THE HON’BLE SRI JUSTICE V.V.S.RAO COMPANY PETITION No.23 OF 2009 DATED 06.08.2009 BETWEEN: M/s.BDK Engineering Industries Limited … Petitioner AND M/s.Sirpur Paper Mills Limited … Respondent THE HON’BLE SRI JUSTICE V.V.S.RAO COMPANY PETITION No.23 OF 2009 ORDER: This petition is filed under Sections 433(e) and (f) and 439 of the Companies Act, 1956 seeking winding up of respondent company on the ground that it has become insolvent and is unable to pay its debts. The petition is listed for ordering publication of petition under Rule 99 of the Companies (Court) Rules, 1959. Therefore, the approach ought to be with reference to prima facie case for admission of company petition before the Court proceeds further. Petitioner is manufacturer of industrial valves. The allegations made in company petition are as follows. Respondent is a company registered under the Companies Act in State of Andhra Pradesh with authorized share capital of Rs.3,500 lakhs divided into 2,50,00,000 equity shares of Rs.10/- each and 10,00,000 preference shares of Rs.100/- each. Issued and subscribed capital stands at Rs.1501.14 lakhs divided into equity shares of Rs.10/- each. During 2005-2006 and 2006-2007, petitioner supplied industrial valves on running account as and when respondent placed purchase orders. According to petitioner, total value of sales invoices raised by petitioner during the period is Rs.1,58,35,061/-. An amount of Rs.1,35,92,901.79 ps., was released by respondent against sales invoices and petitioner furnished Performance Bank Guarantee. Balance amount of Rs.22,42,159.21 ps., against sales invoices was not released by respondent in spite of repeated demands and requests by petitioner. The amount due has been conformed by respondent through Statement of Account for the period from 01.04.2006 to 21.09.2007. In spite of the same, respondent did not liquidate the liability and therefore, petitioner is entitled to claim interest @ 24% per annum. The total amount thus due with interest is Rs.32,92,914.21 ps. The petitioner also alleges that respondent company indebted to various other creditors. The petitioner sent notice under Section 434 of the Companies Act by registered post with acknowledgement due on 27.11.2008 and the same has been duly served. Petitioner also sent a notice through DTDC Courier on 09.01.2009 which is acknowledged by respondent company but within 21 days after receipt of notice, respondent did not pay the admitted amount due to petitioner, and therefore, the company petition. Respondent filed counter affidavit and opposed company petition. It is alleged that by filing petition, petitioner is trying to pressurize respondent though ingredients required for winding up do not exist. The company petition is not maintainable as agreement beweeen parties provides for arbitration. It is admitted that respondents placed purchase orders for supply of valves of different varieties for using in respondent’s plant. General terms of contract are applicable to all the purchase orders placed by respondent. Respondent paid substantial payments to petitioner against goods supplied by petitioner. There was delay on the part of petitioner in supplying valves and respondent addressed letters for supplies within agreed time frame. Several valves supplied by petitioner were of inferior quality. The valves developed problems within short time. Due to this, pipelines in the plant got jammed and resulted in total stoppage of recovery boiler and supply of green liquor to caustisizer plant. Respondent had to drain green liquor from the system on several occasions resulting in huge production loss. Petitioner was asked to depute service engineer to rectify the defects, in vain. Therefore, respondent had to get several valves replaced by incurring huge expenditure of Rs.33.62 lakhs. In addition, petitioner is liable to pay liquidated damages amount to Rs.12.94 lakhs on account of delay in supply of valves under the contract. To that effect, respondent addressed letters to petitioner on 02.01.2007, 08.01.2007 and 20.08.2008. The allegation that an amount of Rs.22,42,159.21 ps., is denied. It is further alleged that petitioner is liable to pay an amount of Rs.46.56 lakhs towards loss suffered by respondent for replacing substandard valves supplied by petitioner and towards liquidated damages. The allegation that respondent company owes large sums of money to its creditors and is not in a position to meet financial obligation is denied. The allegation that respondent became commercially insolvent is denied. It is stated that respondent is oldest reputed paper mills in the country as on today manufacturing varieties of papers and paper boards. Its products are sold through out the country and in other countries like China, Nepal and Srilanka. Respondent also modernised its plant in recent days and has adopted all pollution control methods in its factory. The net profit of the company as per audit accounts for the years 2005-2006, 2006-2007 and 2007-2008 is Rs.1,459 lakhs, Rs.1,332 lakhs and Rs.3,262 