Delhi High Court
Madhya Pradesh Iron & Steel Company vs G.B. Springs (P) Ltd. And Mohta Bright ... on 11 December, 2002
Equivalent citations: [2003]117COMPCAS327(DELHI)
Author: Vikramajit Sen
Bench: Vikramajit Sen
JUDGMENT Vikramajit Sen, J.
1. This Order shall operate in CP 366/1999 entitled Madhya Pradesh Iron & Steel Company Vs. G.B. Springs (P) Ltd. as well as in CP 433/1999 entitled Madhya Pradesh Iron & Steel Company Vs. Mohta Bright Steels (P) Ltd. In CP 366/1999 the Claim is for a principal sum of Rs.73,46,674.37 together with Rs.13,44,990.99 towards interest at the rate of 21% per annum calculated up to 31.12.1998 A Statutory Notice dated January 6, 1999 was served on the Respondent Company which sent its response thereto in terms of its letter dated 1.2.1999. The defense of the Respondent is that problems commenced due to the supply of defective material by the petitioner leading to its rejection. In the Reply there is a reference to a Debit Note dated 28.9.1997 raised by the Respondent Company for a sum of Rs.9,89,888.86. Mention has also been made to the Respondent's letter dated 23.12.1997 whereby the petitioner was notified of discrepancies including insufficient and deficient supply of material and poor quality of material. A demand for a Credit Note was made by the Respondent Company and according to it Debit Note for Rs.7,93,430.40 was made on 20.12.1997. Paragraph 15 of the Reply refers to a Debit Note dated 17.12.1998 which reads as under:-
GBS/MISC-DN/018 17-12-98 DEBIT NOTE M/s. MADHYA PRADESH IRON & STEEL CO., 'Kanchenjunga, 9th Floor, k 18, Barakhamba Road, NEW DELHI-110001.
Dear Sir, We debited your account for Rs.6910210=80p (Rs.Sixty nine lacs ten thousand two hundred ten & Paisa eighty six only), towards the details given below:-
Sl.No. ITEM AMOUNT (RS.)
------ ------ -------------
1. Excess paid to produce
at risk & cost of MISC
on pending orders
on 5-11-98
680 MT x Rs.3350.00 PMT 22,78,000=00
2. Cost of inconvenience
02% PM of value of
orders (pending) as
on 5-11-98
380MT x Rs.22750=Rs.8645000=00
300MT x Rs.19500=Rs.5850000-00
___________
Rs.14495000=x2% 2,89,900=00
3. Cost of RP by our
customers on us as
on 30-11-98 7,65,502=00
4. Cost L.D. Levied on us
by our customers on us
as on 30-11-93 1,02,500=00
5. Cost of loss of business
and profit expected to be
earned and loss of
goodwill 12,55,200=00
6. Details as per Annexure 22,19,108=86
-------------
Total 69,10,210=86
-------------
Thanking you,
Your's faithfully
Sd/-illegible
for GB. SPRINGs (P) LTD.,
AUTHORISED SIGNAtorY."
This stand was controverter by the petitioner in terms of its Advocate's letter dated 5.6.1999.
2. Mr. Krishnamani, Learned Senior counsel appearing for the Respondent has contended that a civil Suit for the recovery of money under Order xxxvII of the Code of Civil Procedure is pending on the Original Side of this Court and, therefore, the present petition ought not to be entertained any further. His argument is that any order that may now come to be passed in these proceedings would adversely affect and jeopardise the Respondent's defense in the said Summary Suit. The Reinstatement of the law regarding winding-up is to be found in the perspicuous judgment of the Hon'ble Supreme Court in Pradeshiya Industrial and Investment Corporation of Uttar Pradesh Vs. North India Petro-Chemical Ltd and Another, (. In NEPC Vs. Indian Airlines, 100 (202) Delhi Law Times 14, I had attempted to distil the observations of the Apex Court in PIICUP case (supra) by setting down the following proposition:
(i) If there is a bona fide dispute and the defense is a substantial one, the Court will not wind-up the company.
(ii) Where the debt is undisputed the Court will not act upon a defense that the company has the ability to pay the debt but the company chooses not to pay it.
(iii) Where the defense of the company is in good faith and one of substance, and the defense is likely to succeed in point of law, and the company adduces prima facie proof of the facts on which the defense depends, the petition should be rejected.
(iv) The Court may consider the wishes of creditors so long as these appear to be justified.
(v) The machinery of winding-up should not be allowed to be utilised merely as a means of Realizing its debts.
