Case: Tata Finance Limited, Mumbai Vs. Kanoria Sugar and General Manufacturing Company Limited, Mumbai

ORAL JUDGMENTA.P. SHAH, J.The appellants before us are the original petitioners in Company Petition No. 203 of 2001 and in the appeal, they impugn the order of the learned Company Judge, dismissing the petition. In order to appreciate the order and the appellants contentions with respect thereto, a few facts may be noted. 2.The appellants and the respondent company had entered into a lease agreement dated 30-9-1994 whereby the appellants had leased certain machinery to the respondent company, on the respondent agreeing to pay Rs.1,32,30,000/- as lease rentals payable in instalment of Rs. 6,61,500/- each quarter extended over a period of five years effective from 16-11-1994 till 15-11-1999. It seems that the respondent committed default in payment of the lease rentals and according to the appellants a sum of Rs.2,70,14,476/- consisting of arrears of lease rentals and service charges is due from the respondent. To the petition, the appellant annexed correspondence between the parties including the reply dated 16-12-2000 to the statutory notice dated 17-10-2000 wherein the respondent company admitted its liability but shown its inability to pay the amount due to various factors. 3.It appears to have been urged before the learned Company Judge that the terms and conditions stipulated in printed agreement were oppressive, coercive and were usurious and in particular a grievance was made that the Income Tax Authorities disallowed the claim of depreciation on the machinery and therefore, the appellants have increased the lease rentals to the tune of Rs. 11,85,400/- instead of Rs. 6,61,500/- per quarter and added thereto service charges on arrears of lease rentals at the rate of 30% per annum. It was contended that the petition was filed with ulterior motive to pressurise the respondent to succumb to the coercive tactics of the appellants. 4.The Learned Company Judge seems to have proceeded on the basis that the entire claim was based on the fact that the Income Tax Authorities have disallowed the claim of the appellants for depreciation of the leased machinery. We may mention that the learned Judge was entirely wrong in holding that the claim is based solely on disallowance of depreciation by the Income Tax department. It is conceded before us by the learned counsel for the respondent that the outstanding lease rentals are Rs.29,46,000/- and the amount of service charges as per agreement is Rs. 28,36,544/-. These are figures upto end of September 2001.5.The learned Company Judge after referring to the decision of the Supreme Court in the case of Hind Overseas Pvt. Ltd. vs. Raghunath Prasad Jhunjhunwalla and another, AIR 1976 SC 565 held that the appellants ought to resort to the remedy of arbitration as provided in the printed agreement to resolve dispute between the parties. The learned Judge observed that: "The petitioners have bypassed the regular civil remedy of civil suit and also bypassed the arbitration clause in the lease agreement and have resorted to this extra ordinary remedy which is to be resorted sparingly where there are no genuine dispute and the debt is an admitted liability. The petitioners have abused the process of the Court and the law by filing this petition." The learned Judge, therefore, dismissed the petition with direction to the appellants to pay costs of Rs. 25,000/-. 6.We are afraid we cannot agree with the view expressed by the learned Judge. In the first place, the learned Company Judge was not right in holding that the appellants ought to resort to the remedy of arbitration as per the agreement. It seems that the learned Judge has based his view on the observations of the Supreme Court in Hind Overseas Pvt. Ltd. which reads thus: "36. Section 433(1) under which this application has been made has to be read with section 433(2) of the Act: Under the latter provision 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. 37. Again under sections 396 and 397 of the Act there are preventive provisions in the Act as a safeguard against oppression in management. These provisions also indicate that relief under section 433(f) based on the just and equitable clause is in the nature of a last resort when other remedies are not efficacious enough to protect the general interests of the company."7.In the case of Hind Overseas Pvt. Limited the question that was raised before the Supreme Court related to the scope of section 433(f) of the Companies Act, and in particular whether the principles applicable in the case of dissolution of partnership could be invoked in the case of company. In that case a petition under section 433(f) for winding up was filed on the ground that the company was formed as a result of mutual trust and confidence and the company in substance is partnership and, therefore, the principles of partnership would be attracted. The learned single judge of Calcutta High Court relying