M/s.Sri Balaji Traders v. M/s.Navayuga Engineering Company Limited

Order

This company petition is filed under Sections 433(e) & (f) and 434 of the Companies Act, 1956, to wind up M/s.Navayuga Engineering Company Limited, Visakhapatnam. The respondent company has its Registered Office at Dwaraka Nagar, Visakhapatnam, and it is stated that as per the objects of its incorporation, it is now undertaking construction works of Krishnapatnam Port. At the outset, it may be noted that the company petition is not filed in accordance with Form 46 and Rule 95 of the Companies (Court) Rules, 1959. The petition is bereft of the details of the authorized, subscribed and paid-up share capital of the respondent company as well as its objects as set out in its Memorandum of Association.

There is also no averment that the respondent company is insolvent and unable to pay its debts. M/s.Sri Balaji Traders, Ghatkesar, Ranga Reddy District, the petitioner proprietorship concern, is a dealer and supplier of hardware, paints, sanitary, welding, electric and safety equipment, industrial and project materials, PVC, MS pipes, aluminum fittings, etc. The petitioner concern approached the respondent company for supplying hardware and sanitary material, etc. to it. Upon acceptance of the said offer, the petitioner concern supplied material from 12.02.2009 to 01.10.2009 to the respondent company at its project site at Krishnapatnam Port in Nellore District. Supply of material was made through 137 delivery challans and invoices were raised against the same.

The petitioner concern claimed that it supplied material worth Rs.1,10,62,188/- but

the respondent company only paid it a sum of Rs.72,93,527/-. The first payment was received from the respondent company on 20.03.2009 while the last payment was made on 17.09.2009. The petitioner concern claimed that payment of the remaining Rs.37,68,661/- was held up by the respondent company since October, 2009 without reason and despite repeated letters to the respondent company, the amount remained unpaid. The petitioner concern further claimed that reminders were issued a number of times regarding payment of the balance amount but the respondent company, on one pretext or the other, did not release the payment due. The petitioner concern got issued legal notice dated 31.07.2010 to the respondent company at its project site at Krishnapatnam Port in Nellore District seeking payment of Rs.37,68,661/- and thereafter filed Company Petition No.236 of 2010 before this Court seeking winding up of the respondent company under the provisions of the Companies Act, 1956. The respondent company entered appearance in the matter and filed a counter stating that it had issued a reply to the petitioner concern’s legal notice and reiterated the stand taken therein, contesting the claim of the petitioner concern. According to it, a fraud had been committed by inflating the invoices raised against it to the tune of nearly Rs.50,00,000/- in respect of supply of material by the petitioner concern and its two sister concerns. A complaint was made to the jurisdictional police station in this regard but the petitioner’s brothers, including Devaram Seervi, requested the respondent company not to proceed with the criminal case and agreed to accept debit notes for a sum of Rs.47,00,000/- for all the three concerns, which also included a debit note against the petitioner concern for a sum of Rs.26,87,000/-. Owing to this compromise, the respondent company did not press criminal charges. The respondent company however admitted liability to the extent of Rs.10,03,308/- and pendente lite paid the said amount with interest. While so, as the statutory notice, which formed the basis of the winding up petition, was not addressed to the Registered Office of the respondent company, this Court dismissed the said company petition on 10.08.2011. Thereupon, the petitioner concern issued statutory notice dated

