In the High Court of Judicature at Madras Dated:- 22-01-2009 Coram: The Honourable Mr.Justice D.MURUGESAN and The Honourable Mr.Justice M.SATHYANARAYANAN Original Side Appeal No.375 of 2002 and C.M.P.Nos.19268, 19269, 10678 and 10679 of 2005 M/s. Sampat Trading & Co., 23, Mount Pleasant, Coonoor 643 102 rep. by its Partner Mr.G.Vinodchand. .. Appellant Versus M/s.Talayar Tea Company Ltd., Registered Office No.10, Damu Nagar, Pullakulam, Coimbatore 641 045. .. Respondents Original Side Appeal filed under Section 483 of the Companies Act, against the order of the learned single Judge dated 25.06.2002, made in in C.P.No.137 of 2000. For Appellant .. Mr.P.Aravind P.Datar, S.C. for Mr.R.Murari. For Respondents.. Mr.J.Sivanandaraj for M/s Sivam Sivanandaraj JUDGMENT M.SATHYANARAYANAN, J Company Petition No.137 of 2000, which has been filed for winding up the respondent company and for appointment of Official Liquidator, was dismissed by this Court on 25.6.2002 and aggrieved by the same, the applicant has preferred this appeal. 2. The facts which are necessary for the disposal of this appeal are given hereunder:- In the petition filed in C.P.No.137 of 2000, it is stated that the respondent company is engaged in the manufacture and sale of tea to various parties and the petitioner/appellant is engaged in the https://hcservices.ecourts.gov.in/hcservices/ tea brokerage business for a considerable period of time, was acting as the agent of the respondent and in that capacity, they used to buy and sell tea on behalf of the respondent to various customers. They also maintaining a running account. The respondent also used to borrow money on a regular basis from the petitioner to meet their fund requirement and the petitioner was also advancing monies periodically to the respondent to meet such requirements. It is further averred in the petition that the respondent had accumulated huge dues and in respect of consignment coffee supplied by the respondent, there was a short supply and in that regard also, amounts were due to the petitioner. The petitioner after crediting certain payments made by the respondent, got execution of pronotes in their favour by the respondent. 3. The petitioner further averred that in the year 1997, a Reconciliation Statement was preferred after verification of the accounts of both the petitioner and the respondent. Thereafter, it was agreed by the respondent that a sum of Rs.73,32,810.05 was due and payable by them to the petitioner and the respondent also agreed to pay interest at the rate of 24% per annum on the above said amount. The respondent confirmed and accepted a sum of Rs.99,47,312.67 due and payable as on 27.11.1997 to the petitioner. The respondent also confirmed that a further sum of Rs.67,537.33 was due and payable to the petitioner in respect of short supply of Coffee and after crediting payments made for renewal of pronotes. The respondent confirmed and accepted that a total sum of Rs.1,00,14,850/- was due and payable by the respondent to the petitioner as per the statement of account verified and confirmed on 27.11.1997 by the Managing Director of the respondent on behalf of the respondent company. 4. The petitioner also averred that a liquidated debt due and payable to the petitioner, which the respondent has failed and neglected to pay the same. The respondent through its Managing Director, on 27.11.1997 confirmed that a sum of Rs.1,00,14, 580/- was due and payable to the petitioner and on 15.12.1997, the respondent made part payment of Rs.60,00,000/- by way of Demand Drafts drawn in favour of the petitioner. However, no further payments has been made by the respondent to the petitioner regarding the balance dues. Therefore, the petitioner sent reminders and in response to the same, the respondent in its letter dated 27.7.1999 for the first time has stated that the petitioner is due and payable a sum of Rs.31,86,000/- to them. The said statement according to the respondent is made with a mala fide and oblique motive in order to defeat their claims. 5. The petitioner sent a suitable reply on 3.8.1999 and followed by a further letter dated 16.8.1999 wherein the petitioner brought to the knowledge of the respondent about the letter dated https://hcservices.ecourts.gov.in/hcservices/ 27.11.1997 in which, the Managing Director of the company has confirmed and certified that a sum of Rs.1,00,14,850/- was due and payable by them to the petitioner. However, there was no response to the said letters. 