IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD THURSDAY, THE 14TH DAY OF SEPTEMBER, TWO THOUSAND AND ELEVEN PRESENT HON’BLE SRI JUSTICE A.GOPAL REDDY AND HON’BLE SRI JUSTICE K.S.APPA RAO ORIGINAL SIDE APPEAL No: 41 of 2011 Between: Cheminova Remedies Pvt. Ltd., Having its regd. Office at 15, Balanagar, Hyderabad, rep. by Its Deputy Manager Commercial, V.Anjaneyulu. … Appellant And M/s.S.P.Pharma Lines, Office at D-3, Woodbridge Apartments, Somajiguda, Hyderabad, Rep. by its partner Kamal Biyani. … Respondent This Court made the following: HON’BLE SRI JUSTICE A.GOPAL REDDY AND HON’BLE SRI JUSTICE K.S.APPA RAO ORIGINAL SIDE APPEAL No: 41 of 2011 ORDER: - (Per Hon’ble Sri Justice A.GOPAL REDDY) This appeal under Clause 15 of the Letters Patent read with Section 43 of the Companies Act, 1956 (for brevity, “the Act”) against the orders of the learned Single Judge in admitting the Company Petition No.223 of 2010 filed for winding up, and ordering the admission of the Company Petition to be published in the ‘Deccan Chronicle’ (English daily) and ‘Andhra Jyothi’ (Telugu daily) of Hyderabad Editions. 2. For the sake of convenience, the parties herein will be referred to as appellant company and respondent firm. 3. The appellant company is a partnership firm engaged in the business of manufacturing of formulations of drugs and is having a sister concern Viz., Ms.Cheminova Pharmaceuticals, which is also engaged in the business of formulation of drugs in liquid oral form (Syrups/Suspensions), Tablets and Capsules. The appellant company undertakes formulations of its own and also formulations of various companies on job work basis. For the purpose of carrying out its formulations, it requires a lot of raw material and packing material etc. Respondent firm deals with the business of pharmaceutical empty bottles and solvents etc. The appellant company had placed purchase orders with the respondent firm for supply of empty bottles and sorbitol from time to time and the same were said to have been supplied by the respondent firm basing on the purchase orders and raised invoices from time to time. A running account is said to have been maintained by the respondent firm with regard to the supplies made to the appellant company under various purchase orders and as per its books of account as on 31.07.2010, the appellant company has to pay a sum of Rs.84,41,975/-. The outstanding amount includes the supply of material to Unit-II during 2009-2010 for Rs.7,51,605/-. Further, the appellant company issued several cheques towards payment of the outstanding amount and on presentation, 8 cheques for various amounts mentioned in the impugned order were returned for want of sufficient funds and another 45 cheques for various amounts were not even presented by the respondent firm alleging to be on the request of the appellant company. The respondent company issued statutory notice under Section 433 of the Act on 23.08.2010 calling upon the appellant company to pay the outstanding amount of Rs.76,90,367/- for Unit-I and Unit-II along with interest at 24% per annum within 21 days. The said notice was returned unserved with an endorsement ‘addressee refused’. The appellant company knowing fully well the contents of the notice, intentionally refused to receive the same. The respondent firm came to know that the appellant company is due and payable considerable amounts to other creditors also and as it is unable to pay its debts, thereby the appellant company has become commercially insolvent, warranting its winding up. Hence, the respondent firm filed the above company petition. 4. On issuing notice before admission, the appellant company filed counter opposing the petition and admitting about the purchase orders and stated that one Mr.Deepak Toshniwal, who was the General Manager (Commercial) of the appellant company and its sister company, was incharge of all the purchases for the appellant company and its sister concern. He informed the appellant company that the partners of the respondent firm are known to him and that the respondent firm would supply the raw materials as required by the appellant company and its sister concern promptly and at competitive prices. Mr.Kamal Biyani, partner of the respondent firm, and Deepak Toshniwal, assured the appellant company that the respondent firm would be charging a commission of 2% of Central Excise Invoice amount as per the normal trade practice. The respondent firm thereafter started supplying the raw materials as per the instructions of Mr.Deepak Toshniwal and from the date of inception, there was no practice of paying the amounts on a invoice to invoice basis and rather it was always ‘on account’. Over a period of time, a running account was established