Karnataka High Court
Anand Steels vs Bharath Earth Movers Limited on 18 June, 1987
Equivalent citations: [1989]65COMPCAS427(KAR), 1987(2)KARLJ52
JUDGMENT M.P. Chandrakantharaj Urs, J.
1. This company petition under Section 433(e) of the Companies Act, 1956, is by M/s. Anand Steels, Bangalore. It is a proprietary concern that has moved this court for a winding-up order seeking the winging up of the respondent, Bharath Earth Movers Ltd., Bangalore.
2. The substance of the allegations in the petition is that on various dates commencing from October 9, 1985, to December 4, 1985, certain supplies of steel effected in respect of which a sum of Rs. 13,67,697 was due and liable to be paid by the respondent-company. The same was not paid despite more than one notice issued. The petitioner was informed that goods worth about Rs. 45,405 was rejected by the respondent-company. Therefore, the petitioner is seeking payment of Rs. 13,22,292 together with interest at 18% per annum from July, 1, 1986, up to the date of petition. It is in that circumstance, for non-payment of the cost of materials supplied, the petition is filed, inter alia, contending that the respondent-company is unable to pay its debts and, therefore, it should be wound up.
3.The petition is rejected by the respondent-company. Detailed statement of objection has been filed. It is unnecessary to refer to the objections in detail. In paragraph 5, it is pointed out that the chairman of the respondent-company received a complaint from 108 employees alleging that certain employees were indulging in serious irregularities in the stores department. One employer of the stores department is specifically named to be in collusion with the suppliers in manipulating entries in the records of the stores and receiving departments. It is pleaded that certain consignments which were actually paid for were not received at all. Payments were made on the basis of forged record. In that circumstance, in para. 21 of the statement of objections, the company has asserted as follows :
"It has sufficient assets to carry on its business. It is a profit-making company as could be seen from its balance-sheet. The respondent has not paid the amounts claimed by petitioner in the circumstances stated above and in view of the fraud committed by petitioner."
4. That assertion relates to and is based on the circumstances narrated in the objection statement that certain employees have suspended and enquiry ordered against them. The respondent-company assets that it has lodged a police complaint in regard to the complicity of its employees in falsifying the entries in the records.
5. It is on such pleading, this court even before directing advertisement in the paper, called upon the parties to adduce evidence.
6. On October 31, 1986, this court passed an order as follows :
"For enquiry regarding the alleged liability of the respondent-company and to determine whether it is a fit case for winding-up the company, call on November 20, 1986."
7. Thereafter, P.W. 1 for the petitioner was examined and his evidence was concluded on December 4, 1986, subject to rebuttal evidence, if any. The evidence of the respondent-company was concluded by examination of two witnesses when the question of permitting the petitioner to lead rebuttal evidence on the basis of certain document came up for consideration. At that point of time, the court suggested to the respondent-company to state categorically when their investigation into the alleged complicity of its employees in committing fraud in collusion with the petitioner would be completed so that the court may proceed with the case thereafter. On March 13, 1987, the matter was adjourned to April 16, 1987, the last working day before the summer vacation. On that day, the company judge did not sit, and therefore, the matter was called on March 28, 1987. As recorded in the order sheet on May 28, 1987, a memo was filed by the respondent-company admitting the liability of Rs. 10,33,620.30, but disputing the liability to pay interest and value of three consignments which it was contended had not been delivered. A cheque for the admitted liability was also paid to counsel for the petitioner. The court wanted to close the matter reserving liberty to the petitioner to collect the disputed amount by action in the civil court.
8. Counsel for the petitioner contended that it would not be the correct position in law. The petitioner was entitled to a winding-up order even in respect of the amount disputed as there was no tenable defence disclosed either in the evidence adduced by the respondent or in the pleadings. Therefore, the matter was heard at length today on the above questions.
9. Firstly, reliance was placed on the decision of the Supreme Court in H. S. Mills Co. v. Court Receiver, High Court of Bombay, in which while observing whether it could not be said that the petition filed by the receiver for winding-up of the company is not a mode of realisation of the debt due to the joint family from the company, the court relied upon a passage in Palmer's Company Precedents, Part II, 1960 Edition, at page 25, to the following effect :
"A winding-up petition is a perfectly proper remedy for enforcing payment of a just debt. It is the made of execution which the court gives to a creditor against a company unable to pay its debts."
10. Therefore, it was contended on the strength of the observation of the Supreme Court that the court must necessarily pass a winding-up order when a debt is established and a petition under section 433(e) of the Companies Act is a proper remedy to enforce payment of that debt. One cannot dispute that as a proposition of law. What learned counsel for the petitioner has missed is that the court must be satisfied that it is a just debt. A disputed debt or a debt created by the commission of fraud (though not yet established) cannot be equated with a just debt, due, repayment of which the court would enforce as a matter of course. Therefore, the decision relied upon cannot be said to assist the petitioner on the facts of this case.