(vi) If the stance of the adversaries hangs in balance it is always open to the Company Court to order the Respondent Company to deposit the disputed amount. This amount may be retained by the Court and be held to the credit of the suit, if any is pending, or likely to be filed in the immediate future. [see Civil Appeal No. 720 of 1999 arising out of SLP (C) No. 14096 of 1998-
M/s. Nishal Enterprises v. Apte Amalgamations Ltd., decided by the Hon'ble Supreme Court on February 5, 1999].
(vii) Generally speaking, an admission of debt should be available and/or the defense that has been adopted should appear to the Court not to be dishonest and/or a moonshine, for proceedings to continue. If there is insufficient material in favor of the petitioners, such disputes can be properly adjudicated in a regular civil suit. It is extremely helpful to draw upon the analogy of a summary suit under Order xxxvII of the Code of Civil Procedure. If the Company Court reaches the conclusion that, had it been exercising ordinary original civil jurisdiction it would have granted unconditional leave to defend, it must dismiss the winding-up petition.
The contention of Mr. Krishnamani, that the petition should be rejected since a civil suit has been filed, is per se not appealing. Indubitably, his contention that if the Respondents were to obtain 'Leave to Defend' in the pending Summary Suit then the consequence would be a dismissal of the present petition, is certainly correct. The obverse, however, does not appear to be logical; viz that the admission of the Winding-up petition would jeopardise the defense in the suit, whether under the Summary or ordinary procedure envisaged under the C.P.C. It must be bo(sic)ne in mind that the admission of a Winding-up petition does not necessarily and invariably result in the recovery of the amount due. Therefore, the filing of a civil suit or a recovery of money action is essential has also been drawn to Section 442 of the Companies Act which enables a party, at any time after the presentation of the Winding-up petition and before a Winding-up orde(sic) has been made, to apply for a stay of proceedings in the suit. The person having locus standi to seek this relief includes the company in liquidation or any of its creditors or contributors. It will be immediately deducible that the Legislature contemplated the simultaneously existence and continuance of a Winding-up petition as well as a suit for the recovery of money on the same cause of action. No provision in the Companies Act has been shown to me mandating that on the filing of a suit for recovery, the Winding-up petition must be dismissed.
3. Mr. Krishnamani had also briefly argued that an Arbitration Clause exists between the parties. This argument is predicated on a blank proforma document filed by the Respondent, which has not been admitted by the petitioner. The impact of an Arbitration Clause on Winding-up jurisdiction has been dealt with in some detail in Prime Century City Developments Pvt. Ltd. Vs. M/s. Ansal Buildwell Limited, CP. 303/2001. I continue to adhere to the view articulated in that case that there is no likelihood of a conflict between the statutory relief of Winding-up and of the contractual right to have disputes settled by arbitration. Once a bona fide defense is shown to exist, arbitration will be the efficacious and proper remedy; where the defense is mala fide and moonshine, arbitrable disputes would not exist in actuality and, therefore, the Company Judge would have unfettered powers to pass appropriate orders. In the connected matter Mr. N.K. Kaul, Learned Senior Counsel appearing for the Respondent Company has relied on the observations in the PIICUP Case (supra) to the effect that since the Claim in those proceedings was also the subject matter of the ongoing Arbitration, therefore, there was no definiteness about it. This really vindicates the view taken by me in Prime Century City Development Pvt. Ltd. Vs. M/s. Ansal Buildwell Limited's case (supra). The Hon'ble Supreme Court did not intend to state that wherever arbitration proceedings is pending the Winding-up Petition could not be maintained. Instead, if the debt or dues could be determined only through arbitration, there would logically be no debt available for sustaining Winding-up Proceedings. As has been held in Haryana Telecom Ltd. Vs. Sterlite Industries (India) Ltd., , "the claim in a petition for winding up is not for money. The petition filed under the Companies Act would be to the effect that the company has become commercially insolvent and, therefore, should be wound-up. The power to order winding-up of a company is contained under the Companies Act and is conferred on the court." Even if an Arbitration Clause submits between the parties, this Court has unfet(sic)er powers to entertain these winding-up petitions. The position would be appreciably different if the party fi(sic)ing the winding-up petition is also the very party which initiates the arbitration on the adjudication and quantification of its Claims.
4. The contention of Mr. learned Senior counsel in C.P. 443/99 is that the petition deserves dismissal since there is no averment to the effect that the substratum of the Respondent Company has been eroded, therefore, justifying its Winding-up. In response thereto Mr. Sharma, learned counsel for the petitioners, has argued that the petition falls in Clause (a) of sub-section (1) of Section 434 of the Companies Act, 1956. Section 434 of the Companies Act reads as under:
"434. Company when deemed unable to pay its debts.--(1) A company shall be deemed to be unable to pay its debts--
(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor;
(b) if execution or other process issued on a decree or order of any Court in favor of a creditor of the company is returned unsatisfied in whole or in part; or
(c) if it is proved to the satisfaction of the Court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company.