30.08.2011 to the respondent company at its Registered Office at Visakhapatnam calling upon it to remit the balance amount of Rs.27,65,353/- within three weeks. The respondent company issued reply notice dated 21.09.2011 asserting that there was no admitted debt and that it disputed the petitioner concern’s purported claim. The petitioner concern then filed the present creditor’s winding up petition against the respondent company. The petitioner concern, through its proprietor, claimed that Devaram Seervi was not an agent, representative or relation and that the signature on the debit note did not belong to the petitioner or to Devaram Seervi. It was contended that the debit note was not legally valid as no sanctity would attach to it and that the respondent company could not evade the payment due to the petitioner concern on that basis. Reference was made to the counter filed by the respondent company in C.P.No.236 of 2010 in this regard and it was alleged that a conspiracy had been hatched by the respondent company to evade payment, by involving Devaram Seervi. Notice before Admission was ordered in the matter on

29.11.2011. Sri S.V.S.Chowdary, learned counsel, entered appearance for the respondent company and filed a counter stating thus: The respondent company was an Engineering and Construction Company executing major infrastructure projects throughout India. It was awarded the turnkey contract for construction the Krishnapatnam Port in Nellore District. In this connection, M/s.Jagadamba Trading Corporation, Nellore, M/s.Viswakarma Sales Corporation, Kolkata, and the petitioner concern were said to have jointly approached the Purchase Department of the respondent company offering to supply various materials. All the three firms were represented by Devaram Seervi, the proprietor of M/s. Jagadamba Trading Corporation, which was located at Nellore where the respondent company had its project site. He represented the three concerns in all the transactions which ensued thereafter, whereby the respondent company purchased materials from them. While so, during an internal audit it came to light that the prices of various materials supplied by these three concerns, as shown in the invoices, were highly inflated and huge amounts had been paid to them based thereon. When the respondent company was on the verge of initiating criminal proceedings in the matter, Devaram Seervi agreed to settle the issue by accepting debit notes on behalf of the three concerns for a total value of Rs.46,29,000/-. Accordingly, debit notes were issued by the respondent company to the three concerns as detailed hereunder: Debit Note Date Amount Rs.26,87,000-00 30-09-2009 Sri Balaji Traders 30-09-2009 Jagadamba Trading Corporation Rs. 5,15,000-00 Rs.14,27,000-00 30-09-2009 Viswakarma Sales Corporation Reference was made to the letter dated 30.10.2009 issued by Devaram Seervi in connection with these debit notes. It was also pointed out that Devaram Seervi had throughout acted on behalf of the three concerns in all their dealings with the respondent company and reliance was placed on another letter dated 30.10.2009 issued by Devaram Seervi on behalf of M/s.Jagadamba Trading Corporation, Nellore, authorizing the respondent company to transfer the sum of Rs.12,68,000/- from its account to M/s.Viswakarma Sales Corporation, Kolkata, in respect of the debit note raised against the said concern. As the matter was compromised in this manner, the respondent company did not choose to initiate criminal proceedings. But the petitioner concern then raised the issue by filing Company Petition No.236 of 2010. The respondent company reiterated the defence taken by it in that company petition. It was pointed out that the amount outstanding to the petitioner agency was found to be Rs.10,03,308/- as per the books of account and the same was accordingly paid along with interest at 18% per annum, totaling Rs.12,79,397/-. Reference was also made to the reply dated 21.09.2011 issued by the respondent company to the petitioner’s statutory notice dated

30.08.2011 reiterating its earlier stand that there was no subsisting debt and that the purported claim stood discharged by the debit notes referred to supra. A copy of the said reply was marked to the sister concern, M/s. Jagadamba Trading Corporation, Nellore, and also to Devaram Seervi. However, no reply was received from them or from the petitioner. The respondent company further stated that it issued a separate legal notice dated 21.09.2011 to M/s. Jagadamba Trading Corporation, Nellore, and Devaram Seervi informing them that as they had acted as agents of the petitioner concern they were bound by the same and would be liable for payment for damages. A