between the respondent firm and the appellant company as per the instructions of Deepak Toshniwal. The appellant company continued to make the payments to the respondent firm as directed/indicated by Deepak Toshniwal and the appellant was always assured by Deepak Toshniwal that he was verifying the accounts before instructing the accounts department of the appellant company to release the payments to the respondent firm. In the month of November, 2009, upon verification of invoices raised, the appellant company realised that the respondent firm was raising invoices for excess amounts than what was the prevalent market price for the said products and the respondent collected an excess amount of Rs.43,53,170/-. Mr.Deepak Toshniwal, who was an employee in the appellant company, colluded with the respondent firm and caused huge loss to the appellant company to an extent of Rs.43,53,170/-. The present company petition is filed with a sole intention of pressurizing the appellant company to pay the disputed amount. It is further stated that the respondent firm has filed a suit in O.S.No.696 of 2010 on the file of II Additional Chief Judge, City Civil Court, Hyderabad, against the sister concern of the appellant company for recovery of the amount and the same is pending. Since there has been no crystalisation of the liability to the respondent firm, the petition for winding up of the appellant company is not maintainable. The respondent on realizing that their fraud is exposed, addressed a letter dated 30.11.2009 to the appellant and its sister concern stating that it had collected excess amounts from the appellant company with regard to the supply of Sorbitol, Dextrose, 30 ml and 60 ml glass bottles etc. that it had paid a part of amount collected illegally to Mr.Deepak Toshniwal, which contains the supplies made during the period from April, 2009 to 25.11.2009; that it had collected an excess amount of Rs.9,69,652/-; that on further verification of the supplies made by the respondent to the appellant and its sister concern, it was realized that the respondent had collected an excess amount of Rs.43,53,170/-. It was further stated that after coming to know about the fraud played by the respondent in collusion with Mr.Deepak Toshniwal, the appellant company and its sister concern on verification of the records, lodged a complaint with the Inspector of Police, Balanagar Police Station on 17.10.2010 and the police after receiving the complaint have registered a case in crime No.281 of 2010. The appellant, apart from taking steps to initiate criminal action against the respondent, also initiated civil action for recovery of the difference amount. Realizing the said action, the present company petition has been filed to pre-empt the action of the appellant company and the same is liable to be dismissed. 5. A reply affidavit has been filed by the respondent firm admitting that it gave a discount of Rs.9,00,000/- to the sister concern of the appellant company with assurance that they will clear the entire liability by 31.12.2009, but in spite of receipt of Rs.4,00,000/- out of the said amount, the appellant company failed to pay the balance amount. Therefore, the respondent firm has no other option except to issue notice for winding up. 6. Pending the Company Petition, C.P.M.P.No.786 of 2011 was also filed by the respondent firm under Rule 9 of the Rules r/w Order 7, Rule 14(3) of CPC to receive certain documents filed in O.S.No.696 of 2010 on the file of II Additional Chief Judge, City Civil Court, which was allowed by the learned single Judge on 22.07.2003. 7. The learned Single Judge, after considering the submissions admitted the company petition holding that the respondent firm supplied the material under various purchase orders commencing from 01.04.2007 onwards and copies of the purchase orders commencing from 23.04.2009 have been placed on record, basing on which the respondent firm raised the invoices. The appellant company received the goods covered under the invoices and issued cheques towards the value of the material covered under the purchase orders/invoices. The respondent firm presented some of the cheques issued by the appellant company and thereupon, they came to be dishonoured. Some of the cheques issued by the appellant company came to be not presented on the request of the appellant. The account statement maintained by the respondent firm, which is placed on record, discloses duly crediting of the amount paid by the appellant company and it was due a sum of Rs.76,90,367/- as on 31.03.2011. It was further held that it is not the case of the appellant company that the material covered under the invoices has not been received by it and that it is a case of over billing. To what extent the over billing has been done by the respondent firm is not explained by the appellant company. If Deepak Toshniwal has cheated the appellant company, it is the internal affair of the appellant company. The respondent firm cannot be made to suffer for the illegal activities of the employee of the appellant company. The respondent firm issued a statutory notice to the appellant company to the same address, which was returned with an endorsement of refusal, which is a deemed notice. Even after receipt of notice, the appellant company has not chosen to liquidate the liability and neglected to pay the amount. 