M/s. Sampat Trading & Co. v. M/s.Talayar Tea Company Ltd.

tea brokerage business for a considerable period of time, was actingas the agent of the respondent and in that capacity, they used tobuy and sell tea on behalf of the respondent to various customers.They also maintaining a running account. The respondent also usedto borrow money on a regular basis from the petitioner to meet theirfund requirement and the petitioner was also advancing moniesperiodically to the respondent to meet such requirements. It isfurther averred in the petition that the respondent had accumulatedhuge dues and in respect of consignment coffee supplied by therespondent, there was a short supply and in that regard also,amounts were due to the petitioner. The petitioner after creditingcertain payments made by the respondent, got execution of pronotesin their favour by the respondent. 3. The petitioner further averred that in the year 1997, aReconciliation Statement was preferred after verification of theaccounts of both the petitioner and the respondent. Thereafter, itwas agreed by the respondent that a sum of Rs.73,32,810.05 was dueand payable by them to the petitioner and the respondent also agreedto pay interest at the rate of 24% per annum on the above saidamount. The respondent confirmed and accepted a sum ofRs.99,47,312.67 due and payable as on 27.11.1997 to the petitioner.The respondent also confirmed that a further sum of Rs.67,537.33 wasdue and payable to the petitioner in respect of short supply ofCoffee and after crediting payments made for renewal of pronotes.The respondent confirmed and accepted that a total sum ofRs.1,00,14,850/- was due and payable by the respondent to thepetitioner as per the statement of account verified and confirmed on27.11.1997 by the Managing Director of the respondent on behalf ofthe respondent company. 4. The petitioner also averred that a liquidated debt due andpayable to the petitioner, which the respondent has failed andneglected to pay the same. The respondent through its ManagingDirector, on 27.11.1997 confirmed that a sum of Rs.1,00,14, 580/-was due and payable to the petitioner and on 15.12.1997, therespondent made part payment of Rs.60,00,000/- by way of DemandDrafts drawn in favour of the petitioner. However, no furtherpayments has been made by the respondent to the petitioner regardingthe balance dues. Therefore, the petitioner sent reminders and inresponse to the same, the respondent in its letter dated 27.7.1999for the first time has stated that the petitioner is due and payablea sum of Rs.31,86,000/- to them. The said statement according tothe respondent is made with a mala fide and oblique motive in orderto defeat their claims.5. The petitioner sent a suitable reply on 3.8.1999 andfollowed by a further letter dated 16.8.1999 wherein the petitionerbrought to the knowledge of the respondent about the letter dated https://hcservices.ecourts.gov.in/hcservices/

27.11.1997 in which, the Managing Director of the company hasconfirmed and certified that a sum of Rs.1,00,14,850/- was due andpayable by them to the petitioner. However, there was no responseto the said letters. 6. It is further stated by the petitioner that the respondentbecame commercially insolvent as their balance sheet for the yearended 31.3.1999 would disclose that as against the paid up capitalof Rs.12,50,000/- and Reserves of Rs.12,55,442/-, the respondent hasloans outstanding secured and unsecured to the extent ofRs.1,26,13,182/-. Further, as against the current assets, loans andadvances of Rs.1,80,87,017/-, current liabilities and provisions areRs.5,00,55,958/-. That apart, during the said year, the respondentcompany suffered a loss of Rs.44,45,080/- and the said figurecoupled with carry forward losses to the extent of Rs.2,38,65,494/-and the loss transferred to the balance sheet as on 31.3.1999 isRs.2,83,10,574/-. Therefore, the above figures given in the balancesheet clearly establish that the respondent company becomecommercially insolvent and the petitioner and other creditors willnot be able to recover anything from the assets. Hence, for thesaid reasons, the petitioner herein prayed for winding up of therespondent company and appointment of Official Liquidator to proceedfurther in the matter. 7. The respondent has filed its counter. In the counterstatement, it has been averred that the respondent company isfinancially very sound and that there is no debt due to thepetitioner but on the contrary, the petitioner owes the respondent asum of Rs.37,36,292.62 as per the revised statement of accounts. Itis further averred in the counter that the present management tookover the respondent company from the previous management. In theprevious management, two of the partners of the petitioner wereDirectors till 12.12.1997 and as such, there was a collusion betweenthem and the previous management of the respondent. It is furtheraverred in the counter that the alleged due of Rs.1,00,14,850/- asconfirmed by the respondent and its Managing Director were prior toDecember 1997 during which period, the respondent company was underthe old management. After take over of the respondent company bythe new management, a sum of Rs.60,00,000/- was paid to thepetitioner with a specific understanding that further tofinalisation of accounts and subject to verification of the same,the respondent's dues to the petitioner will be ascertained and willbe settled in full. At the time of take over on 12.12.1997 by thepresent management, auditing of accounts was over only up to 1995-1996 and the present management had finalised the accountssubsequently for the years 1996-97, 1997-98 and 1998-1999. https://hcservices.ecourts.gov.in/hcservices/

8. The respondent also averred that the agreed rate of interestis only 12% and the petitioner was accepting monies due to therespondent from various third parties such as Tamil Nadu Tea BrokersLtd., under the pretext of setting of its dues from 30.5.1996 and31.1.1997 and the amount involved is Rs.15,17,402.45 and if thesaid amount is taken into account, a sum of Rs.2,90,109.24 has beenpaid in excess to the petitioner as on 15.12.1997 and the respondenthas to refund the same with interest. The respondent supplied teavalued at Rs.6,64,310.44 on 1.2.1998 to the petitioner through M/s.Woodbriar Estate Ltd. It is further averred in the counter that asper the statement of accounts annexed to the counter statement, asum of Rs.37,36,292.82 is due and payable by the petitioner to therespondent and that apart, the petitioner has also included certainpersonal loans given to the respondent’s Managing Director and hisfamily members prior to 12.12.1997. 