11. Similary, attention was drawn to the decisions in Advent Corporation P. Ltd., In re, [1969] 39 Comp Cas 463 (Bom); [1969] LJ 71 and Seksaria Collon Mills Ltd., In re, [1969] 39 Comp Cas 475; [1969] 2 Comp LJ 155, in which the learned judge of the Bombay High Court has more or less reiterated that a petition for winding up is a remedy available to enforce payment of a debt. Again, it pre-supposes that the debt exists; if the existence of the debt is in doubt, then it necessarily follows that the winding-up petition is not a remedy to enforce a debt which is in doubt. Learned counsel for the respondent, therefore, contended that in the case of a disputed debt, the court must be satisfied in regard to the genuineness and bona fide nature of the dispute as held by the Supreme Court in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries P. Ltd., AIR 1971 SC 26..; [1972] 42 Comp Cas 125 (SC).
12. In the said decision, the Supreme Court, after noticing its certain earlier decisions in paragraph 21, which is reproduced below, has explained the position clearly.
"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, In re 16 SJ 369). Where however there is no doubt that the company owners 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 winging up order without requiring the creditor to quantify the debt precisely (See Tweeds Garages Ltd., In re [1962] Ch 406; 32 Comp Cas 795 (Ch D)). The principles on which the court 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." (emphasis (Here printed in italics.) supplied).
13. The court must form an opinion that the defence taken by the company is in good faith and is one of substance and that the defence is likely to succeed in point of law and the company adduces prima facie evidence in proof of the facts of which the defence depends.
14. Learned counsel for the petitioner also drew my attention to a passage in the book The New Frontiers of Company Law by S. C. Sen, 1971 Edition, page 249 under the caption "bona fide disputed debt". The learned author has stated thus :
"It is not only competent for, but is the duty of, the court to go into the question of the genuineness or otherwise of the dispute raised by the company and to see whether the dispute is on the face of it genuine or merely a cloak on the company's real inability to pay its debts. Per Beaman J. in Tulshidas v. Bharat Khand Cotton Mills."
15. The respondent company is a Government company. Its turnover goes into crores of rupees as it manufacturers heavy earth moving equipments. Now, property understood, Justice Beaman's observations cover only cases where a defence is put forward not in regard to the liability but as a screen or a cover to hide the inability of the company to pay its debts. Now, to say that the Government company is not able to pay a debt of Rs. 31 lakhs and, therefore, had raised this dispute would be making a travesty of truth. Therefore, the passage is also not of much assistance to the petitioner.
16. Learned counsel for the petitioner drew the attention of the court to the scanty evidence which the respondent-company has placed before the court which does not establish non-delivery of goods. On the other hand, the documents marked clearly establish that delivery has taken place. This court should not look at the evidence from the point of view of conclusive proof of the transactions. What this court should examine is whether the evidence adduced in any way supports the assertion of the respondent-company in its objection that it has a tenable defence to dispute delivery. R.W.-1, an employee in the stores department, despite innumerable contradictions in his testimony, has stated (which was not challenged in the cross-examination) that one employee in the department has been kept under suspension and a domestic enquiry has been commenced against him in regard to his complicity in manipulation of the records in the stores department and receiving department. As earlier noticed, the specific averment in para 21 of the statement of objections is that the petitioner, in collusion with the employees, has manipulated the documents and obtained payments for delivery which have not been effected. Therefore, the company court trying the case in summary procedure is not the proper court to determine delivery or non-delivery that is now complained of by the respondent and the petitioner. If the case of the respondent company is one of collusive fraud committed by the petitioner, that can be established only in a properly framed suit filed by the petitioner, that can be established only in a property framed suit by the petitioner or in a criminal case launched by the State on the complaint of the respondent company. That a complaint has been made to the police is not in dispute and that ultimately the complaint may result in a prosecution need not now be debated. It is does not, within a reasonable time, result in prosecution, the petitioner's case for having effected delivery becomes that much stronger.
17. One the respondent-company had paid a large sum of Rs. 10 lakhs and disputes to pay the interest claimed and the price of the alleged undelivered goods, the court should not proceed to determine the question of delivery or non-delivery, for the reasons already stated, viz., that the should be done only in a civil court, where proper evidence may be led after proper issues are raised on specific pleadings. Collateral pleadings in defence of a winding up petition cannot be said to be adequate to raise those issues.
18. It is in that view of the matter and on a correct understanding of the Supreme Court decision in Gordhandas's case, [1972] 42 Comp Cas 125 this court has no choice but to relegate the petitioner, at this stage itself, to the civil court for the balance of the price of the alleged undelivered supplies of steel. It is only when such a claim is made in a properly framed suit in a civil court that the respondent will have the opportunity to plead his defence in detail for establishing collusion and fraud. That court which tries that suit will arrive at a proper conclusion and give its decision on the evidence led before it and that should not be anticipated by the company court in its summary jurisdiction.
19. Therefore, on the facts of this case, the proper thing that this court may do is to relegate the petitioner to claim the balance of the price in a properly framed suit, in the appropriate court having jurisdiction.
20. If the petitioner obtains a decree in the suit which he may file, then this court will certainly have no hesitation to pass an order of winding up, on a company petition being filed.
21. Therefore, this petition is rejected.