*THE HONOURABLE SRI JUSTICE V.V.S.RAO + COMPANY PETITION No.62 OF 2008 % Dated 03-09-2009 # M/s. Kitti Steels Limited, having its office at Kitti Towers, 6-3-1238, Raj Bhavan Road, Somajiguda, Hyderabad – 82, rep. By its Managing Director, Mr.H.S.Sethi …APPLICANT V. M/s.Sanghi Industries Limited, Having its registered office at Sanghi nagar, PO, Ranga Reddy District – 501 511, Secretarial office at 4-3-352, Bank Street, Hyderabad, rep by its Managing Director, Mr.Ravi Sanghi …RESPONDENT < Gist : > Head Note: ? Citations: 1) (1971) 41 Comp Cases 352 (Guj) 2) 2003 (5) ALD 316 3) 2005 (2) ALD 531 4) (1998) 91 Comp Cases 646 (Ker) 5) AIR 1971 SC 2600 : 4 Comp Cas 125 6) (2005) 7 SCC 42 : (2005) 124 Comp Cas 473 : 2005 (3) Scale 357 7) (2001) 104 Comp Cas 533 (Guj) THE HON’BLE SRI JUSTICE V.V.S.RAO COMPANY PETITION No.62 OF 2008 ORDER: In this petition filed under Section 433(e), 434(1)(a) and 439(1)(b) of the Companies Act, 1956, (‘the Act’, for brevity) M/s.Kitty Steels Limited, petitioner herein, seeks an order to wind up respondent company. This court ordered notice on 27.08.2008. After receiving notice, respondent entered appearance. Counter affidavit is filed opposing publication of petition under Rule 99 of the Companies (Court) Rules, 1959, (‘the Rules’, for brevity). Petitioner is engaged in business of constructors, fabricators, engineers, consultants and manufacturing of heavy machinery. Respondent is a company incorporated under the Act on 14.06.1995, with main objectives of manufacturing and marketing clinker and cement products, marketed in India and outside. Authorized share capital of respondent is Rs.550,00,00,000/- (Rupees five hundred and fifty crore only). It is the case of petitioner that respondent placed a purchase order dated 19.04.1995 with petitioner for supply of four ship loaders for bagged and bulk material of value of Rs.11,00,00,000/- (Rupees eleven crores only). Respondent had drawn a Hundi dated 25.12.1996 for an amount of Rs.1,78,08,795/- (Rupees one crore seventy eight lakh eight thousand seven hundred and ninety five only), being 70% value of material imported by petitioner for manufacturing ship loaders. Petitioner furnishing bank guarantee for an amount of Rs.1,10,00,000/- (Rupees one crore ten lakhs only) in favour of respondent. In February 1996, respondent invoked bank guarantee, as petitioner allegedly failed to perform the contract. Therefore, petitioner instituted suit being O.S.No.1177 of 1997 on the file of the Court of XI Senior Civil Judge, City Civil Court, Hyderabad for recovery of a sum of Rs.2,17,82,129/- (Rupees two crore seventeen lakh eighty two thousand one hundred and twenty nine only) with interest at the rate of 12% per annum till the date of delivery and 6% per annum from the date of judgment till realization. Suit was decreed on 27.04.2006. As the decree was not satisfied, petitioner got issued notice under Section 434(1), calling upon respondent to pay a sum of Rs.4,80,55,623/- (Rupees four crore eighty lakh fifty five thousand six hundred and twenty three only) which includes subsequent interest. Notice was served on respondent. They did not give reply. Petitioner alleges that as respondent failed to pay the amounts after receiving notice, it requires to be wound up. It is also mentioned that respondent preferred appeal against judgment of lower Court, but they did not obtain any stay. Respondent, in their counter, made following allegations and averments. The Company Petition is based on decree granted by the Civil Court, against which, respondent preferred appeal in C.C.C.A.No.223 of 2006 and therefore, Company Petition for winding up is not maintainable. Legal enforceability of debt and of decree cannot be determined simultaneously in Company Petition in order to avoid conflict of findings that may be recorded in appeal. The allegation that respondent did not give reply to petitioner’s notice is denied stating that reply was given thereto. It is further alleged that petitioner is aware of pendency of appeal, being C.C.C.A.No.223 of 2006. Respondent’s paid up capital is Rs.304.82 crores and its turn over, as per its 21st Annual Report for 2007 – 2008 and fixed assets, are valued at Rs.931.08 crores and 1,674.53 crores respectively. Therefore, for non-payment of disputed debt of 2.17 crore, company cannot be wound up. Respondent also raised other objections, which are as follows. The Company Petition is not filed in accordance with Rule 25 and petitioner failed to plead that respondent is unable to pay its debts and therefore, Company Petition would not lie. By filing this case, petitioner is seeking to execute a decree and when respondent’s company has capital adequacy and huge turnover, Company Petition would not lie under Section 443(2) of the Act. Rule 95 