9. The respondent has sent a detailed reply to the lawyer’snotice dated 20.7.1999 and also sent reply to the statutory noticedated 18.9.1999. The sum and substance of the counter statement ofthe respondent is that since there is bona fide dispute on theamount due and payable to the petitioner by the respondent, and thatactually the petitioner is liable to pay amounts to the respondent,and also, the respondent company is financially sound, the petitionfor winding up the company is not maintainable. Therefore, therespondent prayed for dismissal of the application for winding up.10. The petitioner has filed its reply to the counter statementstating among other things that the transaction between thepetitioner and M/s. Woodbriar Estates Ltd., has absolutely noconnection with the respondent company. It is further averred inthe reply statement that the respondent requested the petitioner whohad a bank account at Coonoor to deposit the cheques pertaining tothe transaction with Tamil Nadu Tea Brokers Ltd. Accordingly, thecheques were deposited in the accounts of the petitioner and lateron a sum of Rs.15,17,402.45 received by the petitioner from TamilNadu Tea Brokers Ltd., has been transferred to the respondent interms of the above said understanding except a sum of Rs.535.80.The respondent has also acknowledged the same vide their letterdated 3.2.1997. The petitioner further denied the allegation thatcertain personal loans given by the petitioner to the ManagingDirector of the respondent were included. 11. The learned Judge after consideration of the averments madein the petition, counter and reply, held that there is a bona fidedispute as regards the existence of the debt and it is for thepetitioner to prove by production of accounts and other documentsthat monies were due to the petitioner. The learned Judge furtherfound that the collusion between the previous management of thecompany with the petitioner cannot be decided in summary proceedings https://hcservices.ecourts.gov.in/hcservices/ and it is for the petitioner to establish the same in a properlyinstituted suit. The learned Judge further found the financialcondition of the respondent is neither week nor unsound to orderwinding up of the respondent company and for the said reasons, hasdismissed the company petition filed by the petitioner for windingup of the respondent company. The petitioner aggrieved by the same,has preferred this appeal. 12. Heard the submissions of Mr.Aravind P.Dattar, learnedsenior counsel appearing for the appellant and Mr.SivamSivanandaraj, learned counsel appearing for the respondent.13. The learned senior counsel appearing for the appellant hasmade the following submissions:-(a) The respondent company has paid a sum of Rs.60,00,000/- interms of the agreement dated 12.12.1997 after the new managementtook administration and affairs of the company and as per clauseNo.2, the new management has to take over all liabilities. Inclause No.6.1 of the said agreement it has been admitted that a sumof Rs.60,00,000/- has been paid and further undertaking was given topay the balance due. If really the truth and validity of theagreement dated 12.12.1997 is under dispute, the respondent shouldnot have paid a sum of Rs.60,00,000/- and promised to pay thebalance dues to the appellant.(b) The respondent has written a letter dated 3.2.1997 to theappellant, confirming the receipt of a sum of Rs.15,16,855.85 andthere were cash receipts / acknowledgements in respect of individualamounts paid by the respondent. The erstwhile management had alsogiven acknowledgement from 1.6.1996 to 14.12.1996 and the newmanagement took the administration and affairs of the respondentcompany on 12.12.1997 and the said terms are not in dispute. (c) There is no bona fide dispute to the amount due and payableto the appellant as the admitted balance as on 27.11.1997 wasRs.1,00,14,850/- and the finding of the learned judge that it is notclear as to whether payments of Rs.5,000/- and 1,500/- on 9.6.1997and 1.9.1997 respectively have been taken into account whiledetermining the balance on 27.11.1997, on the face of itunsustainable as the said amounts are insignificant and irrelevantto adjudicate the issue with regard to the bona fide dispute of theamount payable. (d) There is no bona fide dispute with regard to the balance ofprinciple amount due and payable and assuming that there is adispute on the quantum of interest, the same cannot be against theclaim of the appellant. (e) With regard to the dispute in respect of payment by M/s.Woodbriar Estates Ltd., it is an independent transaction withanother company and the respondent company has nothing to do with https://hcservices.ecourts.gov.in/hcservices/ the said payment. There is no question of any adjustment betweenthe payments and receipts with regard to the M/s. Woodbriar EstatesLtd., as they are two different and independent transactions in twodifferent companies. (f) The agreement dated 12.12.1997 read with letter ofconfirmation dated 27.11.1997 are prima facie sufficient toconstitute an admitted liability on the part of the respondent. (g) The former Managing Director as well as new ManagingDirector had admitted the liability and the said admission has beenmade on behalf of the respondent company and the same is binding onthem. (h) In respect of amounts due from Tamil Nadu Tea Brokers Ltd.,acknowledgement/cash receipts show full payment of the amount ofRs.15,16,866.85. (i) As regards the commercial insolvency of the respondent, itis submitted by the learned senior counsel appearing for theappellant that as per the 55th Annual Report for the financial year2000-2001, the share capital was shown as Rs. 12.5 lakhs and theloss for the year 2000-2001 was shown as Rs.58.24 lakhs and thetotal carry forward loss is Rs.5.57 crores. According to thelearned senior counsel appearing for the appellant when the annualloss is 4.5 times more than the share capital amount and the carryforward loss is 40 times, it cannot be said that the company is insound position. (j) Lastly it is submitted by the learned senior counselappearing for the appellant that for deciding the petition forwinding up, the Court has to proceed only the prima facie case andthere is no question of appreciation of evidence involved whileadjudicating the said petition. In any event, the petition forwinding up cannot be ordered straight away and only an advertisementis ordered to be issued and thereafter, after adjudicate the claimsof the other creditors and the contention putforth by the debtor,the Court has to decide the winding up of the company. Therefore,the learned Judge ought to have ordered issuance of theadvertisement according to the learned senior counsel appearing forthe appellant. 