1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. COMPANY PETITION NO.570 OF 2009 M/s.Gati Limited. ...Petitioner. Vs. M/s.Grindwell Norton Ltd. ...Respondent. .... Mrs.Shilpa Kapil for the Petitioner. Ms.Neha Bhosale with Mr.Prakash Shinde i/b. J.Sagar Associates for the Respondent. ..... CORAM : DR.D.Y.CHANDRACHUD, J. November 4, 2009. P.C. A warehousing agreement was entered into between the Petitioner and the Respondent on 28th February 2006. Under the agreement, the Petitioner agreed to provide warehousing services to the Company from 1st March 2006 until 28th February 2007. Clause 5.1 of the agreement provided that the Company shall pay to the Petitioner monthly warehousing charges of Rs.75,000/- for an agreed space of 2500 sq.ft. at the warehouse of the Petitioner at Panvel. Bills were to be submitted by the Petitioner on the 25th day of every month and the Respondent was to pay the amount within twenty days of the 2 date of the submission of the bills. Clause 5.3 provided that “bill payments should not be linked to claims/damages” and that such cases shall be settled separately. Under the agreement, extra space utilized by the Respondent was to be charged at Rs.5000/- per rack. The Petitioner raised 11 bills in the total amount of Rs.11,45,161/-. An Advocate’s notice was addressed to the Respondent on 17th November 2008 which was replied to on 8th December 2008 by the Company. A statutory notice under Sections 433 and 434 of the Companies’ Act, 1956 was addressed on 29th January 2009 which was replied to on behalf of the Company on 12th February 2009. On behalf of the Petitioner, it has been submitted that the warehousing facilities extended by the Petitioner were utilized by the Company and in terms of clauses 5.1 and 5.3 of the agreement, the Company is bound and liable to pay warehousing charges. Moreover, it was submitted that payments under the bills should not be linked with claims or damages which are to be settled separately. An affidavit in reply has been filed in these proceedings. 3 The defence in the reply is that in pursuance of the agreement between the parties, the Respondent received several complaints from its customers regarding late delivery, non-delivery, wrong supply, short supply, excess supply, despatching of material not ordered, failure to despatch the material ordered/billed and non-receipt of despatch documents. The Company had raised four debit notes dated 10th May 2007 and 20th June 2007. Eventually a meeting was held on 18th October 2007 between the officials of the Petitioner and the Respondent, when a decision was taken that the business relationship between the parties would be discontinued and the Respondent would raise a debit note for the amount to be recovered from the Petitioner. Thereupon, a debit in the amount of Rs.14,27,760/- was raised by the Respondent on 27th December 2007. In considering the rival submissions, it must be noted that the relationship between the parties was governed by the agreement which was entered into on 28th February 2008. Under the agreement, the Respondent agreed to pay warehousing charges of Rs.75,000/- each month for an agreed space of 2500 sq.ft. Clause 5.3 provided 4 for the time schedule within which bills would be raised and payments would be made by the Company and it was undoubtedly one of the terms of the agreement that bill payments should not be linked to claims/damages. On 10th May 2007 and 20th June 2007, the Company raised four debit notes upon the Petitioner. On 18th October 2007, a meeting was held between the two Companies. In order to appreciate the decisions that were taken therein, it would be necessary to extract from the Minutes: “ 1. GNO discussed in length on the service issues and stock mismatch made by Gati in last 18 months. 2. GNO & Gati did physical stock verification and documented the stocks as on 17/10/07. Both excess stocks and physical shortage of stocks were tallied and minuted between Gati & Grindwell Norton Ltd. 3. GNO decided to part off and move out of Gati & close the agreement of stock management and warehouse operations of GNO. 4. Gati needs to submit all invoice and acknowledgement copies by Oct. 25th 2007. 5. Gati needs to submit all excises records of GNO by Oct.25th 2007. 5 6. GNO will provide a detailed list of stock excess & deficit with values and reconciliation statement by 22nd Oct. 2007. 7. Gati to submit a detailed list of BBND consolidated list for invoices upto 30/9/2007. 