6. It is further stated by the petitioner that the respondent became commercially insolvent as their balance sheet for the year ended 31.3.1999 would disclose that as against the paid up capital of Rs.12,50,000/- and Reserves of Rs.12,55,442/-, the respondent has loans outstanding secured and unsecured to the extent of Rs.1,26,13,182/-. Further, as against the current assets, loans and advances of Rs.1,80,87,017/-, current liabilities and provisions are Rs.5,00,55,958/-. That apart, during the said year, the respondent company suffered a loss of Rs.44,45,080/- and the said figure coupled with carry forward losses to the extent of Rs.2,38,65,494/- and the loss transferred to the balance sheet as on 31.3.1999 is Rs.2,83,10,574/-. Therefore, the above figures given in the balance sheet clearly establish that the respondent company become commercially insolvent and the petitioner and other creditors will not be able to recover anything from the assets. Hence, for the said reasons, the petitioner herein prayed for winding up of the respondent company and appointment of Official Liquidator to proceed further in the matter. 7. The respondent has filed its counter. In the counter statement, it has been averred that the respondent company is financially very sound and that there is no debt due to the petitioner but on the contrary, the petitioner owes the respondent a sum of Rs.37,36,292.62 as per the revised statement of accounts. It is further averred in the counter that the present management took over the respondent company from the previous management. In the previous management, two of the partners of the petitioner were Directors till 12.12.1997 and as such, there was a collusion between them and the previous management of the respondent. It is further averred in the counter that the alleged due of Rs.1,00,14,850/- as confirmed by the respondent and its Managing Director were prior to December 1997 during which period, the respondent company was under the old management. After take over of the respondent company by the new management, a sum of Rs.60,00,000/- was paid to the petitioner with a specific understanding that further to finalisation of accounts and subject to verification of the same, the respondent's dues to the petitioner will be ascertained and will be settled in full. At the time of take over on 12.12.1997 by the present management, auditing of accounts was over only up to 1995- 1996 and the present management had finalised the accounts subsequently for the years 1996-97, 1997-98 and 1998-1999. https://hcservices.ecourts.gov.in/hcservices/ 8. The respondent also averred that the agreed rate of interest is only 12% and the petitioner was accepting monies due to the respondent from various third parties such as Tamil Nadu Tea Brokers Ltd., under the pretext of setting of its dues from 30.5.1996 and 31.1.1997 and the amount involved is Rs.15,17,402.45 and if the said amount is taken into account, a sum of Rs.2,90,109.24 has been paid in excess to the petitioner as on 15.12.1997 and the respondent has to refund the same with interest. The respondent supplied tea valued at Rs.6,64,310.44 on 1.2.1998 to the petitioner through M/s. Woodbriar Estate Ltd. It is further averred in the counter that as per the statement of accounts annexed to the counter statement, a sum of Rs.37,36,292.82 is due and payable by the petitioner to the respondent and that apart, the petitioner has also included certain personal loans given to the respondent’s Managing Director and his family members prior to 12.12.1997. 9. The respondent has sent a detailed reply to the lawyer’s notice dated 20.7.1999 and also sent reply to the statutory notice dated 18.9.1999. The sum and substance of the counter statement of the respondent is that since there is bona fide dispute on the amount due and payable to the petitioner by the respondent, and that actually the petitioner is liable to pay amounts to the respondent, and also, the respondent company is financially sound, the petition for winding up the company is not maintainable. Therefore, the respondent prayed for dismissal of the application for winding up. 10. The petitioner has filed its reply to the counter statement stating among other things that the transaction between the petitioner and M/s. Woodbriar Estates Ltd., has absolutely no connection with the respondent company. It is further averred in the reply statement that the respondent requested the petitioner who had a bank account at Coonoor to deposit the cheques pertaining to the transaction with Tamil Nadu Tea Brokers Ltd. Accordingly, the cheques were deposited in the accounts of the petitioner and later on a sum of Rs.15,17,402.45 received by the petitioner from Tamil Nadu Tea Brokers Ltd., has been transferred to the respondent in terms of the above said understanding except a sum of Rs.535.80. The respondent has also acknowledged the same vide their letter dated 3.2.1997. The petitioner further denied the allegation that certain personal loans given by the petitioner to the Managing Director of the respondent were included. 