14. The learned senior counsel appearing for the appellant insupport of his submissions, has took us through the typed set ofdocuments and also placed reliance upon the following judgments:-i. (1994)3 Company Law Journal page 438 (Delhi)ii. (1999) Vol.95 Company Cases page 172 - AshokaAgencies & Business Forms Ltd.,iii. TDICI Limited vs. Neptune Inflatables Ltd.reported in (1999)1 Company Law Journal page 240 (Mad.),iv. [2006] 129 Company Cases page 678 (Delhi) -Mahesh Nathani vs. Sir Edward Dunlop Hospitals (India)Ltd. https://hcservices.ecourts.gov.in/hcservices/ v. [1978] vol.48 Company Cases page 378 (Bomb.) -United Western Bank Ltd., In re.,vi. [1982] Vol.52 Company Cases page 479 (Calcutta) -Wastinghouse Saxby Farmer Ltd., In re.vii. [1978] Vol.48 Company Cases, page 129(Allahabad) - Registrar of Companies, U.P. vs.KT.Financiers Private Ltd.,viii. (2002)3 MLJ 750 - Imperian Corporate andServices (P) Limited vs. Aruna Sugars and Enterprises Ltd.15. The judgment reported in (1994)3 Company Law Journal page438 (Delhi) came to be decided on the facts of the case as the HighCourt of Delhi in the said decision found that debt has beenadmitted and proved and therefore ordered winding up of the company.16. In (1999) Vol.95 Company Cases page 172 - Ashoka Agencies& Business Forms Ltd., the petition for winding up was filed againstthe respondent company on the ground of its failure to pay thebalance of Rs.24,32,416.01 on a running account which wasacknowledged by the said company by its communication dated21.9.1992. The company raised defence, that the said communicationwas not a promise to pay and at the most, it was an acknowledgementof a time-barred debt. The Calcutta High Court on the facts of thesaid case held that in the light of the petitioner's affidavit thatthere was continuous and running transactions; there could be nopresumption that the acknowledgement was of a time-barred debt. TheHigh Court of Calcutta citing the said reasons, ordered issuance ofadvertisement. 17. In TDICI Limited vs. Neptune Inflatables Ltd. reported in(1999)1 Company Law Journal page 240 (Mad.), this Court on the factsof the said case held that various letters of undertaking sent bythe respondent pay the debts would prove that the respondent isunable to pay its debts and the admission of debt voluntarily,recorded by the respondent in their letter, will prove they areunable to pay the debts and therefore, this Court has orderedissuance of advertisement as contemplated in Rule 96 read with Rule24 of the (Company Courts) Rule 1959. 18. In [2006] 129 Company Cases page 678 (Delhi) - MaheshNathani vs. Sir Edward Dunlop Hospitals (India) Ltd., a non-residentIndian has remitted money for allotment of shares in respondentcompany and later on the said person has withdrawn his intention tosubscribe shares. However, the company has not repaid the amount. https://hcservices.ecourts.gov.in/hcservices/ The High Court of Delhi held that even tough the company was asolvent but has not chosen to pay the amount and therefore, admittedthe petition for winding up and ordered publication in newspapers. 19. In [1978] vol.48 Company Cases page 378 (Bomb.) - UnitedWestern Bank Ltd., In re., the High Court of Bombay underlying theprinciples for ordering the winding up of the company, which are asfollows:-"On a petition under section 483 of the CompaniesAct, 1956, where the defence is that the debt is disputed,the court has to see first whether the dispute on the faceof it is genuine or merely a cloak to cover the company'sreal inability to pay just debts. The inability isindicated by its neglect to pay after a proper demand anda lapse of three weeks. Such neglect must be judged onthe facts of each case. Merely seeking to raise certaindisputes for putting off liability for payment of the debtor creating a kind of defence to the claim will not makethe debt a disputed one. Disputes which appear to havebeen created or manufactured for the purpose of creatingpleas to cover up the liability for payment of the debtcan never be considered to be bona fide and will be of noavail in resisting a winding-up petition."20. In [1982] Vol.52 Company Cases page 479 (Calcutta) -Wastinghouse Saxby Farmer Ltd., In re., the High Court of Calcutta,on the facts of the case, held that there is no bona fide disputebased on material on record and therefore, ordered winding up of thecompany. 21. As regards Commercial Insolvency, reliance was placedupon the judgment reported in [1978] Vol.48 Company Cases, page 129(Allahabad) - Registrar of Companies, U.P. vs. KT.Financiers PrivateLtd., wherein the balance sheet of the company showed that the totalrealisable assets of the company was over Rs.6.00 lakhs as againstthe liabilities of over Rs.11 lakhs and none of the Directors,responded to the statutory notices issued under section 439(5) ofthe Companies Act, 1956. The Allahabad High Court on a perusal ofthe material on record found that the company had become financiallyunsound and was unable to carry on its business. Therefore, thecompany should be wound up. 22. In (2002)3 MLJ 750 - Imperian Corporate and Services (P)Limited vs. Aruna Sugars and Enterprises Ltd., this Court has placedreliance upon the decision of the Hon'ble Supreme Court of India,reported in 1971 Manu (Supreme Court) page 33 - M.Gordhandas andCompany vs. M.W.Industries, and in the said decision, it has beenheld as follows:- https://hcservices.ecourts.gov.in/hcservices/ " 20. Two rules are well settled. First if the debt isbona fide disputed and the defence is a substantial one,the Court will not wind up the company. The Court hasdismissed a petition for winding up where the creditorclaimed a sum for goods sold to the company and thecompany contended that no price had been agreed upon andthe sum demanded by the creditor was unreasonable (SeeLondon and Paris Banking Corporation (1874) 19 Eq.444).Again, a petition for winding up by a creditor who claimedpayment of an agreed sum for work done for the companywhen the company contended that the work had not been doneproperly was not allowed. (See Re.Brighton Club andNorfolk Hotel Co. Ltd., (1865) 35 Beav.204)21. Where the debt is undisputed the Court will notact upon a defence that the company has the ability to paythe debt but the company chooses not to pay thatparticular debt (See Re.A company 94 SJ 369). Wherehowever there is no doubt that the company owes thecreditor a debt entitling him to a winding up order butthe exact amount of the debt is disputed the Court willmake a winding up order without requiring the creditor toqualify the debt precisely (See Re. Tweeds Garages Ltd.,1962 Ch.406). The principles on which the Court acts arefirst that the defence of the company is in good faith andone of substance, secondly, the defence is likely tosucceed in point of law and thirdly the company adducesprima facie proof of the facts on which the defencedepends."23. This Court in the said decision also placed reliance upon aDivision Bench decision of this Court reported in 1970 MANU/TN 122 -Sree S.Mitts v. Dharmaraja Nadar and held that the test of inabilityto pay the debt under Section 433(e) of the Companies Act was notwhether the company, if it converted all its assets into cash, wouldbe able to discharge its debts, but whether in a commercial sensethe existing liabilities could be paid by it while continued tocarry on as a company. In the said decision it has been found thatthe company has failed and neglected to pay the sums due to thepetitioner and therefore ordered publication. 