copy thereof was marked to the petitioner concern. Despite service, this legal notice also remained unanswered. The respondent company stated that it had filed a suit against the petitioner concern, M/s. Jagadamba Trading Corporation, Nellore, and Devaram Seervi in O.S.No.806 of 2011 on the file of the learned III Additional Chief Judge, City Civil Court, Hyderabad, seeking a declaration that M/s. Jagadamba Trading Corporation, Nellore, and Devaram Seervi were the agents of the petitioner concern and consequently, the debit notes accepted by them were valid and enforceable against the petitioner concern. In the alternative, the respondent company sought recovery of the debit note amount of Rs.26,87,000/- from M/s. Jagadamba Trading Corporation, Nellore, and Devaram Seervi. The respondent company further stated that it was a national level construction company executing prestigious construction, infrastructure and BOT projects throughout India and was a financially sound entity. It further stated that its defence in the present case was a bona fide, valid and genuine one and that it was not trying to avoid any legally payable and genuine debt. The respondent company concluded by stating that the amount claimed by the petitioner concern was not a debt due and payable by it and that it was a disputed debt covered by the proceedings in O.S.No.806 of 2011 on the file of the learned III Additional Chief Judge, City Civil Court, Hyderabad. The respondent company therefore prayed for dismissal of the petition. In his reply to the above counter, the proprietor of the petitioner concern stated that the amount of Rs.27,65,353/- was owed by the respondent company to the petitioner concern and that the respondent company had filed O.S.No.806 of 2011 on the file of the learned III Additional Chief Judge, City Civil Court, Hyderabad, against the petitioner concern and others only as a ruse for creating a dispute. He reiterated that he had not given any authorization to any person, including Devaram Seervi, to approach the respondent company on behalf of the petitioner concern for supplying material to the respondent company. He further stated that the respondent company was unnecessarily dragging Devaram Seervi into the issue to evade payment to the petitioner concern and reiterated that the signature in the debit note did not belong either to him or to Devaram Seervi. He further stated that the petitioner concern was not connected with the debit note or the transaction between Devaram Seervi and the respondent company. He reiterated that the filing of the suit was an afterthought on the part of the respondent company only to avoid payment of the legally enforceable debt due to the petitioner concern. He further stated that the respondent company was building the Krishnapatnam Port which was worth crores of rupees and that it was a big company, possessing lot of machinery and manpower. Stating so, he contended that the respondent company should act as per the rules of trading and purchase and that its actions were causing heavy loss to the petitioner concern. He further stated that the respondent company never informed the petitioner concern in writing that they had accepted the debit note issued by Devaram Seervi and asserted that there was a dispute as to the said debit note. Paras 16 and 17 of the reply are relevant and are extracted hereunder: “16. In reply to Paras 36 to 38: It is submitted that, the respondent company clearly admitted that, it is a national level construction company executing prestigious constructions and BOT projects throughout India is financially a sound entity, and not trying to avoid any legally payable genuine debt. But, in practice they had created a bogus and legally invalid debit note and trying to evade the payment, and trying to say it is a disputed matter by filing O.S.No.806 of 2011, in the Civil Court, after filing Company Petition by the petitioner herein, and the respondent company without following the business rules simply trying to escape their liability and responsibility for payments, on the ground of created, bogus and legally invalid debit note, and the petitioner never given any authorization on behalf of him nor the petitioner signed on the debit note and there is no legal sanctity to the debit note created by the respondent herein.