8. Sri S.Niranjan Reddy, learned counsel for the appellant contends that in the absence of any notice issued intimating the bounce of the cheques and the initiation of proceedings under Section 138 of N.I.Act, non presentation of the cheques issued from 23.02.2009 till 15.09.2009 itself shows that the accounts have to be finalized between the parties. When the appellant company is due of various amounts as claimed in the company petition in stead of giving deductions to the accounts from the amounts, due payment of the amounts of Rs.4,00,000/- and acknowledging due of Rs.5,69,653/- in the letter addressed by the respondent firm, dated 30.11.2009, does not arise. In the said letter, it is the respondent firm informed the details of price difference, which comes to Rs.9,68,652/- from 10.11.2009 to 27.02.2009 and from 01.04.2009 to 25.11.2009 from the period for which the various cheques were issued. When the appellant company is functioning properly working with 400 employees, unless the definite sum of money payable immediately or future debt and the appellant company is unable to bear its dues, is established, the machinery for winding up cannot be put into motion. Further, in the absence of any pleading or any material to establish that the liabilities of the appellant company are disproportionate to its assets and as such the commercial insolvency of the appellant company has been established, the winding up cannot be ordered. To substantiate the same, he relies upon a Judgment of a Division Bench of this Court in Packaging P. Ltd., vs. Sirpur Paper Mills Ltd., and Anr.,[1], to which one of us is a party and another judgment of this Court in Nagarjuna Constructions Co. Ltd., vs. Sharat Industries Ltd.,[2] decided by one of us. Further reliance is also placed on Tata Iron and Steel Company v. Micro Forge India Limited.[3] 9. Per contra, learned counsel for the respondent/ petitioner in the company petition, contends that the non- presentation of the cheques in the Bank was not on account of the appellant company asking the respondent firm not to present as they have received excess amount, is not correct. When several cheques were returned unpaid with remarks of unavailability of sufficient funds, the other cheques were not presented at the request of the appellant company. The very fact that there is no amount in the account of the appellant company and the cheques were dishonoured itself shows that the appellant is unable to pay the debt. Till April 2010, the amounts were paid and thereafter the amounts covered by the cheques were not paid. When the statutory notice under Section 433 of the Act was refused, it is deemed service. In spite of service, the appellant company, who has indebitted a sum exceeding Rs.1,00,000/- failed to pay the same or neglected to pay the same within three weeks on issuance of the notice nor failed to secure or compound for it to the reasonable satisfaction of the creditor, which will come within the purview of the word ‘debt’. Therefore, the learned Single Judge taking into consideration of all the factors ordered for winding up. In support of the same, reliance is placed on 1) Horizon Flora India Ltd. V. Assets Reconstruction Co. India Ltd.,[4] and 2) M/s.Vijay Industries v. M/s.NATL Technologies Ltd.,[5]. 10. In the light of the above submissions, the questions that arise for consideration are:- 1. Whether the debt claimed by the respondent firm is ‘debt due’ or not? 2. Whether the appellant company is unable to pay the debts making liable for winding up? 11. In the company petition filed by the respondent firm, in para 5, it is stated that the respondent firm used to supply material to the appellant company on receipt of the purchase orders and invoices were raised from time to time and obtained acknowledgment of the materials from the units of the appellant company. As per the books of account of the respondent firm as on 31.07.2010, the appellant company is due and payable a sum of Rs.84,41,975/- after deducting last payment of Rs.3,63,417.21 on 08.07.2010 made by the appellant company, which includes supply of material to