24. Per contra, Mr.Sivam Sivanandaraj, learned counselappearing for the respondent has submitted the following:-(a) Two partners of the appellant were Directors of therespondent company as evidenced from form 32 filed before theRegistrar of Companies and hence it can be safely assumed that theappellant had close nexus with the old management and had access tothe office of the respondent including its stationary and records. https://hcservices.ecourts.gov.in/hcservices/ (b) As per the agreement dated 12.12.1997, it has been statedthat a sum of Rs.60,00,000/- was due to the appellant and if thereis any balance due, the same will be paid to the appellant withinsixty days. The appellant after receipt of Rs.60,00,000/-, hadtransferred all share certificates pledged with them as security, tothe new management of the respondent and this was done due to thereason that the entire liability had been cleared and if anythingwas found to be due, it was only a meagre amount. Any prudentperson will not transfer all share certificates pledged, in theabsence of full and final settlement of amounts due. The same isevidenced from the letter dated 27.11.1997 and the statement ofaccounts even dated. (c) The statement of accounts produced by the appellant wouldreveal the date of last transaction was on 25.02.1997 and it wassigned by one Mr.K.A.Narayanan in his capacity as the ManagingDirector of the respondent who was part of the old management.The balance sheet and statement of accounts ending up to 31.3.1997was furnished by the old management at the time of take over and asper the statement of accounts, the amount due and payable as on31.3.1997, is only Rs.49,70,714/- and it was also signed byMr.K.A.Narayanan. A combined reading of those documents wouldclearly exhibit that the statement of accounts dated 27.11.1997 is afabricated one. (d) The letter dated 3.3.1997 relied on by the appellant wasalso issued by Mr.K.A.Narayanan, wherein the rate of interest hasbeen increased from 20% to 24% and it is also to be pointed out atthis juncture according to the learned counsel appearing for therespondent, the promissory notes do not mention the rate ofinterest. The appellant in collusion with Mr.K.A.Narayanan, hadcreated and fabricated those documents to suit their convenience andto enable them to file a petition for winding up. (e) The appellants had filed a suit in O.S.No.15 of 2000 on thefile of the Court of District Munsif, Coimbatore, praying for apermanent injunction restraining the respondent herein fromencumbering the shares and also sought a relief of mandatoryinjunction to return the cheques. If there is any amount due andpayable after the payment of Rs.60,00,000/-, the suit should havebeen laid for recovery of money and the appellant has not reservedits rights to file separate suit by obtaining leave. (f) The respondent after perusal of records had sent a letterdated 7.2.1998 stating among other things that the company was onstrike from 8.9.1997 to 26.12.1997 and the respondent was paying asum of Rs.60,00,000/- without verifying the accounts, as theaccounts were not ready on that date. In the said letter, therespondent also made a counter claim of Rs.22,00,0000/-. Theappellant in spite of having received the said letter, has notchosen to send any reply. The said letter was followed by anotherletter dated 27.7.1999 sent by the respondent claiming a sum ofRs.31,86,255/-. The appellant then woken up and issued a legal https://hcservices.ecourts.gov.in/hcservices/ notice dated 20.7.1999 calling upon the respondent to crystallisethe liability and there was no demand for payment of the amount. Ifreally the appellant was in possession of the letter dated27.11.1997, wherein Mr.K.A.Narayanan on behalf of the erstwhilemanagement had acknowledged the liability of Rs.1,00,14,850/-, theappellant would have definitely made a claim for that amount. Therespondent has also sent a reply dated 6.8.1999 denying the entireclaim.(g) The appellant had sent a legal notice dated 18.9.1999wherein for the first time, made a claim for a sum of Rs.60.47 lakhsand in the said letter, confirmation of balance as on 27.11.1997 hasalso been referred to and the same would clearly exhibit that thedocument evidencing confirmation of balance dated 27.11.1997 hasbeen put into service for the purpose of issuing statutory notice. (h) The respondent in response to the statutory notice, hadsent a reply dated 4.10.1997 specifically disputing the liabilityand also made a counter claim. The reply sent by the respondent tothe statutory notice has been deliberately suppressed by theappellant at the time of filing of the winding up petition and sincethe appellant has failed to approach this Court with clean hands, itis not entitled to any relief. (i) As regards the counter claim made by the respondent, thelearned counsel appearing for the respondent would submit that thesaid counter claim was made as early as on 7.2.1998 and it is alsosubstantiated by the documents produced by them. (j) In reply to the submission made by the learned counselappearing for the appellant that the respondent company had becomecommercially insolvent, the learned counsel appearing for therespondent has submitted that the respondent company made profit ofRs.23 lakhs in the year 2007, after taxation and profit of Rs.75lakhs in the year 2006 and thereby the respondent is wiping up theloss incurred by the earlier management. It is further submitted bythe learned counsel appearing for the respondent that the respondentcompany on an average, produces around 10 lakh kilograms of tea andis employing 800 employees and further it holds lands of more than2500 acres valued at Rs.57 crores ad the value of the superstructureis Rs.6,67,25,000/-. In the event of winding up being ordered,d therespondent company is bound to lose its business and thereby putinto peril the interest of 800 employees and their families. (k) Hence it is submitted by the learned counsel appearing forthe respondent that the respondent company need not be ordered to bewound up and the learned single Judge has carefully analysed theentire materials placed before him and correctly held that therespondent company is not liable to be wound up and rightly rejectedthe Company Petition and therefore, no interference is warranted. 25. The learned counsel appearing for the respondent insupport of his submissions placed reliance upon the followingjudgments:- https://hcservices.ecourts.gov.in/hcservices/ (1) 1965(35) Company Cases 456 (SC) (AmalgamatedCommercial Traders (P) Ltd. vs. A.C.K.Krishnaswami andanr.). (2) 1968 Vol. 38 Company Cases 384 (DB) (LakshmiSugar Mills vs. National Industrial Corporation Limited)(3) (1970) 1 All E.R. 923 (Chancery Division) In ReFidles Bros Ltd.(4) (1971)3 SCC 632 (Madhusudhan Gordandhas and Co.vs. Madhu Woollen Industries)(5) (1992) 1 MLJ 232 (Viswanathan vs. M/s. SeshasayeePaper & Bd. Ltd.)(6) (1992) 73 Company Cases 337 (Delhi) Kalra IronStores Faridabad Fabricators (P) Ltd.(7) (1996) 95 Company Cases 586 (DB) (Malhotra SteelSyndicate vs. Punjab Chemi-Plants Ltd.).(8) (2001) 104 Company Cases 533 (DB) Tata Iron andSteel vs. Micro Forge (India) Ltd.