17. It is further submitted that, the respondent company admitted that, it is a national level company and formulated the rules and regulations and system already it has established 3 level checks in receiving the supplies and the respondent company failed to follow their own standards and business rules and trying now to blame the petitioner and trying the legally valid supplies amount as a disputed amount and the respondent company and failed to approach this Hon’ble Court with clean hands. Hence this Reply.” The aforestated pleadings demonstrate that the respondent company, having received material from the petitioner concern, made payment therefor to the tune of Rs.72,93,527/- even before the filing of the earlier company petition and after filing of the said petition, it again paid a further sum of Rs.12,79,397/-, admitting its liability to pay Rs.10,03,308/- along with interest due at 18% per annum. The amount claimed thereafter by the petitioner concern, which led to the filing of this winding up petition, is a sum of Rs.27,65,353/-. Supply of material by the petitioner concern to the respondent company is not in dispute. It is however the case of the respondent company that the invoices in respect of the material supplied by the petitioner concern and the other two concerns had been inflated to the tune of nearly Rs.50,00,000/- and it was in connection therewith, that the matter had been compromised with Devaram Seervi, the proprietor of M/s. Jagadamba Trading Corporation, Nellore, who had dealt with the respondent company all through on behalf of the three concerns. In support of its contention that it had dealings with Devaram Seervi on behalf of all the three concerns, the respondent company filed copies of 8 tax invoices issued by the petitioner concern, wherein Devaram Seervi affixed his signature as its proprietor. Copies of 8 tax invoices issued by M/s. Jagadamba Trading Corporation, Nellore, bearing the same signature are also filed. The very same signature is again reflected in copies of the 8 tax invoices issued by M/s.Viswakarma Sales Corporation, Kolkata. The respondent company also filed copies of the bank vouchers issued by it to the petitioner concern and M/s.Viswakarma Sales Corporation, Kolkata, wherein Devaram Seervi affixed his signature in evidence of having received payment. It is interesting to note that the respondent company also filed a copy of one bank voucher issued to M/s.Viswakarma Sales Corporation, Kolkata, wherein T.R.Choudhary, the proprietor of the petitioner concern, received the cheque of Rs.5,00,000/- and signed on its behalf ! Sri Ch.Ganesh, learned counsel for the petitioner concern, does not dispute that Devaram Seervi is known to the proprietor of the petitioner concern. He also admits that Devaram Seervi supplied goods to the respondent company on behalf of the petitioner concern and received payment on its behalf. He however states that there is no relationship between the two and that Devaram Seervi only helped out the petitioner concern by undertaking such supply of material and receiving payment. There is, however, no explanation forthcoming as to why the proprietor of the petitioner concern received payment on behalf of M/s.Viswakarma Sales Corporation, Kolkata. The relationship amongst the three concerns is therefore shrouded in mystery. It is the case of the respondent company that Devaram Seervi, upon being apprised of the fact that it intended to initiate criminal proceedings in connection with the inflated invoices relating to the material supplied by the three concerns, settled the matter on their behalf by accepting debit notes. The original letters addressed by M/s. Jagadamba Trading Corporation, Nellore, in this regard were directed to be produced before the Court by order dated 28.08.2012. Accordingly, Sri S.V.S.Chowdary, learned counsel, placed before the Court the original letter dated 30.10.2009 addressed by M/s. Jagadamba Trading Corporation, Nellore, to the respondent company, wherein it is stated as under: “Dear Sir, Sub: “Amendment of Invoices” in respect of the goods supplied – Reg:- We refer to the various invoices submitted towards the material supplied to you. In view of our relations with your company, we have considered your request to revise the rates in respect of the material supplied by our company and our sister concerns viz., Viswakarma Sales Corp., and Sri Balaji Traders, under the invoices raised till date. Accordingly, we have decided to revise the rates of the various material supplied under the said invoices, by accepting debit notes in respect of the same. We hereby acknowledge the debit notes, listed under Appendix-A, issued by you. Thanking you,” There are two signatures affixed on this letter. However, neither of the two signatures is identical to that of Devaram Seervi, as found in the tax invoices and bank vouchers. The other letter dated 30.10.2009 addressed by M/s. Jagadamba Trading Corporation, Nellore, is also produced in original and it reads as under: “Dear Sir, Sub: Transfer of funds to M/s.Viswakarma Sales Corp., We authorize you to transfer an