Unit II during 2009-2010 for Rs.7,51,605/- . The appellant company also not issued Form C for some bills and the statement of account of the appellant company in the books of the respondent firm has been filed along with the petition. In para 6 it is stated that the several cheques were issued by the appellant company for payment of the above outstanding amount. Out of the said cheques, some cheques when presented were returned for insufficient funds and several other cheques were not even presented at the request of the appellant company. Except stating as above and issuance of the notice under Section 433 of the Act, which was refused by the appellant company, it has not been stated that the appellant company is unable to pay its debts and the liabilities of the appellant company are more than the assets. The debt is an ascertained and a definite amount due and does not refer to a claim due to the creditor and not disputed amount. 12. From the statement of account, it is clear that the various cheques issued by the appellant company from 12.04.2009 to 29.08.2009 when presented were dishonoured. Out of them, five cheques were issued for a sum of Rs.41,235/- on 08.08.2009, 12.04.2009, 14.08.2009, 17.08.2009 and 23.08.2009. The remaining three cheques for a sum of Rs.38,918/-, Rs.56,612/- , Rs.41,237/- are dated 23.05.2009, 24.05.2009 and 29.08.2009 respectively. In all for a total sum of Rs.3,42,942/-. If the said amounts are due from the appellant company, payment of a sum of Rs.2,00,000/- on 28.11.2009 and another sum of Rs.2,00,000/- to Deepak Toshniwal and acknowledging due of further sum of Rs.5,69,652/- by the respondent firm to the appellant company, does not arise. 13. The Supreme Court in IBA Health (I)(P) Ltd., v. Info Drive Systems SDB, BHD.,[6] held that if the creditor’s debt is bona fide disputed on substantial grounds, the court should dismiss the winding up petition and leave the creditor first to establish his claim in an action, lest there is danger of abuse of winding up procedure. In para 23, after referring to various judgments of the Supreme Court in 1) Amalgamated Commercial Traders (P) Ltd. v. A.C.K.Krishnaswami[7], 2) Madhusudan Gordhandas and Co. v. Madhu Woollen Industries (P) Ltd.,[8] 3) Mediquip Systems (P) Ltd. v. Proxima Medical Syustem GmbH[9] and 4) Vijay Industries v. NATL Technologies Ltd.[10], it was held that the principles laid down in the abovementioned cases indicate that 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 and non-payment of the amount of such a bona fide disputed debt cannot be termed as “neglect to pay” so as to incur the liability under Section 433(e) read with Section 434(1)(a) of the Companies Act, 1956. It was further held under the head of ‘Commercially Solvent’, at para 31 that where the Company Court is satisfied that a debt upon which a petition is founded is a hotly contested debt and also doubtful, the Company Court should not entertain such a petition. The Company Court is expected to go into the causes of refusal by the company to pay before coming to that conclusion. The Company Court is expected to ascertain that the company’s refusal is supported by a reasonable cause or a bona fide dispute in which the dispute can only be adjudicated by a trial in a civil Court. Further under the head of ‘Malicious proceedings for winding up’ it was held that a creditor’s winding up petition implies insolvency and is likely to damage the company’s creditworthiness or its financial standing with its creditors or customers and even among the public. Further, under the head of ‘Public Policy Considerations’, it was held at para 34 that a creditor’s winding up petition, in certain situations, implies insolvency or financial position with other creditors, banking institutions, customers and so on. Publication in the newspaper of the filing of winding up petition may damage the creditworthiness or financial standing of the company and which may also have other economic and social ramifications. Competitors will be all the more happy and the sale of its products may go down in the market and it may also trigger a series of cross-defaults, and may further push the company into a state of acute insolvency much more than what it was when the petition was filed. The company Court, at times, has not only to look into the interest of the creditors, but also the interests of the public at large. 14. In Tata Iron and Steel Company Limited’s case (3 supra) a Division Bench of High Court of Gujarat while holding that certain important chronicles and contours to be kept in mental radar, before reaching to the conclusion in a winding up petition, at para 15 of its judgment, held that inability to pay debts, is required to be judged from various set of facts and circumstances and the Company Court is under obligation to consider the financial status, strength and substratum of the Company, in overall context etc., before ordering the winding up application. 