(9) (2003) 113 Company Cases 383 (Mad) SICAL-CWTDistripark Ltd. vs. Besser Concrete Systems Limited. (10) 2004(120) Company Cases 784 (DB) Neg.MiconLimited vs. NEPC India)(11) AIR 2005 SC 4175 (Mediquip Systems (P) Ltd. vs.Promima Medical Systems) (12) (2008) 6 MLJ 633(DB) (Narsey Brothers vs.Nithyalakshmi Textiles Mills (P) Ltd.26. In 1965(35) Company Cases 456 (SC) (Amalgamated CommercialTraders (P) Ltd. vs. A.C.K.Krishnaswami and anr.), the Hon'bleSupreme Court of India on the facts of the case found that there wasa bona fide dispute with regard to the debt and further held asfollows: "It is well-settled that "a winding up petition is not alegitimate means of seeking to enforce payment of the debtwhich is bona fide disputed by the company. A petitionpresented ostensibly for a winding up order but really toexercise pressure will be dismissed, and undercircumstances may be stigmatized as a scandalous abuse ofthe process of the court. At one time petitions foundedon disputed debt were directed to stand over till the debt https://hcservices.ecourts.gov.in/hcservices/ was established by action. If, however, there was noreason to believe that the debt, if established, would notbe paid, the petition was dismissed. The modern practicehas been to dismiss such, petitions. But, of course, ifthe debt is not disputed on some substantial ground, thecourt may decide it on the petition and make the order.(Vide Buckley on the Companies Acts, 13th edition, page451)."27. In 1968 Vol. 38 Company Cases 384 (DB) (Lakshmi SugarMills vs. National Industrial Corporation Limited), the High Courtof Punjab on the facts of the case dismissed the appeal filed by theappellant/petitioner for winding up the respondent company underSection 433(3) read with Section 434(1)(a) of the Companies Act,1956 on the ground that the debt is in bona fide dispute. It hasbeen further held that in a statutory appeal against a discretionaryorder such as the one declining to wind up a company under section433 of the Act, interference is not normally justified unless theappellate court is satisfied that the court below has not exercisedits discretion according to sound judicial principles. 28. In (1970) 1 All E.R. 923 (Chancery Division) In Re FidlesBros Ltd., it has been held as follows:-"If on the facts existing when the petition was presentedit was then just and equitable to wind up the company, butsubsequently it has ceased to be so, I do not think awinding up order should be made. Sec. 222(f) CompaniesAct 1948 is cast in the present tense, providing for anorder if the court 'is' of of the opinion that it 'is'just and equitable that the company should be wound up.No doubt if there were cogent grounds for complaint at thetime when the petition was presented, but they wereafterwards melted away, there may be consequences inrelation to costs; but a winding up order under this headmust be based on subsisting facts and not on pasthistory."29. In (1971)3 SCC 632 (Madhusudhan Gordandhas and Co. vs.Madhu Woollen Industries), claim was made from the company based oncertain invoices and it denied on the ground of fraud. The Court ona perusal of materials placed on record found that the books ofaccounts did not support the case of the petitioner who soughtwinding up of the company and held that the claim of the petitioneris tainted by dishonesty and the petition for winding up filedonly to quash the company to make the payment and it is not bonafide. 30. In (1992) 1 MLJ 232 (Viswanathan vs. M/s. Seshasayee Paper& Bd. Ltd.), it has been held that when there is a bona fide dispute https://hcservices.ecourts.gov.in/hcservices/ with regard to liability, the petition for winding up is to bedismissed.31. In (1992) 73 Company Cases 337 (Delhi) Kalra Iron StoresFaridabad Fabricators (P) Ltd., the defence was raised in respect ofa petition for winding up by contending that fraud has beencommitted at the time of issuance of predated cheques and it hasbeen held that in view of the allegations of fraud, civil Court isthe competent forum to adjudicate the issues and not the companyCourt.32. In (1996) 95 Company Cases 586 (DB) (Malhotra SteelSyndicate vs. Punjab Chemi-Plants Ltd.), the winding up petition wasfiled on the basis of the amount due and payable under thedishonoured cheque and on the facts of the case it was held thatthere was a bona fide and substantial dispute, which can beadjudicated only by a civil court. The learned counsel appearing forthe respondent submits that the ratio laid down in the saiddecision, is ipso facto applicable to the case on hand.33. In (2001) 104 Company Cases 533 (DB) Tata Iron and Steelvs. Micro Forge (India) Ltd. (Gujarat), the High Court of Gujarathas laid down the following principles at the time of orderingwinding up of the company:-"It cannot be gainsaid that winding up of a company is aprocess in which the life span of it is cut short and itsproperty administered for the benefit of its creditors,contributories and the shareholders-members by a competentperson to be appointed by the court. Winding up of acompany differs from the insolvency of an individual,inasmuch as a company cannot be made insolvent under theinsolvency law in India unlike in United Kingdom.Moreover, even a solvent company may be wound up andadministered or a liquidator could be appointed by thecompetent court who takes charge of the company and thecompany remains under his control. He collects its assetsand dues and pays the debts and liabilities and finallydistributes any surplus amongst its members in accordancewith the respective legal rights of the concerned parties.This is highlighted to show that once an order of windingup is recorded by the competent court on any one of thegrounds enumerated in section 433 of the Companies Act,the outcome would be like the death of an individual.Once the winding up order is passed, the entire managerialfunctioning and decision-making authority is shifted and,ordinarily, entrusted to the official liquidator or anadministrator. No doubt, the impugned order radiates animprint of only an admission of winding up petition and https://hcservices.ecourts.gov.in/hcservices/ directing the publication of the advertisement in leadingdaily newspapers. It also cannot be gainsaid that anorder admitting a winding up petition and the resultantorder for the publication of an advertisement invitingclaims from respective parties by a public notice is, inmany cases, from the commercial point of view, thebusiness point of view, from the marketability point ofview, no less injurious than winding up. This propositioncould, hardly, be questioned. The parameters prescribed or propounded by process ofevolution of case-law, in order to reach the conclusion ofa fit and appropriate case for declaring a company fit forwinding up are also very well settled, extensivelyexplored by a catena of judicial pronouncements. Theexpression in section 433(e) "inability to pay its debts"is required to be considered ad examined taking intoaccount various aspects. It may also be mentioned that atthis stage,that a claim to an order of winding up is not amatter of right, but it is the discretion of the court onone or more of the grounds having been established