amount of Rs.12,68,000/- from our account to M/s.Viswakarma Sales Corp., Kolkata (being our sister concern) to meet the Debit note amount. With Regards, For Jagadamba Trading Corp.,” There are again two signatures on this letter and one of them is somewhat similar to that of Devaram Seervi, as found in the tax invoices and bank vouchers. The originals of the three debit notes addressed by the respondent company to the three concerns bearing the date ‘30.10.2009’ are also produced. Acceptance of these three debit notes is signified by two signatures in the case of M/s. Jagadamba Trading Corporation, Nellore, and one signature each in the case of the petitioner concern and M/s.Viswakarma Sales Corporation, Kolkata. A signature similar to that of Devaram Seervi is found on the debit note addressed to M/s. Jagadamba Trading Corporation, Nellore, while the other signatory to this debit note signed the other two debit notes. Sri Ch.Ganesh, learned counsel, vehemently contended that the respondent company was concocting a dispute for the purpose of evading payment of the lawful dues of the petitioner concern. He stated that Devaram Seervi was not the authorized representative of the petitioner concern and therefore, any transaction entered into by him with the respondent company as reflected in the debit note would not bind the petitioner concern. S r i S.V.S.Chowdary, learned counsel for the respondent company, on the other hand, argued that there was a genuine dispute with regard to the petitioner concern’s entitlement to the claimed amount. He pointed out that Devaram Seervi, being available at Nellore where respondent company was undertaking construction work, had acted on behalf of the three concerns throughout and he was therefore the implied agent of the petitioner concern and M/s.Viswakarma Sales Corporation, Kolkata. He placed reliance on Sections 186 and 187 of the Indian Contract Act, 1872 in this regard. He also cited case law in support of his contention that the case, as made out, did not warrant the winding up of the respondent company under the provisions of the Companies Act, 1956. In his reply, Sri Ch.Ganesh, learned counsel, reiterated that the three concerns had no connection and that the petitioner concern, having its own proprietor, had not authorized Devaram Seervi to deal with the respondent company on its behalf. He therefore asserted that in the absence of such authorization, the respondent company could not fall back on the debit notes said to have been accepted by Devaram Seervi to absolve itself of its liability to the petitioner concern. As pointed out earlier, the company petition suffers from lacunae as it is not in conformity with Rule 95 and Form 46 of the Companies (Court) Rules, 1959. The petition does not even contain an averment that the respondent company is insolvent and unable to pay its debts. On the other hand, paras 16 and 17 of the reply filed by the petitioner concern indicate to the contrary that the respondent company is financially sound. In KITTI STEELS LIMITED v. SANGHI INDUSTRIES LIMITED [1] , this Court pointed out that when a petition is presented by a creditor for winding up a company under Sections 433(e) or (f) of the Companies Act, 1956, it must contain essential pleadings to the effect that the company failed and neglected to pay the petitioner’s debt even after receipt of notice of payment in writing and that such company is insolvent and unable to pay its debts. It was held that compliance with Rule 95 of the Companies (Court) Rules, 1959 is essential to succeed in such a winding up petition. The present company petition, suffering from patent deficiencies in so far as such essential pleadings are concerned, therefore warrants dismissal on this preliminary ground. However, as arguments were advanced at length on the merits of the case, this Court deems it appropriate to deal with the same. As pointed out by this Court in KRISHNA KILARU v. MAYTAS PROPERTIES LIMITED [2] , before admitting and advertising a petition for winding up, the Company Court would look into the following issues: ( 1) Whether the petitioning-creditor is a creditor to whom the Company owes an ascertained sum of money or substantially ascertained sum of money; (2) Whether the said debt is within limitation; (3) Whether the defence of the Company is valid and bona fide or whether it is mere moonshine; (4) Whether, from the material on record, a presumption arises that the Company is unable to pay its debts as contemplated under S. 434(1) (a) or (b) as the case may be; or (5) Whether, from the material on record, the Court is prima facie satisfied that the Company is commercially insolvent as contemplated under S. 434 (1) (c ). Needless to state, if the respondent company raises a bona fide dispute with regard to the claim put forth by the petitioning- creditor and not mere moonshine, the Company Court would not initiate steps for winding up the company. (MADHUSUDAN GORDHANDAS & CO. v MADHU WOOLEN INDUSTRIES PVT. [3] LTD. , MEDIQUIP SYSTEMS (P) LTD. v PROXIMA MEDICAL SYSTEM GMBH [4] and VIJAY INDUSTRIES v NATL TECHNOLOGIES