8. GNO will provide a list of credit note made due to shortage & BBND cases due to Gati. 9. Difference of excess material value and deficit (BBND + credit notes physical shortage) will be debited to Gati. Debit details would be given by GNO in detail to Gati in advance for understanding and acknowledgement. Balance payment will be made by GNO by 25th Nov. 2007. 10. GNO will extend every support to resolve and settle the commercial issues.” The Minutes of the meeting dated 18th October 2007, referred to the circumstance that a discussion had taken place on service issues and on the stock mismatch made by the Petitioner in the previous eighteen months. Parties agreed to close the agreement and end the relationship created by the agreement for stock management and warehousing operations. The Petitioner on its part agreed to submit invoices and the excise records. The Respondent was to 6 provide a detailed list of stock excess and deficit. Significantly, clause 7 provides that the Petitioner would submit a detailed list of BBND items and a consolidated list for invoices upto 30th September 2007 (BBND is an abbreviation for ‘Billed but not delivered’). The Company was to provide a list of credit notes made due to shortage and BBND cases due to the Petitioner. Clause 9 then stipulates that the difference of excess material value and deficit (BBND + credit notes physical shortage) would be debited to the Petitioner. Debit details would be given by the Company to the Petitioner in advance for ‘understanding and acknowledgement’. The balance payment was to be made by the Respondent by 25th November 2007. In pursuance of the meeting, the Respondent addressed a communication dated 27th December 2007 to the Petitioner by which a statement of reconciliation was furnished. By the statement, the Respondent claimed to be entitled to debit an amount of Rs. 14,27,760/- against the existing outstandings of the Petitioner. The Petitioner was requested to pay the balance amount since the aforesaid debit of Rs.14.27 lakhs exceeded the current total 7 outstandings due to the Petitioner. Together with the statement, certain details were furnished including (1) Minutes of the closure of operations on 18th October 2007; (ii) Excess stock and short stock details after the audit of 17th October 2007; and (iii) Credit Note statement with all invoice details and amount details. The Petitioner sent a reply by a communication dated 25th January 2008. The Petitioner disputed the reconciliation statement of the Respondent. The aforesaid narration of facts would establish that the Company had on 18th October 2007, drawn the attention of the Petitioner to what was perceived as a deficiency in the service rendered by the Petitioner to the Respondent. It is in this background that the Minutes of the meeting dated 18th October 2007 referred to service issues and stock mismatch on the part of the Petitioner. The Minutes clearly specified in clause 9 that the Company would be liable to pay to the Petitioner the balance that would remain after a debit was made to the Petitioner on a “difference of excess material value and the deficit”. 8 On the basis of the record as it stands, it is evident that there is a dispute between the parties on reconciliation of accounts in pursuance of the Minutes of the Meeting dated 18th October 2007. The Respondent has in its communication dated 27th December 2007 sent a reconciliation statement which has been controverted. The Petitioner submitted its own reconciliation statement on 25th January 2008 which in turn has been disputed by the Respondent. Evidently, in the background of this dispute, it cannot be said that there is a debt due and payable by the Respondent to the Petitioner. There is a bona fide dispute on the reconciliation of accounts which requires resolution at the trial of a suit on the basis of the evidence on record. It is a settled principle of law that if a debt has been bona fide disputed by the Company on substantive grounds, there cannot be a ‘neglect to pay’ under Section 434 of the Companies Act, 1956 and if there is no neglect to pay, the deeming provision does not come into effect and the ground of winding up, namely, that the Company is unable to pay its debts, is not substantiated, Amalgamated Commercial Traders (P) Ltd. vs. A.C.K. Krishnaswami, (1965 Com.Cases 456). 9 In these circumstances, the Company Petition would have to be dismissed and shall accordingly stand dismissed. However, it would be necessary to clarify that the observations contained in this order are confined to the petition for winding up and would not amount to any determination of the rights and contentions of the parties which may be determined in duly constituted proceedings for recovery. .......