lakhs respectively. Its turn over for these three years were Rs.26,865 lakhs, Rs.27,042 lakhs and Rs.27,116 lakhs. The company also regularly declared dividends for the last three years at 35% per annum. Respondent company is not in financial crisis nor it is not able to meet its financial obligations. After receiving legal notice, dated 27.11.2008 issued by petitioner, respondent sent a reply on 04.02.2009 by registered post acknowledgement due. There is a bona fide dispute existing and respondent is entitled to recover liquidated damages and also cost of replacement of substandard materials supplied by petitioner which exceeds the claim of petitioner. In view of arbitration clause, in general terms of contract, company petition for winding up is not maintainable. The petitioner has filed reply affidavit and also additional affidavit reiterating that respondent company is unable to pay its debts of not only to petitioner but also to several other supliers and bankers. Learned counsel for petitioner relies on Statement of Account for the period from 01.04.2006 to 21.09.2007 and submits that the debt due to petitioner has been admitted by respondent and its failure to discharge the debt within 21 days after receiving notice under Section 434(1)(a) of Companies Act would require winding up of the company under Section 433(e) and (f) of Companies Act. He submits that plea of respondent that goods supplied were defective is an afterthought and though petitioner was supplying regularly, never there was such a complaint in spite of performance guarantee clause. The three letters allegedly sent by respondent on 02.01.2007, 08.01.2007 and 20.08.2008 are concocted documents. Even if the company is ongoing company, as it failed to comply with the requirements of Section 434(1) (a) of Companies Act, winding up of respondent is just and proper. He also submits that arbitration clause in the agreement between parties does not bar company petition. He placed reliance on Gulamhussein Ahmedalli v Canhag Private Limited[1], In the matter of Dhootpapeshwar Sales Corporation Private Limited[2], Haryana Telecom Limited v Sterlite Industries (India) Limited[3], Electron Industries Limited v Soham Polymers (Private) Limited[4] and Vijay Industries v NATL Technologies Limited[5]. Learned counsel for respondent submits that claim made by petitioner for alleged amount is in dispute. The defence raised by respondent has substance having regard to the contract between the parties. Therefore, company petition which is filed only for recovery of amount would not lie. He submits that valves supplied by petitioner were defective and therefore, respondent is entitled to claim liquidated damages and also cost of replacement. He placed reliance on M.Govardhandas & Co., v M.W.Industries[6], Mediquip Systems (Private) Limited v Proxima Medical System GMBH[7], TATA Iron & Steel Company v Micro Forge (India) Limited[8] a n d Narsey Brothers v Nithyalakshmi Textiles Mills (Private) Limited[9] and an unreported Judgment of this Court, dated 15.06.2009 in C.P.No.59 of 2008 (Commercial Private Limited v R.V.K.Energy Private Limited). The dispute in relation to alleged debt of Rs.22,42,159.21 ps., admittedly pertains to period from 2006-2007 and for a brief period thereafter. During the period, petitioner supplied industrial valves for the use by respondent. There is no dispute on this. A perusal of the Statement of Account furnished to petitioner would show that running account was maintained by respondent with effect from 01.04.2006 upto 21.09.2007. Periodically credit balances were posted in the ledger and regular payments were made by way of cheques by respondents. More often than not, advances were also paid by respondent to petitioner. It is not a case where respondent avoided payments intentionally right from the beginning of the supplies. Why then there is a dispute about the amounts payable? Respondent, as already noticed supra, contents that various valves supplied by petitioner were of inferior quality and caused impediments in production activity, as a result of which respondent had to replace defective valves by spending an amount of Rs.33.62 lakhs besides incurring damages on account of delay in supply. The question whether petitioner supplied the valves as per specifications prescribed by buyer, or the question whether valves supplied as per specifications were defective are certainly matters which are questions of fact and which need evidence. Even under law of Sale of Goods, a buyer can always reject the goods supplied by seller if they are found to be defective and do not conform to the requirements of purchase order. In such an event, it is always a question of fact and law as to whether seller or buyer suffered legal injury by reason of breach of contract. Therefore, in a case of contract of sale of goods, it is a valid defence by buyer to plead that the goods supplied, for which money is claimed, are defective and therefore, buyer need not pay the amount and also claim general as well as liquidated