LIMITED [5] ). In this regard, the observations of the Supreme Court in IBA HEALTH (INDIA) PRIVATE LIMITED v. INFO- DRIVE SYSTEMS SDN. BHD. are also relevant: [6] “20. The question that arises for consideration is that when there is a substantial dispute as to liability, can a creditor prefer an application for winding-up for discharge of that liability? In such a situation, is there not a duty on the Company Court to examine whether the company has a genuine dispute to the claimed debt? A dispute would be substantial and genuine if it is bona fide and not spurious, speculative, illusory or misconceived. The Company Court, at that stage, is not expected to hold a full trial of the matter. It must decide whether the grounds appear to be substantial. The grounds of dispute, of course, must not consist of some ingenious mask invented to deprive a creditor of a just and honest entitlement and must not be a mere wrangle. It is settled law that if the creditor's debt is bona fide disputed on substantial grounds, the court should dismiss the petition and leave the creditor first to establish his claim in an action, lest there is danger of abuse of winding-up procedure. The Company Court always retains the discretion, but a party to a dispute should not be allowed to use the threat of winding-up petition as a means of forcing the company to pay a bona fide disputed debt.” Trite to state, the process of winding up is not to be utilized merely as a means of realizing a debt from a corporate entity. The power of the Company Court under Sections 433 and 434 of the Companies Act, 1956 is essentially discretionary and the overall picture as to the company’s financial status would normally have to be borne in mind by the Court while exercising such discretion. In the present case, the petitioner concern does not dispute that Devaram Seervi did act on its behalf in various transactions with the respondent company. Section 186 of the Indian Contract Act, 1872 speaks of the authority of an agent being either expressed or implied. Section 187 of the said Act elaborates on expressed or implied authority as under: “187. Definitions of express and implied authority:- An authority is said to be express when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.” The voluminous material placed on record by the respondent company puts it beyond doubt that the three concerns which supplied materials to the respondent company at its project site at Nellore were represented by Devaram Seervi. Significantly, T.R.Choudhary, the proprietor of the petitioner concern, also acted on behalf of one of the other concerns, M/s.Viswakarma Sales Corporation, Kolkata. The issue as to whether there was any implied authority for Devaram Seervi to act on behalf of the three concerns is the subject matter of the suit, O.S.No.806 of 2011, pending before the learned III Additional Chief Judge, City Civil Court, Hyderabad. All that is relevant for the purposes of this case is whether the dispute raised by the respondent company with regard to Devaram Seervi settling the matter of the alleged inflated invoices constitutes a bona fide dispute warranting rejection of this winding up petition. In the light of the material on record, this Court has no hesitation in holding that things are far from clear as to the relationship amongst the three concerns and the authority wielded on their behalf not only by Devaram Seervi but also by the proprietor of the petitioner concern. These issues would have to be tested and resolved through a full- fledged trial in the pending suit. The admission of the petitioner concern that the respondent company is financially sound and commercially solvent, added to the fact that the respondent company itself came forward to pay the sum of Rs.12,79,397/-, being the principal amount of Rs.10,03,308/- due along with interest, speak in its favour. As pointed out in IBA HEALTH (INDIA) PRIVAE LIMITED6, determination of the company’s insolvency may be a useful aid in deciding whether the refusal to pay is a result of a bona fide dispute or whether it reflects its inability to pay. The Supreme Court opined that in other words, commercial solvency can be seen as relevant as to whether there was a dispute as to the debt, not as a ground in itself, that means it cannot be characterized as a stand alone ground. The admitted commercial solvency of the respondent company therefore supports its plea that its defence is not mere moonshine and that there is bona fide dispute as to the petitioner concern’s entitlement to the amount claimed. The validity of the debit note and its enforceability against the respondent company would necessarily have to be adjudicated by the Civil Court but at this stage, no grounds are made out to support the allegation that the respondent company is commercially insolvent and is unable to pay its debts. The Company Petition therefore does not warrant admission and is accordingly dismissed. No costs. ____________________ SANJAY KUMAR, J. 29TH NOVEMBER, 2012. VGSR [1] [2] [3] [4] [5] [6] 2010 (4) ALD 116 Company Petition No.70 of 2010 and batch dated 21.08.2012