on an English case (In re Cuthbert Cooper and Sons Ltd., 1937 Ch 392) held that there was no evidence of mismanagement or misapplication either as regards shareholders or as regards directors. It was held that directors disputes are no ground for winding up on the facts and circumstances of the case. In appeal the division bench relying upon the decision in In re Yendidje Tobacco co. Ltd., (1916) 2 Ch 426 held that condition nos. 2, 3 and 4 mentioned therein were unquestionably fulfilled. The Supreme Court after referring to various decisions of English Courts and Courts in India, held that the sixth clause of section 433 namely just and equitable is not to be read as being ejusdem generis with the preceding five clauses. While the five earlier clauses prescribe definite conditions to be fulfilled for the one or the other to be attracted in a given case, the just and equitable clause leaves the entire matter to the wide and wise judicial discretion of the Court. The only limitations are the force and content of the words themselves, just and equitable. In this context the Supreme Court referred to sections 396 and 397 of the Act which are intended to act as safeguards against oppression in management and observed that the Court may refuse to make order of winding up if it is of the 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. It was held that sections 397 and 398 contain preventive provisions and those provisions also indicate that relief under section 433(f) based on just and equitable clause is in the nature of last resort when other remedies are not efficacious enough to protect the general interests of the company. These observations have no application to the present petition for winding up which is instituted under 443(1)(e) of the Act on the ground that the company is unable to pay its debt. Reliance placed on the decision of Hind Overseas Pvt. Ltd. was thus clearly misconceived. The learned Judge was, therefore, not right in holding that the appellants ought to have pursued the alternative remedy of arbitration or suit. 8.It is well settled that a winding up petition should not be allowed to be taken as a means to recover debt from the company. It is not a legitimate way to enforce payment of debts which are bona fide disputed by the company and cannot be used as a weapon to pressurise and coerce the company to make payments. But it is also equally well settled that when the debt is undisputed and the defence is not bona fide and genuine, the Court will not act upon a defence that the company has liability to pay but chooses not to pay and the creditors will, in such case, be entitled to a winding-up order. This is clear from the following observations of the Supreme Court in Madhusudan Gordhandas and co. vs. Madhu Woollen Industries, (1972) 42 Comp Cases 125: "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 Corpn., Re. 4) 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 Brighton Club and Horfold Hotel Co. Ltd. Re. 5) 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 A Company, Re. 6) 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. (See Tweeds Garages Ltd., Re..7). The principles on which the Courts 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."9.In United Western Bank Ltd.s case, (1978) 48 Companies Cases 378 (Bom), Kania, J. (as he then was) observed that when 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 companys real inability to pay the debts. The inability is indicated by its neglect to pay the debt within three weeks, after proper demand was made. He added that neglect is to be assessed on the facts of each case. 10.In Goel Bros. and Co. Pvt. Ltd.s case, 1979 Mh.LJ. 607 = (1980) 50 Comp Cases 356 (Bom.), another Single Judge of this Court, Agarwal, J. held that after the creditor establishes that the debt is clear, valid in law, unimpeachable and indisputable, the creditor is entitled to a winding up order ex debito justitiae. But if the debt is disputed and the dispute is bona fide and genuine, no winding up order can be made. He clarified that neglect to pay is not equivalent to omission to pay for it requires that such omission is without reasonable cause or valid excuse. 11.Applying now, the law as above, to the case in hand, can it be said that the defence raised by the company is legitimate and the debt of company is bona fide disputed. In the instant case, the Companys case is that the total amount of more than Rupees Two crores is payable by the company. It is true that there is some dispute about the claim of enhanced lease rentals on account of disallowance of claim of depreciation by the Income Tax department. There is, however, absolutely no dispute for the outstanding lease rentals which are in the range of nearly Rupees Thirty Lakhs. The terms of agreement are also very clear and in case of default, the company is liable to pay the service charges. When a part of claim made by the creditor is seriously disputed but the remaining portion is prima facie appear to exceed the limit of Rs. 500/- indicated in section 434 of the Act, it would be unjust to refuse wind up order on the ground that there is dispute as to precise amount owned. In re Tweeds Garages Ltd., (1962) 1 Ch. 406; it was clearly held that it would be unjust to refuse a winding up order to the petitioner who has admittedly owned moneys which have not been paid merely because there is a dispute as to the precise amount owning. Almost to the same effect are the observations in Cardiff Preserved Coal and Coke co. vs. Norton, (1867) 2 (Sh. App. 405. 