of the Rules is not complied with. In the absence of any specific pleading that respondent is unable to pay its debts or neglected to pay its debts, a petition for winding up is liable to be dismissed. In addition to above pleas, respondent also alleged the following. Respondent’s company, which is world’s largest cement company, has capacity of 3 MTPA with technology of Fuller International Incorporated, U.S.A. It has sold 17,15,509 tonnes of cement as well as 41,483 clinker for domestic market and 83.827 tonnes of cement and 2,45,630 tonnes of clinker in export market earning foreign exchange of Rs.199.66 crores. Respondent paid an amount of Rs.100 crores to exchequer. It has 60 MW Power Plant, Desalinization Plant, Road network and Jetty to cater needs of sea route transportation. It placed an order for supply of four ship loaders valued at Rs.11 crores. As per purchase order, respondent is required to pay 10% of value as advance against bank guarantee and 70% after delivery of machinery at site and the balance 20% on commissioning the machinery delivered by petitioner with performance guarantee after 24 months. Accordingly, an amount of Rs.1,10,00,000/- (Rupees one crore ten lakh only) was paid by respondent against petitioner’s furnished bank guarantee. As per the purchase order, it is the responsibility of petitioner to market components for fabrication of machines by paying cost of machinery, freight, insurance and customs charges. They failed to execute purchase order and therefore, respondent invoked bank guarantee. State Bank of Travencore paid the amount by pay order dated 22.07.1996. Petitioner negotiated with respondent for rescheduling delivery of machines. Minutes were recorded on 12.03.1996, pursuant to which a fresh bank guarantee was furnished by petitioner and respondent paid 10% of purchase order by returning pay order given by bank. Respondent entered into high seas sale contract dated 15.06.1996 to enable petitioner to import goods worth Rs.2,54,41,135/- (Rupees two crore fifty four lakh fourty one thousand one hundred and thirty five only). Petitioner then claimed 70% of the value being Rs.1,78,08,795/- (Rupees one crore seventy eighty lakh eight thousand seven hundred and ninety five only), to execute purchase order and promised to dispatch machines in all respects and requested to execute Hundi for the said amount. Respondent executed Hundi dated 25.12.1996. However, petitioner failed to honour their part of obligation under the purchase order, as per minutes or under Hundi. Respondent has no obligation to honour Hundi and also exercised their right by invoking fresh bank guarantee to recover 10% of value of purchase order. Petitioner committed breach of contract and filed suit. Aggrieved by the decree, respondent filed appeal before High Court disputing enforceability of debt. When the debt is disputed, question of enforceability does not arise. Learned counsel for petitioner and learned counsel for respondent made their submissions to which, reference shall me made at appropriate place. In view of pleadings and submissions, three main issues arise, namely, (i) Whether the appeal filed by respondent before this Court, which is pending adjudication, bars the winding up petition under Section 433(e) of the Act (ii) Whether the Company Petition has to be rejected for non- compliance with Rule 95 of the Rules and Section 434(1)(c) of the Act and (iii) Whether petitioner has, prima facie, made out the case for winding up and whether the defense pleaded by the respondent that debt is bonafide disputed, has any substance. Insofar as first issue is concerned, law appears to be fairly settled. Section 443(2) of the Act empowers Court to refuse to make an order of winding up, if it is of opinion that some other remedy is available to petitioner and that petitioner is acting unreasonably in seeking to have the company wound up in response to pursuing other remedy. In this case, no doubt petitioner obtained a decree from Civil Court and no doubt it is a basis for filing winding up petition. There is no dispute that the decree is in appeal. In such a situation, winding up the petitioner company under Section 433(e) of the Act would not lie. A reference may be made to some of the decided cases cited by learned counsel for respondent. In Re Atul Drug House Limited[1], High Court of Gujarat laid down that a person approaching Company Court for winding up of a company must convince the Court that there is no alternate remedy open to petitioner. Relevant observations are as follows. …Section 443(2) in term enacts that where the petition is presented on the ground that it is just and equitable that the company should be wound up, the court may refuse to make an order of winding up. If