11. The learned Judge after consideration of the averments made in the petition, counter and reply, held that there is a bona fide dispute as regards the existence of the debt and it is for the petitioner to prove by production of accounts and other documents that monies were due to the petitioner. The learned Judge further found that the collusion between the previous management of the company with the petitioner cannot be decided in summary proceedings https://hcservices.ecourts.gov.in/hcservices/ and it is for the petitioner to establish the same in a properly instituted suit. The learned Judge further found the financial condition of the respondent is neither week nor unsound to order winding up of the respondent company and for the said reasons, has dismissed the company petition filed by the petitioner for winding up of the respondent company. The petitioner aggrieved by the same, has preferred this appeal. 12. Heard the submissions of Mr.Aravind P.Dattar, learned senior counsel appearing for the appellant and Mr.Sivam Sivanandaraj, learned counsel appearing for the respondent. 13. The learned senior counsel appearing for the appellant has made the following submissions:- (a) The respondent company has paid a sum of Rs.60,00,000/- in terms of the agreement dated 12.12.1997 after the new management took administration and affairs of the company and as per clause No.2, the new management has to take over all liabilities. In clause No.6.1 of the said agreement it has been admitted that a sum of Rs.60,00,000/- has been paid and further undertaking was given to pay the balance due. If really the truth and validity of the agreement dated 12.12.1997 is under dispute, the respondent should not have paid a sum of Rs.60,00,000/- and promised to pay the balance dues to the appellant. (b) The respondent has written a letter dated 3.2.1997 to the appellant, confirming the receipt of a sum of Rs.15,16,855.85 and there were cash receipts / acknowledgements in respect of individual amounts paid by the respondent. The erstwhile management had also given acknowledgement from 1.6.1996 to 14.12.1996 and the new management took the administration and affairs of the respondent company on 12.12.1997 and the said terms are not in dispute. (c) There is no bona fide dispute to the amount due and payable to the appellant as the admitted balance as on 27.11.1997 was Rs.1,00,14,850/- and the finding of the learned judge that it is not clear as to whether payments of Rs.5,000/- and 1,500/- on 9.6.1997 and 1.9.1997 respectively have been taken into account while determining the balance on 27.11.1997, on the face of it unsustainable as the said amounts are insignificant and irrelevant to adjudicate the issue with regard to the bona fide dispute of the amount payable. (d) There is no bona fide dispute with regard to the balance of principle amount due and payable and assuming that there is a dispute on the quantum of interest, the same cannot be against the claim of the appellant. (e) With regard to the dispute in respect of payment by M/s. Woodbriar Estates Ltd., it is an independent transaction with another company and the respondent company has nothing to do with https://hcservices.ecourts.gov.in/hcservices/ the said payment. There is no question of any adjustment between the payments and receipts with regard to the M/s. Woodbriar Estates Ltd., as they are two different and independent transactions in two different companies. (f) The agreement dated 12.12.1997 read with letter of confirmation dated 27.11.1997 are prima facie sufficient to constitute an admitted liability on the part of the respondent. (g) The former Managing Director as well as new Managing Director had admitted the liability and the said admission has been made on behalf of the respondent company and the same is binding on them. (h) In respect of amounts due from Tamil Nadu Tea Brokers Ltd., acknowledgement/cash receipts show full payment of the amount of Rs.15,16,866.85. (i) As regards the commercial insolvency of the respondent, it is submitted by the learned senior counsel appearing for the appellant that as per the 55th Annual Report for the financial year 2000-2001, the share capital was shown as Rs. 12.5 lakhs and the loss for the year 2000-2001 was shown as Rs.58.24 lakhs and the total carry forward loss is Rs.5.57 crores. According to the learned senior counsel appearing for the appellant when the annual