01, 25716/02, 25716/03
and 25716/04, all dated 14th January, 2009, in this regard.
7. 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
140.324.85, 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 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.
8. 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 140,324.85 is also made, this being equal to the
total price differential of the contracted goods, as calculated by the
Petitioner.
9. Notice was issued to the respondent to show cause as to
why winding up proceedings be not initiated 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.
10. 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 its non-payment raises a 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 and S.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 many as 10 instances where the quantities
stated to have been supplied by the petitioner, the value of the sale to
the respondent; the value of the sale to the new buyer/third party and
the resulting price differential, are incorrect, when compared to the
copies of the invoices annexed to the petition. The net result is that the
total price differential, when calculated as per the figures in the
invoices annexed to the petition, comes to an amount of USD
149,566.55. Details of these are as follows:
Invoice Amount Total value Total Price differential (in
no. supplied of sale to value of USD)
(as per respondent sale to 3rd
copy of (In USD) party (in
invoice USD)
annexed to
petition)
25442/01 54.52 133,574 71148.60 62,425.40
(incorrectly (stated
(stated (stated incorrectly as
stated as 45 incorrectly as
incorrectly 51,525 in Annexure N to
in Annexure 110,250 in
as 58,725 the petition)
E and N to Annexure N
in
the petition) to the
Annexure N
petition)
to the
petition)
25442/02 13.44 32928 17539.20 15,388.8 (incorrectly
(incorrectly stated as 17,175 in
(stated (stated
stated as 15 Annexure N to the
incorrectly as incorrectly
in Annexure petition)
36,750 in as 19,575
E and N to
Annexure N in Annexure
the petition)
to the N to the
petition) petition)
25716/04 15.09 38,479.50 19627.20 18,852.30 (stated
incorrectly as 18,724.80
(stated
in Annexure N to the
incorrectly as
petition)
38,352 in
Annexure N)
13. Furthermore, while both Contract Nos.25442 and 25716
are in the name of „Blue Precision Ltd, Plot No. 111, Sector 59, HSIDC
Industrial Area, Faridabad, Haryana‟; only one invoice No.25716/03 is
in the name of „Blue Precision Ltd.‟. All the other invoices, namely, nos.
25442/01, 25442/02, 25716/01, 25716/02 and 25716/04, are in the
name of „Blue Engineering Pvt Ltd.‟ All the Bills of Lading with regard to
all the abovementioned invoices, are in the name of „Blue Engineering
Pvt. Ltd.‟
14. The 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 Pvt. 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 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."
16. 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."
17. 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."
18. 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.
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 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(e) of the Companies Act, 1956 for winding up
purposes.
20. 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."
21. 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."
22. 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."
23. 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.
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, 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."
26. 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 is 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."
27. 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?
28. 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..."
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 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.
31. 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‟.
32. 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."
33. In the present petition, the petitioner has made incorrect
claims against the respondent company, who has, in turn, not
challenged them 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