it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy. In the context of section 443(2), which is applicable when, the ground for winding up is under section 433(f) that it is just and equitable to do so, it would be the bounden duty of the petitioners to disclose the material facts as to the alternative remedies which they have availed of or which are available to them. It is only this disclosure which would enable the court to exercise its discretion under section 443(2) and when such a petition is presented on this ground under Section 433(f), to make up its mind as to whether the other remedy is available to the petitioners and they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy. The material distinction between the bankruptcy proceedings and winding up proceedings should always be kept in mind, for the winding up proceedings cannot be heard and decided without issuing a public advertisement under the rules. Such a public advertisement would have very serious repercussions especially when the concern is a solvent, flourishing, running concern and the harm which would be done to such a concern by issuing the public advertisement would be almost irreparable and irreversible. That is why the petitioners, who seek to get the winding up petition admitted full well knowing that in such solvent concern the advertisement would have such effect or irreparable damage, must exercise scrupulous care and caution to come with absolute altogether candour by disclosing to the Court why they are pursuing the alternative remedies they have or which they may have availed of before filing such a petition. In Maharashtra Apex Corpn.Ltd.,Sec’bad v Spartex Ceramics India Ltd.,Chandragiri[2], this Court considered the case, wherein, petitioner obtained an award from arbitrator against which, respondent had filed an application before District Court, Chittoor. The Company Petition for winding up was opposed on this ground contending that unless and until award passed by arbitrator is enforceable, Company Petition for winding up would not lie. This Court upheld the contention of respondent therein, observing as follows. …It is settled that if a decree or order passed by Court or Judicial Forum is enforceable, and after receiving statutory notice an incorporated company fails to pay the amount, presumption can be drawn relying on Section 434 of the Act, that the company is unable to pay debts. In such an event, it would always be a different aspect of the matter whether the creditor could have moved the Civil Court for execution of the decree. But, where the Award of the arbitrator is obtained by the creditor and after receiving notice demanding payment of Award amount, presumption under Section 434 of the Act cannot be drawn especially in a case where Award is challenged by respondent company under Section 34 of the Arbitration Act. The fact that award has been passed by the Arbitrator would presupposes two things; that there is a dispute regarding the amount claimed and that Award passed has not attained finality and enforceability, especially when the same is challenged in the Civil Court. In National Research Development Corporation, New Delhi v Elector Flux (P) Ltd., Medak District, A.P.[3], this Court considered a similar question and dismissed the Company Application for winding up on the ground that without availing alternative remedy of execution of decree, a petition for winding up would not lie. Relevant observations are as follows. …The petitioner claims that they have an award passed by the Arbitrator for a sum of Rs.2,40,912/- in their favour, which subsequently became the rule of the Court. Upon the award becoming the rule of the court, the award passed by the Arbitrator is treated as a decree, as if it has been passed by the Court. The relief to be granted under Sections 433 and 434 of the Companies Act, there cannot be any doubt is discretionary, and is to be exercised by the Company Court only when it is proved that the company is unable to pay its debts to its creditors on account of the fact that it has become commercially insolvent. It is not the case of the petitioner that in spite of initiation of execution proceedings, the respondent failed to satisfy the award either in whole or in part, and therefore, it should be deemed to have become commercially insolvent. The petitioner admittedly, did not avail the execution proceedings, which is an effective alternative remedy available to them under Order XXI of the Code of Civil Procedure, 1908, for recovering the money under an award. Merely because the respondent has not paid the amount under the award in spite of receipt of demand notices, it cannot be said that the company has become commercially insolvent, warranting exercise of discretionary power by this Court Inasmuch as the petitioner