loss is 4.5 times more than the share capital amount and the carry forward loss is 40 times, it cannot be said that the company is in sound position. (j) Lastly it is submitted by the learned senior counsel appearing for the appellant that for deciding the petition for winding up, the Court has to proceed only the prima facie case and there is no question of appreciation of evidence involved while adjudicating the said petition. In any event, the petition for winding up cannot be ordered straight away and only an advertisement is ordered to be issued and thereafter, after adjudicate the claims of the other creditors and the contention putforth by the debtor, the Court has to decide the winding up of the company. Therefore, the learned Judge ought to have ordered issuance of the advertisement according to the learned senior counsel appearing for the appellant. 14. The learned senior counsel appearing for the appellant in support of his submissions, has took us through the typed set of documents and also placed reliance upon the following judgments:- i. (1994)3 Company Law Journal page 438 (Delhi) ii. (1999) Vol.95 Company Cases page 172 - Ashoka Agencies & Business Forms Ltd., iii. TDICI Limited vs. Neptune Inflatables Ltd. reported in (1999)1 Company Law Journal page 240 (Mad.), iv. [2006] 129 Company Cases page 678 (Delhi) - Mahesh Nathani vs. Sir Edward Dunlop Hospitals (India) Ltd. https://hcservices.ecourts.gov.in/hcservices/ v. [1978] vol.48 Company Cases page 378 (Bomb.) - United Western Bank Ltd., In re., vi. [1982] Vol.52 Company Cases page 479 (Calcutta) - Wastinghouse Saxby Farmer Ltd., In re. vii. [1978] Vol.48 Company Cases, page 129 (Allahabad) - Registrar of Companies, U.P. vs. KT.Financiers Private Ltd., viii. (2002)3 MLJ 750 - Imperian Corporate and Services (P) Limited vs. Aruna Sugars and Enterprises Ltd. 15. The judgment reported in (1994)3 Company Law Journal page 438 (Delhi) came to be decided on the facts of the case as the High Court of Delhi in the said decision found that debt has been admitted and proved and therefore ordered winding up of the company. 16. In (1999) Vol.95 Company Cases page 172 - Ashoka Agencies & Business Forms Ltd., the petition for winding up was filed against the respondent company on the ground of its failure to pay the balance of Rs.24,32,416.01 on a running account which was acknowledged by the said company by its communication dated 21.9.1992. The company raised defence, that the said communication was not a promise to pay and at the most, it was an acknowledgement of a time-barred debt. The Calcutta High Court on the facts of the said case held that in the light of the petitioner's affidavit that there was continuous and running transactions; there could be no presumption that the acknowledgement was of a time-barred debt. The High Court of Calcutta citing the said reasons, ordered issuance of advertisement. 17. In TDICI Limited vs. Neptune Inflatables Ltd. reported in (1999)1 Company Law Journal page 240 (Mad.), this Court on the facts of the said case held that various letters of undertaking sent by the respondent pay the debts would prove that the respondent is unable to pay its debts and the admission of debt voluntarily, recorded by the respondent in their letter, will prove they are unable to pay the debts and therefore, this Court has ordered issuance of advertisement as contemplated in Rule 96 read with Rule 24 of the (Company Courts) Rule 1959. 18. In [2006] 129 Company Cases page 678 (Delhi) - Mahesh Nathani vs. Sir Edward Dunlop Hospitals (India) Ltd., a non-resident Indian has remitted money for allotment of shares in respondent company and later on the said person has withdrawn his intention to subscribe shares. However, the company has not repaid the amount. https://hcservices.ecourts.gov.in/hcservices/ The High Court of Delhi held that even tough the company was a solvent but has not chosen to pay the amount and therefore, admitted the petition for winding up and ordered publication in newspapers. 19. In [1978] vol.48 Company Cases page 378 (Bomb.) - United Western Bank Ltd., In re., the High Court of Bombay underlying the principles for ordering the winding up of the company, which are as follows:- "On a petition under section 483 of the Companies Act, 1956, where the defence is that the debt is disputed, the court has to see first whether the dispute on the face of it is genuine or merely a cloak to cover the company's real inability to pay just debts. The inability is indicated by its neglect to pay after a proper demand and a lapse of three weeks. Such neglect must be judged on the facts of each case. Merely seeking to raise certain disputes for putting off liability for payment of the debt or creating a kind of defence to the claim will not make the debt a disputed one. Disputes which appear to have been created or manufactured for the purpose of creating pleas to cover up the liability for payment of the debt can never be considered to be bona fide and will be of no avail in resisting a winding-up petition." 