15. In Horizon Flora India Ltd.’s case (4 supra), A Division Bench of Bombay High Court at para 7 held that if there is a silver lining, then the dark couds need not impel the Company Court into admitting the petition for winding up the company. But is there a silver lining at all in the appellant’s case is the crucial question. Is there any silver lining at all has to be seen from the facts of the case. If there is any material presented before the Company Court to indicate that the company’s assets far exceeded its liabilities, or that the cash crunch was only a temporary phase, and given a little breathing time, the Company would soon come out of straits, the argument of the Company that it should not be ordered to be wind up has to be considered. 16. In M/s.Vijay Industries v. M/s.NATL Technologies Ltd.’s case, (5 supra) Justice S.B.Sinha and Justice Cyriac Joseph while referring to the observation of the Delhi High Court in Devendra Kumar Jain’s case and various other judgments and facts of the case observed at para 37 that on the date of filing of the application, dues in respect of at least a part of the debt which was more than the amount specified in Section 433 of the Companies Act has not been denied. It is not a requirement of the law that the entire debt must be definite and certain. The Division Bench of the High Court proceeded on the basis that the entire sum covering both the principal and the interest must be undisputed, holding that, “except making a bald allegation in the company petition that the petitioner had come to know that the respondent company owes large sums of money to its creditors and it is not in a position to meet its debt obligations and as, therefore, become commercially insolvent, the petitioner has not taken necessary care to prima facie establish the same. The only piece of evidence available on the side of the petitioner is that the respondent is indebted to the petitioner a sum which is claimed towards interest on the delayed payment. Assuming for a moment that the respondent company is liable to pay interest on the delayed payments and it has not paid the said amount to the petitioner, could it be said that the respondent neglected to pay the debt particularly when the respondent is disputing the liability of payment of interest on the delayed payments and when there is no such written agreement in between the parties for such payment of interest.” It further held that the above findings are not correct for more than one reason; firstly, because the Division Bench did not hold that the invoices were not proved by cogent evidence; secondly, question of leading evidence would arise only after the company petition is admitted and, thirdly, issuance of invoices and signature of the respondent thereon is not disputed and that further, the judgment of the Division Bench also contains a legal flaw insofar as it failed to take into consideration that the appellant had in fact issued three notices being dated 06.01.2003, 08.09.2003 and legal notice, dated 23.12.2003, specifically mentioning that the payments had been adjusted towards interest first and balance, if any, shall be adjusted towards the principal. Thus, a prima facie case was made out and accordingly, the judgment of the High Court was set aside. But in spite of remanding the same, in exercise of the jurisdiction under Article 142 of the Constitution of India, it directed the respondent company to pay simple interest at 12% per annum on the balance amount instead of 24% per annum within eight weeks from the date of amount became due till it is paid failing which the consequences provided in law shall ensue. 17. The facts in the said case are entirely different to the facts of the present case, except to the extent of issuing notice under Section 433 of the Act demanding the amount for which the appellant company has not replied. Whether non reply to the notice will amount to admission of the debt or not has to be seen from the various other aspects as referred to in the earlier paragraphs. 18. Admittedly, the respondent firm filed O.S.No.696 of 2010 on the file of II Additional Chief Judge, City Civil Courts, Hyderabad against the sister concern of the appellant company for recovery of the amount, which is pending. After dishonouring of the cheques issued in favour of the respondent firm, the respondent firm in stead of deducting the amount payable by it to the appellant company, paid a sum of Rs.4,00,000/- and admitted the balance due of Rs.5,68,652/- in its