has an effective alternative remedy, and has approached this Court under Sections 433(e) and 434 of the Companies Act, without availing the said effective alternative remedy, and in the absence of any proof placed by the petitioner about the non-satisfaction of the award passed by the Arbitrator, which subsequently became a decree of the Court, by executing it before a competent Court having jurisdiction, no order or winding up can be passed presuming that the company has become commercially insolvent. Be that as it may, since the petitioner has an alternative remedy of executing the award is a competent Civil Court having jurisdiction of the Company Court, for executing the award passed by the Arbitrator, which subsequently became a decree. Petitioner, who obtained a decree instead of filing an execution petition, filed the present Company Petition. Further, decree in O.S.No.117 of 1997 is under appeal. Both the counsel brought to the notice of this Court that judgment and decree under appeal have been suspended. As a necessary corollary, it becomes clear as on today, decree is unenforceable and hence, it cannot be said that there is enforceable debt against respondent company. On issue number one, therefore, this Court holds against the petitioner and in favour of respondent. Insofar as second issue is concerned, there cannot be any doubt that as per Rules 3 and 4 read with Rule 6 of Company (Court) Rules, 1959, all applications and petitions filed under the Act, as far as possible, must comply with Rules adopting various forms prescribed therein, wherever applicable. Part 3 of the Rules contain Rules 95 to 338 to regulate winding up proceedings from the stage of filing up of petitions, (both creditors winding up petition and voluntary winding up), the other proceedings in relation thereto and liquidation subsequent to winding up order. Rule 95 lays down that a petition for winding up of a company shall be in Form No.45, 46 or 47, as the case may be, with such variations, as the circumstances may require. Be it noted, Form No.45 is a general form of petition for winding up and Form No.46 is a petition by creditor, whereas Form No.47 is a petition by company, which is for voluntary winding up. Form No.46 is as follows. FORM No. 46 (See rule 95) (Heading as in Form No. 1) Company Petition No. …….. of 19 ………. ……………Petitioner Petition by Creditor The petition of [insert full name, description, occupation and address of petitioner] showeth as follows:- Paras 1 to 5 as in Form No.45 6. The company is indebted to the petitioner in sum of Rs……….. for [state consideration for the debt, with particulars, showing that the debt claimed is due] 7. The petitioner applied to the company for the payment of his debt by his notice of demand signed and dated.…………served on the company at its registered office on.……………. by registered post [or, set out the manner of service, if it was otherwise than by registered post], but the company has failed and neglected to pay the same or any part thereof. [If the ground of the petition is that execution or other process issued on a decree or order of any Court in favour of the petitioning creditor was returned unsatisfied in whole or in part, set out the particulars relating to the decree and the execution or other process which has been returned unsatisfied in whole or in part]. 8. The company is [insolvent and] unable to pay its debts [Where the company is being already wound up voluntary or subject to the supervision of the Court, set out the facts showing that the voluntary winding up or winding up subject to the supervision of the Court cannot be continued with due regard to the interests of the creditors] 9. The petitioner therefore prays as follows:- (1) That the ………………. Co. [Ltd.,] may be wound up by the court under the provisions of the Companies Act, 1956, and (2) Such other order may be made in the premises as shall be just. Advocate for the Petitioner Petitioner As can be seen from the above, when a petition is presented by creditor under Section 433(e) and/or 433(e) read with 433(f) of the Act, a petition must contain essential pleadings that respondent company failed and neglected to pay the petitioner’s debt even after receipt of notice of demand in writing and that such company is insolvent and unable to pay its debts. This appears to be essential in view of Section 434(1)(c) of the Act, which stipulates that company shall be deemed to be unable to pay its debts if it is proved to be so. When there being a proper pleading as required in Form No.46, question of proof under Section 434(1)(c) of the Act does not arise. Therefore, compliance with Rule 95 is essential to succeed in winding up petition. Kerala High Court considered this aspect of the matter i n Kanchanaganga Chemical