asmentioned in section 433 of the Companies Act. Even atthe stage of admitting the petition, unlike otherpetitions, the company court has to be very alive to therelevant aspects and is obliged to consider manycircumstances.Certain important chronicles and contours to be keptin the mental radar, before reaching the conclusion in awinding up petition can be articulated as under:(1) The remedy under section 433 in general and underclause (e) in particular is not a matter of right; assuch, and it is discretion of the company court. It doesnot confer any right on any person to seek order that thecompany should be wound up. It is a provision empoweringthe court by a statutory provision to pass an order ofwinding up in an appropriate case. (2) Merely because any one of the circumstances enumeratedin section 433 of the Companies Act exists, the court isnot bound to order winding up of the company. Nobody canaspire to wind up the company as a matter of course. Thecourt has wide power and discretion. In this connection,inability to pay debts is required to be judged fromvarious sets of facts and circumstances. It may also bestated that inability to pay debts in all cases, ipsofacto, could not be construed as an appropriate case forwinding up. (3) A debt is money which is payable or will be payable infuture by reason of a person's obligation. The expression"debt" would refer to liability to pay and it rests oncertain contingencies, conditions and causalities. Even https://hcservices.ecourts.gov.in/hcservices/ if the debt is proved and even if the inability to pay thedebt is also shown, it is not a launching pad, in allcases, for a successful winding up order. Inability mayarise for a variety of reasons and the court is obliged toconsider whether the inability is the outcome of anydeliberate or designed action or mere temporary shock andeffect of economy and market. In a given case, it mayhappen that a party may become unable to pay its debts fora while, but that by itself is not a criterion forexercise of the power to wind up, ipso facto. (4) It is necessary for the company court to consider thefinancial status, strength and substratum of the company,in the overall context. It is possible, at times, thatthere may be a cash crunch. It may be also, possible, attimes, that there is temporary cash crisis despite highsales and heavy turnover and, therefore, in such asituation, mere disability or only on the ground ofinability to pay would not constitute a ground empoweringthe court to wind up the company. (5) If the company is an ongoing concern having regularbusiness and employment of employees, the court cannotremain oblivious to this aspect. The effect of winding upwould be of putting an end to the business or an industryor an entrepreneurship and, in turn, resulting in loss ofemployment to several employees and loss of production andeffect on the larger interest of the society. (6) Even dividend declared by the company regularly andhaving profit in the light of the profit and loss account,though temporarily, there may be inability to pay the debtor in the case of any eventuality, the company is unableto make the payment of dues and that by itself could notbe construed as a ground to wind it up. (7) Winding up of a company, as such, is nothing but acommercial death or insolvency and, therefore, the companycourt is obliged to take into consideration not only thetemporary inability, or disability to make the payment ofdebts, but the entire status and position of the companyin the market. (8) When grounds on which the winding up order can bedenied, upon an evaluation of the facts of the case, afteradmission, exist from the record already placed before thecourt, it would be a sound exercise of discretion toreject the petition instead of admitting it. This view isvery much celebrated. (9) Inability to pay debts in terms of section 433(e) readwith section 434(1)(a), demand of the debt would raise apresumption as to inability to pay its debts. But such apresumption is rebuttable. Such a presumption may berebutted on existing material and what evidence is https://hcservices.ecourts.gov.in/hcservices/ sufficient depends on the facts and circumstances of thecase. (10) If the company has shown considerable growth in areasonable span and is a growth oriented enterprise, evenin a case of temporary inability would not be sufficientto drive it to winding up. (11) Though, ordinarily, an unpaid creditor may aspire foran order of winding up, the "ex debito justitiae" rule isnot of inflexible mandate, but is, as such a matter ofdiscretion of the court. (12) Section 433 is also indicative of the fact that evenif one or more grounds mentioned in section 433 exist, itis not obligatory for the court to make an order ofwinding up. The court has discretionary power. The courtmust in each case exercise its discretion in decidingwhether in the circumstances of the case, it would be inthe interest of justice to wind up the company. It is awell known rule of prudence that even in a case whereindebtedness to the petitioning person is undisputed, thecourt does not pass an order for winding up where it issatisfied that it would not be in the larger interest ofjustice to wind up the company. (13) It is also well settled that a winding up order shallnot be made on a creditor's petition, if it would notbenefit him or the company's creditors in general.(14) The Court is also obliged to consider that it wouldbe in the interest of justice to give the company sometime to come out of the momentary financial crisis or anyother temporary difficulty as winding up is a measure oflast resort. (15) Winding up course cannot be adopted as a recourse torecovery of the debt. (16) The court must bear it in mind one more celebratedprinciple and consider whether the company has reached astage where it is obviously and plainly and commerciallyinsolvent, that is to say, that its assets are such andits existing liabilities are such as to make the courtfeel clearly satisfied that current assets would beinsufficient to meet the current liabilities, along withother principles. (17) It is also necessary to consider whether therespondent-company has become defunct or has closed itsbusiness, for quite some time, whether it is commerciallyinsolvent. For the purpose of finding commercialinsolvency, a mere look into the financial data isrelevant to examine about its soundness. In all mattersrelating to winding up, the court may have regard to thewishes of the creditors and contributories and may, ifnecessary, ascertain their wishes appropriately. If the https://hcservices.ecourts.gov.in/hcservices/ company is solvent, the wishes of the contributories wouldcarry more weight as they are persons, mainly, interestedin the assets.