(2) The demand referred to in Clause (a) of sub-section (1) shall be deemed to have been only given under the hand of the creditor if it is signed by any agent or legal adviser duly authorised on his behalf, or in the case of a firm, if it is signed by any such agent or legal adviser or by any member of the firm."
5. Mr. Sharma's argument is not convincing. There are frequent instances where the Respondent Company fails altogether to send any reply to the statutory notice. Even though the statute appears to indicate that in such a situation the Company must be deemed to be unable to pay its debt, a number of judgments have been delivered in which the stand that has been favored is that the defense of the Company can nonetheless be looked into to defeat the petition.
6. I shall first deal with the consequences of the Respondent's failure to send a Reply to the Statutory Notice. A perusal of the precedents on this point do not indicate that such failure inexorably leads to the conclusion that Winding-up orders must unvariably be passed. From my understanding of the judgments of my Learned Sister Hon'ble Ms. Usha Mehra in Mayar Traders Ltd. Vs. Akhil Services Ltd., 52 (1993) Delhi Law Times 577 and G.K.W. Ltd. Vs. Shriram Bearings Ltd., , she had taken the failure to reply to the notice as an important factor in determining whether a bona fide defense had been put forward. In the circumstances of both the cases, she preferred to view the defense as an afterthought and as being bereft of bona fide. In CP 220/2001 entitled H.B. Stock Holdings Ltd. Vs. Associated Infotech Ltd., I have favored the opinion that where no response had been made to the statutory notice the Respondent Company runs the risk of a winding-up petition being admitted for hearing at the very threshold. Normally, the Company Judge considers it prudent in the first instance to issue notice to the Respondent so that its defense to the far-reaching and fatal winding-up orders can be considered. The admission of the petition at its first hearing is possible because, by virtue of Section 434 of the Companies Act, a presumption of the indebtedness can be legitimately drawn by the Court where no Reply to the statutory notice is forthcoming. The risk of the admission of the petition as well as the appointment of a provisional Liquidator is thus broodingly and ominously present in all those cases where the Respondent Company neglects to send any Reply to the winding-up notice. But this is as far as the danger extends. In Wimco Ltd. Vs. Sidvink Properties (P) Ltd., 1996 Vol.86 Company Cases 610, it has been held by P.K. Bahri, (sic) that where a bona fide dispute had been shown to the Court, the question of applying the deeming provision should not automatically arise. I am in respectful agreement with this view.
7. If failure to respond to statutory notice does not attract fatal consequences and does not lead to the civil death of the Company there would be scant scope to apply Clause (a) of sub-section(1) of Section 434 of the Act whether a Reply has been sent by the Respondent Company setting out the reasons for its refusal to pay as per the legal demand in the statutory notice. In the present petition the Respondent is on firm foundation inasmuch as it has sent its Reply thereto. It has, however, not made any payment, which has spurred Mr. Sharma to contend that the Clause (a) of sub-section (1) of Section 434 automatically and immediately applies. If this argument is to be accepted the inevitable and invariable result would be that no sooner three weeks elapses from the receipt of a winding-up notice, and if demand for payment is not acceded to, winding-up orders must be passed. This is an absurd proposition. As I see it, there is a motley amalgam of considerations which must be considered by the Company Judge in winding-up proceedings as adumbrated in the Pradeshiya Industrial and Investment Corporation of Uttar Pradesh v. North India Petro-Chemical Ltd. and Another, (1994) 2 Comp LJ 50 (SC). As has been laid down in the plethora of precedents which can be found on this subject, the relief of winding-up should be always tempered and modulated by equitable considerations. If the defense is found to be false, dishonest and moonshine, winding-up orders would be justified. There may, however, be instances where the Respondent Company is suffering from transient liquidity problems, although its asset base is sufficiently strong to weather a charge from claimants. The Company Judge would in such circumstances prod and push the Respondent Company to clear its outstandings but would be extremely reluctant to pronounce its civil death without affording it a reasonable time to resuscitate its resources. It is for these reasons that the Company Court would invariably investigate the well being of the Company, its asset base and its substratum. However, the contention of Mr. Kaul to the effect that it should be categorically pleaded in the winding-up petition that the substratum of the Company has been eroded appears to me to overstate the significance of this factum. In considering the phrase 'that the substratum of the Respondent Company' should have been eroded,' the Court implements the duties and obligations case upon it by Clause (c) of sub-section (1) of Section 434 of the Act.