12.The learned single judge of Calcutta High Court in Ofu Lynx Ltd vs. Simon Carves India Ltd., (1971) 41 Comp Cas 174 has observed:"I, therefore, hold that a notice under section 434 of the Companies Act, 1956, will not be rendered invalid only because of the fact that the amount of debt mentioned in the notice may not be exactly correct amount of the debt due, provided the amount mentioned in the notice includes debt due and exceeds sum of Rs. 500/-." 13.The Judgment of single judge of Calcutta High Court has been cited with approval by the Division Bench of this Court in Pfizer Ltd. vs. Usan Laboratories P. Ltd., 1985 Mh.L.J. 554 = 1985 (57) Comp Cas 236. Therefore, merely because a part of the claim was.disputed by the company, the defence cannot be said to be legitimate and bona fide. 14.Mr. Dwarkadas, learned counsel appearing for the respondent company stated that the company is ready and willing to pay the admitted lease rentals amounting to Rs. 29,46,000/- and 25% of the service charges i.e. Rs. 7,06,000/- without prejudice to its rights and contentions. He stated that above amounts will be paid within three months. Both the parties agreed that the dispute should be referred to the arbitration as per the agreement. Mr. Madon appearing for the appellants stated that the appellants have nominated Mr. A.Y. Bookwalla as an arbitrator, which is acceptable to the respondent company.

Decision reasoning: 0[ds]8.It is well settled that a winding up petition should not be allowed to be taken as a means to recover debt from the company. It is not a legitimate way to enforce payment of debts which are bona fide disputed by the company and cannot be used as a weapon to pressurise and coerce the company to make payments. But it is also equally well settled that when the debt is undisputed and the defence is not bona fide and genuine, the Court will not act upon a defence that the company has liability to pay but chooses not to pay and the creditors will, in such case, be entitled to an United Western Bank Ltd.s case, (1978) 48 Companies Cases 378 (Bom), Kania, J. (as he then was) observed that when 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 companys real inability to pay the debts. The inability is indicated by its neglect to pay the debt within three weeks, after proper demand was made. He added that neglect is to be assessed on the facts of each case. 10.In Goel Bros. and Co. Pvt. Ltd.s case, 1979 Mh.LJ. 607 = (1980) 50 Comp Cases 356 (Bom.), another Single Judge of this Court, Agarwal, J. held that after the creditor establishes that the debt is clear, valid in law, unimpeachable and indisputable, the creditor is entitled to a winding up order ex debito justitiae. But if the debt is disputed and the dispute is bona fide and genuine, no winding up order can be made. He clarified that neglect to pay is not equivalent to omission to pay for it requires that such omission is without reasonable cause or valid excuse. 11.Applying now, the law as above, to the case in hand, can it be said that the defence raised by the company is legitimate and the debt of company is bona fide disputed. In the instant case, the Companys case is that the total amount of more than Rupees Two crores is payable by the company. It is true that there is some dispute about the claim of enhanced lease rentals on account of disallowance of claim of depreciation by the Income Tax department. There is, however, absolutely no dispute for the outstanding lease rentals which are in the range of nearly Rupees Thirty Lakhs. The terms of agreement are also very clear and in case of default, the company is liable to pay the service charges. When a part of claim made by the creditor is seriously disputed but the remaining portion is prima facie appear to exceed the limit of Rs. 500/Dwarkadas, learned counsel appearing for the respondent company stated that the company is ready and willing to pay the admitted lease rentals amounting to Rs. 29,46,000/and 25% of the service charges i.e. Rs. 7,06,000/without prejudice to its rights and contentions. He stated that above amounts will be paid within three months. Both the parties agreed that the dispute should be referred to the arbitration as per the agreement. Mr. Madon appearing for the appellants stated that the appellants have nominated Mr. A.Y. Bookwalla as an arbitrator, which is acceptable to the respondent company.