(18) The element of public policy in regard to commercialmorality has, likewise, to be taken into account beforedetermining the winding up issue. The court has also toconsider the purpose and policy behind sections 443 and557 of the Companies Act. (19) Winding up is the last thing the court would do andnot the first thing to do having regard to its impact andconsequences. Winding up of a company would ensue:(a) closing down of a company which is engaged inproduction or manufacture or which provides some services;(b) it would throw out of employment numerous persons andresult in gross hardship to the members of families of theemployees;(c) loss of revenue to the State by way of collection oftaxes which otherwise should have been collected, onaccount of customs, excise duties, sales tax, income-tax,etc.;(d) scarcity of goods and diminishing of employmentopportunities.(20) A winding up petition has to be submitted in theprescribed form highlighting all the facts and emphasisingthe inability of the company to pay its debts. The formprescribed under the Companies (Court) Rules, clearly,indicates that the petitioner should, provide all thenecessary material particulars. The petitioner is obligedto show that the financial status or the monetarysubstratum or the commercial viability of the company hasgone so low and down that winding up is obviously, andevidently, unavoidable. (21) It is a settled proposition of law that a winding uppetition is not a legitimate means of seeking to enforcethe payment of a debt which is disputed by the company,bona fide. A winding up petition ought not to be aimedat pressurising the company to pay the money. Such anattempt would be nothing but tantamount to blackmailing orstigmatizing the concerned company by abusing the processof the court. (22) A winding up petition is not an appropriate modeenforcing bona fide disputed debts and it is nothing butmisuse and abuse of the process of the court. (23) A winding up petition is not an alternative form forresolving the debt dispute. In certain cases disputes aresuch that they are fit for resolving through the civilcourt rather than through the company court. (24) What is bona fide and what is not is a question offact. The expression "bona fide" would mean genuine, in https://hcservices.ecourts.gov.in/hcservices/ good faith and when a dispute is based on substantialgrounds or when a defence is probable and with somesubstance, it is a bona fide dispute. It must be strictlynoted that a winding up petition is not an alternative toa civil suit. "The High Court of Gujarat on the facts of the case, held that therewas a serious controversy about the liability which requireinvestigation of facts and evaluation of document and examination ofwitnesses and therefore it would be advisable to the parties to goto the civil court for adjudication. 34. In (2003) 113 Company Cases 383 (Mad) SICAL-CWT DistriparkLtd. vs. Besser Concrete Systems Limited, the agreement relied on bythe petitioner was genuine alleging fraud and this Court held thatthe case is not one for winding up and it can be adjudicated onlybefore a civil forum. 35. In 2004(120) Company Cases 784 (DB) Neg.Micon Limited vs.NEPC India), in respect of the petition for winding up, defence wasraised by stating that the letter acknowledging the liability hasbeen fabricated, which came to be produced only at a later stage, ithas been held in the said decision that the defence raised by therespondent merits acceptance and it require deeper investigation andconsequently, the petition for winding up was dismissed. Accordingto the learned counsel appearing for the respondent, the facts ofthe said case and the ratio laid down in the said decision squarelyapplicable to the facts of this case. 36. In AIR 2005 SC 4175 (Mediquip Systems (P) Ltd. vs. PromimaMedical Systems), the Hon'ble Supreme Court held that in order topass an order of winding up, there should be a debt and it should bedetermined or denied and it should not be allowed to be utilised asa means to realising the debts and the power under Section 433 isdiscretionary. It has been further held that if there is any bonafide dispute, it is to be resolved by approaching the civil court. 37. This Court in the decision reported in (2008) 6 MLJ 633(DB)(Narsey Brothers vs. Nithyalakshmi Textiles Mills (P) Ltd., on thefacts of the case found that in spite of factual positions, therewere earlier notices and replies have been sent and that the amountas well as the quantum is in dispute and hence the winding uppetition cannot be made as a device, to pressurise the respondent tomake payment as per the demand raised. 38. The Court has carefully considered the submissions made bythe learned senior counsel appearing for the appellant and thelearned counsel appearing for the respondent and also perused thematerials available on record in the form of typed set of documents https://hcservices.ecourts.gov.in/hcservices/ and also taken into consideration, the principles laid down in thedecisions cited by the respective counsels. 39. A perusal of the agreement dated 12.12.1997 would revealthat a sum of Rs.60,00,000/- was paid to the appellant herein and anundertaking was given to ensure payment of the balance amount due tothe appellant within a period of 60 days from the date of theagreement. Though the total liability is Rs.1,00,14,850/-, theappellant on receipt of Rs.60,00,000/- had transferred all the sharecertificates which were pledged with them by way of security to thenew management of the respondent. That apart, a perusal ofstatement of accounts would reveal the said document was signed byThiru.K.A.Narayanan in his capacity as the Managing Director whilethe respondent company was with the old management. The amount ofRs.49,70,714/- was stated to be due as on 31.3.1997 as per the saidstatement of accounts and it was also signed by the same person. Inso far as the increase of interest from 20% to 24% it wasundertaken in the letter dated 3.3.1997 signed by the same personviz., Thiru.K.A. Narayanan. 40. The learned counsel appearing for the respondent invitedthe attention of this Court to the resolution passed in the Board ofDirectors meeting held on 6.5.1995, wherein it has been stated thatall commercial transactions and contracts excepting Rs.500/- had tobe ratified/approved by two whole time Directors apart fromMr.K.A.Narayanan and hence according to the learned counselappearing for the respondent, it is not open to Mr.K.A.Narayanan tounilaterally increase the payment of interest to 24% from 20% perannum and that he is not competent to acknowledge the liability tothe extent of 1,00,14,850/-. The above said acts of Mr.K.A.Narayananwho was part of the old management according to the learned counselappearing for the respondent is in collusion with the appellantthereby the statement of accounts and other documents came to befabricated in favour of the appellant. That apart, it is submittedby the learned counsel appearing for the respondent that twopartners of the appellant firm were Directors of the old managementof the respondent company and utilising their services, thedocuments came to be fabricated based on which, the appellant madeuntenable claim which resulted in the filing of the companypetition. 41. The Court has also taken into consideration the suit filedby the appellant in O.S.No.15 of 2000, wherein it was filed forpermanent injunction restraining the respondent from encumbering theshares and also for mandatory injunction to return the sharecertificates held by him. The suit is not laid for recovery ofmoney and no leave under Order 2 Rule 3 of C.P.C. was obtained whileinstituting the suit. https://hcservices.ecourts.gov.in/hcservices/