8. The defense to the winding-up petition would therefore have to be considered on merits. Both parties rely on the Minutes of the Meeting held by them on 12.8.1998 which (sic)nter alia read as follows:
"1. As on date up to 12.8.98 a sum of Rs.75.14 lacs is receivable from GBS on account of supplies made by NISC from time to time. However, as per records of GBS the amount due to MISC is Rs.73.00 lacs approximately. MISC claims of receivable shall be limited to the amount thus finally reconciled
2. GBS has agreed that the amount such reconciled shall be paid @ 3.50 lacs to Rs.4.00 lacs P.M. beyond the supplies made during the month till the outstanding figure is bought down to Rs.65.00 lacs. All supplies to be hereinafter made by MISC shall be against payment of the equivalent value either by the demand draft payable at New Delhi or by a local cheque payable at Delhi and the material shall be dispatched by MISC on the same day a DD or cheque is received by them. GBS assures that the cheque shall be cleared on presentation and MISC also assured that the cheque shall be deposited only after the dispatch of material.
9. Mr. Narendera Sharma Learned Counsel appearing for the petitioner has vehemently argued that there can be no room for further debate on the question that a sum of Rs.73,00,000/- approximately, was admittedly due and payable by the Respondent. He further contends that the second paragraph merely records that credit facilities for Rs.65 lacs had been allowed to the Respondent. Mr. Krishnamani's contention is that because of the numerous complaints pertaining to the quality of the supplied material and the consequent Debit Notes, the Respondent's claims were temporarily quantified at Rs.65,00,000/-. He has also emphasised the fact that whilst the petitioner had filed a copy of the Debit Note dated 7.12.1998, for a sum of Rs.69,10,210/-, this fact has been glossed over in the Winding-up petition. This may be so, and in most cases may prove to be fatal since non-disclosure of relevant facts may by itself be sufficient reason to decline to grant discretionary relief. At the highest, the petitioner has neglected to deal with this aspect in detail in the petition, but here is no justification for viewing it a suppression, especially since the Debit Note is contested. A perusal, however, of the said Debit Note for Rs.69,10,210/- discloses that substantial amounts such as Rs.22,78,000/-, Rs.12,55,200/- and Rs.22,19,108/- are not debts in the strict sense since they have not been adjudicated upon and found to be justified. My attention has also been drawn by Mr. Sharma to the Minutes of the Meeting held between the parties on 17.11.1997 which record that the "total outstandings shall be brought down to a level of 60/65 Lacs by 31.3.98; and MPISC confirms to adhere to supply schedule as per GBS requirement." This is clearly a significant and specific affirmation of the fact that a revolving credit of Rs.60,00,0000/- to Rs.65,00,000/- had been agreed upon between the parties. It annihilates the contention of the Respondent that this amount was set aside because the parties had yet to decide on the Respondent's claim due to defective supplies. At this stage it is consequently not possible to give any weightage to the extraordinarily exorbitant Debit Note of Rs.69,10,210/- unilaterally raised by the Respondent.
10. Nonetheless, the fact remains that the Respondent's complaints as to defective supplies cannot be seen as an after-thought or a counterblast to the Winding-up petition since they have been raised almost contemporaneous with the petitioner's demand for money. The defense therefore, does not fall in the category of mere moonshine. There does appear to be some substance in the Respondent's complaints pertaining to the defective supplies but the extent thereof seems to be grossly exaggerated. Mr. Krishnamany has stated that the Respondent is a going concern and is transacting a profitable business. The Respondent has complied with the previous orders directing it to deposit a sum of Rs.20,00,000/- in this Court. Keeping in perspective that the petitioner's claim to the extent of approximately Rs.73,00,000/- stands admitted by the Respondent in the Minutes dated 12.8.1998, and that there are possible claims of the Respondent for rejected goods exist, I am of the view that the Respondent should be directed to deposit a further sum of Rs.20,00,000/- with the Registrar General of this Court within four weeks from today. If this deposit is made it shall stand to the credit of the civil suit and this petition shall be deemed to have been concluded and disposed of. This approach had been commended by the Hon,ble Supreme Court in M/s. Nishal Enterprises Vs. Apte Amalgamations Ltd., Civil Appeal No. 720/1999 arising out of SLP (C) No. 14096/1998 decided on February 5,1999. In the event that the deposit is not made, the Winding-up petition shall stand admitted and Citation will be published in "The Hindustan Times" English Edition and "Vir Arjun", Hindi Edition as well as Delhi Gazette, returnable on 19th February, 2003. The question of the propriety of appointing a Provisional Liquidator will then be considered on the next date of hearing.