damages. Indeed, suit is contemplated even under Section 19 of the Code of Civil Procedure, 1908 read with Section 59 of the Sale of Goods Act, 1930 and other relevant provisions thereof. Alleging that petitioner supplied defective valves resulting in loss to respondent, whether the latter took proper pleadings. In counter affidavit, it is stated that respondent addressed letters on 02.01.2007, 08.01.2007 and 20.08.2008 informing petitioner the delay in supplies and defects in the already supplied valves. These letters are annexed to counter affidavit. There is, however, dispute whether they were actually communicated to petitioner. But, prima facie it stands to reason that as petitioner was having running account and there was a regular correspondence between petitioner and respondent with regard to supply of valves (by placing purchase orders) and/or delay in suppies, there cannot be serious objection to draw an inference that there were such communications. These would lend support to submission of respondent that the debt alleged is disputed and that defence raised has substance which can be put to test in civil Court. It is now settled that a company petition for winding up under Section 433(e) read with Section 434(1)(a) of Companies Act is not an alternative to enforce the debt against the company. Indeed, Section 433(e) of Companies Act does not confer any right to seek an order of winding up. It is a discretion of the Court which has to be exercised keeping in view various aspects and questions and consequences of winding up an incorporated entity. A winding up order, there is no gain saying – is a death sentence executed forthwith against ‘juristic person’. The Court, therefore, must not only exercise caution and decide with reference to history of the company, investments made therein, background of promoters, the participation by public sector banks and financial institutions, the employment generation both direct and indirect, the contribution of company to State exchequer by way of direct and indirect taxes and the prospects of economy of the area where company has established its manufacturing facilities. In Govardhandas (supra), Supreme Court considered this aspect of the matter and explained, thus: (paras 20, 21 and 22 of SCC) Two rules are well settled. First, if the debt is bona fide disputed and the defence is a substantial one, the court will not wind up the company. The court has dismissed a petition for winding up where the creditor claimed a sum for goods sold to the company and the company contended that no price had been agreed upon and the sum demanded by the creditor was unreasonable. Again, a petition for winding up by a creditor who claimed payment of an agreed sum for work done for the company when the company contended that the work had not been properly was not allowed. Where the debt is undisputed the court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt. Where however there is no doubt that the company owes the creditor a debt entitling him to a winding up order but the exact amount of the debt is disputed the court will make a winding up order without requiring the creditor to quantify the debt precisely. The principles on which the court acts are first that the defence of the company is in good faith and one of substance, secondly, the defence is likely to succeed in point of law and thirdly the company adduces prima facie proof of the facts on which the defence depends. Another rule which the court follows is that if there is opposition to the making of the winding up order by the creditors the court will consider their wishes and may decline to make the winding up order. Under Section 557 of the Companies Act, 1956 in all matters relating to the winding up of the company the court may ascertain the wishes of the creditors. The wishes of the shareholders are also considered though perhaps the court may attach greater weight to the views of the creditors. The law on this point is stated in Palmer’s Company Law, 21st Edn. p. 742 as follows: “This right to a winding up order is, however, qualified by another rule viz. that the court will regard the wishes of the majority in value of the creditors, and if, for some good reason, they object to a winding up order, the court in its discretion may refuse the order”. The wishes of the creditors will however be tested by the court on the grounds as to whether the case of the persons opposing the winding up is reasonable; secondly, whether there are matters which should be inquired into and investigated if a winding up order is made. It is also well settled that a winding up order will not be made on a creditor’s petition if it would not benefit him or the company’s creditors generally. The grounds furnished by the creditors opposing the winding up will have an important bearing on the reasonableness of the case. (emphasis supplied) In Mediquip Systems (Private) Limited (supra), Supreme Court approved the principles enunciated by Bombay High Court and Madras High Court, which are extracted