42. The respondent after perusal of accounts, had sent a letterdated 7.2.1998 stating among other things that there was strike inthe factory from 8.9.1997 to 26.12.1997 and hence it was paying asum of Rs.60,00,000/- without due verification of the accounts andthat the accounts were also not ready on the date. It is to bepointed out at this juncture that a counter claim for a sum ofRs.22,00,000/- was also made by the respondent against the appellantand in response to the said letter, there is no reply from theappellant. The respondent also sent one letter dated 27.7.1999claiming a sum of Rs.31.86 lakhs as the amount due and payable bythe appellant and therefore, the legal notice dated 20.7.1999 wassent on behalf of the appellant calling upon them to settle theliability. A perusal of the legal notice would reveal that noadmission for the outstanding amount has been made even thoughaccording to the appellant, Mr.K.A.Narayanan on behalf of the oldmanagement had acknowledged the liability of Rs.1,00,14,850/-. Inresponse to the legal notice, the respondent sent a reply on6.8.1999 disputing the liability. 43. On behalf of the appellant, one more legal notice wasissued on 18.9.1999, wherein a reference was made to theconfirmation of balance letter dated 27.11.1997. The said legalnotice was a statutory notice prior to the filing of the companypetition for winding up and the respondent has sent its reply dated4.10.1999 disputing the contents of the legal notice and theliability and also made a counter claim. A perusal of the companypetition in C.P.No.137 of 2000 would show that there was noreference made to the reply dated 4.10.1999 sent by the respondentin response to the statutory notice. 44. The submissions made by the learned senior counselappearing for the appellant that once the respondent has made a sumof Rs.60,00,000/-, it is not open to him to doubt the genuineness ofthe balance claim cannot merit acceptance for the reason that therespondent has raised a plea of fabrication of documents and alsomade a counter claim for more than one occasion. The respondentalso denied the cash receipts. It is pertinent to point out at thisjuncture that the letter dated 27.11.1997 regarding confirmation ofbalance is seriously disputed by the respondent which is a primaryreason for filing the company petition. Once the said document isdisputed, it is not open to the appellant to contend that the debthas been crystallised in the form of ascertainable liquidated sum soas to enable them to get relief of winding up of the company. 45. As regards the contention made on behalf of the appellantthat the dispute with regard to the sale of Woodbraiar Estate Ltd.,is an independent transaction with another company and it no wayconnected with the respondent company, and that the amounts due fromTamil Nadu Tea Brokers Limited was received by the appellant and https://hcservices.ecourts.gov.in/hcservices/ letter on paid to the respondent, in our considered opinion, arerelatable to factual aspects which are under dispute. Hence, itrequire detailed adjudication before a competent forum. 46. The statement made by the learned senior counsel appearingfor the appellant with the respondent company became commerciallyinsolvent, is seriously disputed by the learned counsel appearingfor the appellant. According to the learned counsel appearing forthe respondent, the respondent is a profit making concern havinghuge assets employing 800 persons and it is also the second largestmanufacturer of tea. It is further submitted by the learned counselappearing for the respondent that the loss incurred by the oldmanagement of the respondent company is being wiped out andprovisions have also been made. In this connection, the learnedcounsel appearing for the appellant has invited the attention ofthis Court to the revised statement of accounts as on 10.5.2005 insupport of his submissions.47. We have also gone through the judgment cited by the learnedsenior counsel appearing for the appellant and we find in most ofthe cases, liability claimed was not disputed and in one case it wasfound the defence raised by the respondent therein was found to befrivolous. 48. In Madhusudanan vs. Madhu Ullan Private Ltd., 1971(3) SCCpage 632 = AIR 1971 SC page 2006, in our considered opinion issquarely applicable to the facts of the case. It is trite law thatthe rule of winding up a company on a petition by creditor is thatif there is a bona fide dispute about the debt and the defence issubstantial one, the defence of the company is in good faith and ofsubstance and is likely to be succeed on a point of law and thecompany adduced prima facie proof of the fact on which the defencedefends, no order of winding up would be made by the Court. We havecarefully analysed the factual aspects of this case keeping in mindthe principles laid down in the decisions cited by the learnedsenior counsel appearing for the appellant and the learned counselappearing for the respondent and found that the respondent hasestablished by materials that there is a bona fide dispute about thedebt and its defence is substantial in nature. The respondentcompany placed the material on record in support of its contentionthat there is genuine, bona fide dispute between the parties. Asthe respondent company according to the appellant is a commerciallyinsolvent company, we perused the revised statement of accountsdated 10.5.2005 and also the submission of the learned counselappearing for the respondent that it is a running company employingabout 800 persons. The said fact has also weighed in our mind. Ifthe company petition is entertained, it would create unnecessaryhardship and other wise causes stigma on the respondent company. https://hcservices.ecourts.gov.in/hcservices/

49. The learned Judge also has carefully analysed the entirematerials placed before the Court and found that the companypetition need not be entertained. 50. We have also independently considered the materials placedbefore us and find no reason to interfere with the order passed bythe learned single Judge. Accordingly, this appeal is dismissedconfirming the order and decree dated 25.7.2002 made in C.P.No.137of 2000. In the circumstances, there will be no order as to costs.Consequently, C.M.P.Nos.19268, 19269, 10678 and 10679 are closed. 51. The findings given above are only for the disposal of thisappeal and it is open to the appellant to put-forth its case on allpoints before the appropriate forum. Sd/-Asst. Registrar./true copy/Sub Asst. Registrar.gr.ToThe Sub Assistant RegistrarOriginal Side, High Court, Madras1 cc to Mr. Sivam Sivanandraj, Advocate, Sr. 25791 cc to Mr.R. Rurari, Advocate, SR. 2626 O.S.A.NO.375 OF 2002.KM (CO)kk 2/2