11. The petition be renotified on 19.2.2003.
C.P. 443/1999.
1. As in the previous case the petitioner had supplied material to the Respondent Company and for which a sum of Rs.7,63,899.05 towards principal and Rs.2,68,202/- towards interest is stated to be outstanding as on 31.7.1999. As this amount, demanded in the Statutory Notice dated 15.9.1999, has not been paid, the winding-up petition has been filed. A Reply to this Notice was sent to the petitioner by the Respondent, in terms of its letter dated 11.10.1999 raising the following three objections:-
"1. We have stood surety for M/s. M.P. Iron & Steel Co. In Haryana Sales Tax Deptt. under the Local & Central Sales Tax Act for a sum of Rs.5.00 Lacs only. As the unit is lying closed since long, we have not yet received clearance from the Department in respect of any Liability on our part due to default by M/s. M.P. Iron & Steel Co. under any said Sales Tax Act.
2. No commercial settlement has been done regarding Quality Complaints lodged with Sh. Jitender Singh -Sh. B.M. Prasad (DGM Mktd.) The samples submitted were cleared by the Q.C. Deptt. of M/s. M.P. Iron & Steel Co. Till date they have not lifted the rejected material lying at our works. Inspite of various assurances given to us by Sh. B.M. Prasad from time to time, no commercial settlement has come forward from the Company. Our customer suffered a huge Loss in Exports to U.S.A. because of defective material of EN-1A Plain & Leaded supplied to us by M/s. M.P. Iron & Steel Co. The customer has withheld our full payment of aprox. Rs.2.50 lacs on account of above facts.
3. M/s M.P. Iron & Steel Co. has charged Local Sales Tax @ 3% on the Invoices raised. But till date we have not yet received Form ST-14 of Aprox. Sales Tax value of Rs.1.00 Lacs. In the past we have suffered during assessment of Sales Tax due to non receipt of ST Form due from M/s. M.P. Iron & Steel Co. and had to deposit additional Sales Tax."
2. Mr. Kaul's contention is that only the firs point, viz. the standing of surety, does not subsist as on date. It is his contention that Credit Notes aggregating approximately Rs. 4.36 lakhs still remain to be settled between the parties. In addition thereto a sum of approximately Rs.1.70 lakhs also requires to be adjusted since the requisite ST Form-14 have also not been furnished by the petitioner. Owing to the non-supply of these Sales Tax Forms, it is alleged that the Respondent had to pay penalties. It is his calculation that if these sums are deducted from the amount of Rs.1.63 lakhs would have to be cleared. Although it is his argument that winding-up proceedings are not available for affecting recoveries, specially where bona fide disputes as to defective supplies have been pleaded, and also where the Respondent Company is financially healthy, the sum of Rs.1.63 lakhs would at best have be deposited. In this case also a civil suit for recovery of money appears to have been filed. Along with the Reply, 'Rejection Letters' dated 30th August, 1997, 10.10.1997, 20.10.1997 and 15.11.1997 have been placed on record.
3. Mr. Sharma has reiterated his argument to the effect that since S.T. Forms had been demanded, the immediate inference which must be drawn is that the goods had been accepted and hence that claims for rejection of material is not admissible. Although it has been pleaded in the Rejoinder that the goods have not been supplied in 1997 the Respondent has kept a long silence of two years pertaining to the defective character of the supplies. there is no specific denial regarding Annexure R-1, which collectively comprises the Rejection Letters mentioned above.
4. The Rejection Letters appear to have been sent contemporaneous with the supply. This is, therefore, a matter which requires further adjudication in greater detail. The claim for furnishing of S.T. Forms presents a legal nodus. It does not strictly fall within the ratio in Mittal Iron Foundry (P) Ltd. Vs. Elektro Flame Limited., (2000) 1 Comp LJ 192 (AP) in which the Court accepted the contention of the petitioning creditors that since the Respondent Company has delivered "C" Forms, and had not cleared the outstanding amount despite statutory Notice it had become commercially insolvent. Keeping the respective cases in mind I am of the view that the Respondent be directed to deposit a sum of Rs.4,00,000/- with the Registrar General of this Court, within four weeks from today.
5. The deposit should be made within four weeks from today. If this deposit is made it shall stand to the credit of the civil suit and this petition shall be deemed to have been concluded and disposed of. However, in the event that the deposit is not made, the Winding-up petition shall stand admitted and Citation will be published in "The Hindustan Times" English Edition and "Vir Arjun" Hindi Edition as well as Delhi Gazette, returnable on 19th February, 2003. The question of the propriety of appointing a provisional Liquidator will then be considered on the next date of hearing.
6. Renotify on 19.2.2003.