20. In [1982] Vol.52 Company Cases page 479 (Calcutta) - Wastinghouse Saxby Farmer Ltd., In re., the High Court of Calcutta, on the facts of the case, held that there is no bona fide dispute based on material on record and therefore, ordered winding up of the company. 21. As regards Commercial Insolvency, reliance was placed upon the judgment reported in [1978] Vol.48 Company Cases, page 129 (Allahabad) - Registrar of Companies, U.P. vs. KT.Financiers Private Ltd., wherein the balance sheet of the company showed that the total realisable assets of the company was over Rs.6.00 lakhs as against the liabilities of over Rs.11 lakhs and none of the Directors, responded to the statutory notices issued under section 439(5) of the Companies Act, 1956. The Allahabad High Court on a perusal of the material on record found that the company had become financially unsound and was unable to carry on its business. Therefore, the company should be wound up. 22. In (2002)3 MLJ 750 - Imperian Corporate and Services (P) Limited vs. Aruna Sugars and Enterprises Ltd., this Court has placed reliance upon the decision of the Hon'ble Supreme Court of India, reported in 1971 Manu (Supreme Court) page 33 - M.Gordhandas and Company vs. M.W.Industries, and in the said decision, it has been held as follows:- https://hcservices.ecourts.gov.in/hcservices/ " 20. 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 (See London and Paris Banking Corporation (1874) 19 Eq.444). 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 done properly was not allowed. (See Re.Brighton Club and Norfolk Hotel Co. Ltd., (1865) 35 Beav.204) 21. 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 (See Re.A company 94 SJ 369). 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 qualify the debt precisely (See Re. Tweeds Garages Ltd., 1962 Ch.406). 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." 23. This Court in the said decision also placed reliance upon a Division Bench decision of this Court reported in 1970 MANU/TN 122 - Sree S.Mitts v. Dharmaraja Nadar and held that the test of inability to pay the debt under Section 433(e) of the Companies Act was not whether the company, if it converted all its assets into cash, would be able to discharge its debts, but whether in a commercial sense the existing liabilities could be paid by it while continued to carry on as a company. In the said decision it has been found that the company has failed and neglected to pay the sums due to the petitioner and therefore ordered publication. 24. Per contra, Mr.Sivam Sivanandaraj, learned counsel appearing for the respondent has submitted the following:- (a) Two partners of the appellant were Directors of the respondent company as evidenced from form 32 filed before the Registrar of Companies and hence it can be safely assumed that the appellant had close nexus with the old management and had access to the office of the respondent including its stationary and records. https://hcservices.ecourts.gov.in/hcservices/ (b) As per the agreement dated 12.12.1997, it has been stated that a sum of Rs.60,00,000/- was due to the appellant and if there is any balance due, the same will be paid to the appellant within sixty days. The appellant after receipt of Rs.60,00,000/-, had transferred all share certificates pledged with them as security, to the new management of the respondent and this was done due to the reason that the entire liability had been cleared and if anything was found to be due, it was only a meagre amount. Any prudent person will not transfer all share certificates pledged, in the absence of full and final settlement of amounts due. The same is evidenced from the letter dated 27.11.1997 and the statement of accounts even dated. (c) The statement of accounts produced by the appellant would reveal the date of last transaction was on 25.02.1997 and it was signed by one Mr.K.A.Narayanan in his capacity as the Managing Director of the respondent who was part of the old management. The balance sheet and statement of accounts ending up to 31.3.1997 was furnished by the old management at the time of take over and as per the statement of accounts, the amount due and payable as on 31.3.1997, is only Rs.49,70,714/- and it was also signed by Mr.K.A.Narayanan. A combined