as below (paras 23 and 24 of SCC). The Bombay High Court has laid down the following principles in Softsule (P) Ltd., Re ((1977) 47 Comp Cas 438 (Bom)) (Comp Cas pp. 443-44) Firstly, it is well settled that a winding-up petition is not legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the company. If the debt is not disputed on some substantial ground, the court/Tribunal may decide it on the petition and make the order. Secondly, if the debt is bona fide disputed, there cannot be “neglect to pay” within the meaning of Section 433(1)(a) of the Companies Act, 1956. If there is no neglect, the deeming provision does not come into play and the winding up on the ground that the company is unable to pay its debts is not substantiated. Thirdly, a debt about the liability to pay which at the time of the service of the insolvency notice, there is a bona fide dispute, is not “due” within the meaning of Section 434(1)(a) and non-payment of the amount of such a bona fide disputed debt cannot be termed as “neglect to pay” the same so as to incur the liability under Section 433(e) read with Section 434(1)(a) of the Companies Act, 1956. Fourthly, one of the considerations in order to determine whether the company is able to pay its debts or not is whether the company is able to meet its liabilities as and when they accrue due. Whether it is commercially solvent means that the company should be in a position to meet its liabilities as and when they arise. The Madras High Court in Tube Investments of India Limited v Rim and Accessories (P) Ltd.((1990) 3 Comp LJ 322, at p.326 has evolved the following principles relating to bona fide disputes: (i) if there is a dispute as regards the payment of the sum towards the 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 parties is a civil court; (ii) 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 a civil court and in such an eventuality, the Company Court itself is competent to decide such a dispute in the winding-up proceedings; and (iii) 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 a civil suit as well as filing a petition for winding up of the company. In TATA Iron & Steel Company (supra), a Division Bench of Gujarat High Court laid down principles to be kept in mind while considering creditors’ petition for winding up on the ground that debtor company is unable to discharge its obligations to the creditors. The relevant principles are as follows. A company petition for winding up of a company on the ground that it is unable to pay its debts would not lie if the company bona fide disputes alleged debt. When it is done so, the Court is required to see whether defence of the company is in good faith and has any substance, whether such defence is likely to succeed in point of law and whether the company has produced prima facie case on which defence depends. A company petition for winding up under Section 433(e) of Companies Act cannot be treated as mechanism to compel and coerce or arm-twist respondent to pay money allegedly due avoiding common law remedy of civil Court especially when there is no determined or a definite sum of money payable immediately or at future date and especially when such debt is disputed in good faith and bona fide. Even when the company’s opposition to winding up is not bona fide, company petition would not lie fdor enforcing a debt which is not legal in the sense the creditor by reason of limitation lost right to enforce the debt. In this case, after giving anxious consideration to the factual background, this Court is convinced that respondent’s defence in disputing the alleged debt has substance and is sustainable in a Court of law. Secondly, counter averment that the company is financially sound and paying dividend at 35% per annum is not disputed. In the Annual Report 2007-2008, “ten year financial highlights” from 1998– 1999 to 2007-2008 is included, which would show that by no stretch of imagination, respondent company be called commercially insolvent. If respondent is non-responsive to the demand made by petitioner in paying an amount of Rs.22,42,159.21 ps., the same does not speak about commercial insolvency of respondent. It is because respondent bona fide disputes debt, and their defence is sustainable in a Court of law. Therefore, petitioner may have to approach the civil Court for recovery of debt, in which event, civil Court shall decide all the issues after regular trial without in any manner being influenced by any of the observations made hereinabove, which are only meant for the purpose of this company petition. In the result, for the above reasons, the company petition fails and is accordingly dismissed. No costs. ______________ (V.V.S.RAO,J) .08.2009 pln [1] (1972) 42 Comp Cas 136 (Bombay) [2] (1972) 42 Comp Cas 139 (Bombay) [3] (1999) 5 SCC 688 : (1999) 97 Comp Cas 683 [4] (2005) 13 SCC 86 [5] (2009) 3 SCC 527 [6] AIR 1971 SC 2600 : (1972) 4 Comp Cas 125 [7] (2005) 7 SCC 42 : (2005) 124 Comp Cas 473 : 2005 (3) SCALE 357 [8] (2001) 104 Comp Cas 533 [9] (2009) 1 Comp LJ 356 (Mad)