Industries v Mysore Chipboards Ltd[4] and held as follows. Machinery for winding up will not be allowed to be utilized merely as a means for realizing debts due from a company. It is also well settled that a winding up petition is not a legitimate means of seeking to enforce payment of debt. An order will not be made if a sufficient case is not stated in the petition even if such a case is proved in evidence. The petition must disclose the assets of the company and whether they are insufficient to meet the liabilities including contingent and prospective liabilities, and further it must disclose the position of fixed assets as well as valuation of plant and machinery of the company. The question is not whether at given time the company can pay all is debts whether presently due or only in future and still to continue to function but the question is whether it is able to meet current demands. The petition, in this case, does not contain essential pleadings nor it gives an opportunity to respondent company with reference to its assets and liabilities and therefore, it must be held that petitioner has not complied with requirements of law. Insofar as third issue is concerned, law seems to be well settled. Not withstanding Section 433(e) read with Section 434(1)(a) of the Act, Court must be slow in ordering winding up, even if it is shown that the company failed to pay debts within three weeks after receipt of registered notice demanding payment, or even if the company having received notice, does not respond. It is also well settled that petition for winding up is not a substitute for accepted mode of recovering debt by way of suit. Proceedings under Section 433(e) of the Act cannot be used for arm- twisting to compel company to pay debts even if there are serious disputes regarding liability. But whenever the company disputes debt, same does not preclude the Court from ordering winding up if it is shown that dispute raised by company regarding debt is not bonafide. If the dispute or defense raised by company has no substance or the dispute or defense is raised as an after-thought before Court, company can be ordered to be wound up. Further, in its discretion, Court may refuse the order of winding up, if it is of opinion that such winding up would not be in the interests of members, employees, workmen and creditors of company. A perusal of Section 443 of the Act would show that absolute discretion is vested in the Court to make an order for winding up. Court can refuse to make an order of winding up, if it is of opinion that the person is acting unreasonably in seeking to have the company wound up instead of pursuing with other remedy. See M.Govardhandas & Co., v M.W.Industries[5], Mediquip Systems (Private Limited v Proxima Medical System GMBH[6] and TATA Iron & Steel Company v Micro Forge (India) Limited[7]. Petitioner herein, filed a suit and obtained decree. Same is under appeal before this Court. Therefore, it cannot be – in absolute terms; said that there is enforceable debt against respondent. The very fact respondent appealed to this Court against the judgment and decree of Civil Court would show that debt is bonafide disputed. Insofar as the defense is concerned, it is the case of respondent that in the first instance, when the order was not executed by petitioner, they en-cashed bank guarantee for an amount of Rs.1,10,00,000/- (Rupees one crore ten lakhs only). Again, there were negotiations between the parties. As per the minutes dated 12.03.1990, purchase order was revived. In pursuance there of, respondent returned the pay order given by the bank and thus fulfilled the condition of depositing 10% as advance towards purchase order. Even thereafter, petitioner allegedly did not deliver ship loaders and therefore, respondent declined to honour their Hundi for an amount of Rs.1,78,08,295 (Rupees one crore seventy eight lakh eight thousand two hundred and ninety five only). Whether petitioner or respondent failed to perform their respective part of contract and whether which party failed to discharge the obligation are all the matters, which are at large before this Court in C.C.C.A.No.223 of 2006. Therefore, dispute is bonafide. It is admitted that as per purchase order dated 19.04.1995, petitioner was required to deliver first machine within the seventh month of order and 2nd, 3rd and 4th loaders shall be delivered in the 9th, 10th and 11th month respectively from the date of order. On an allegation that first ship loader was not delivered within seven months period, respondent invoked bank guarantee and received pay order from concerned. Again, there was revival of purchase order after negotiations. But respondent refused to honour Hundi, allegedly for the reason, that petitioner failed to honour their obligation