Calcutta High Court
N.K. Gossain And Co. Pvt. Ltd. vs Dytron (India) Ltd. on 22 April, 1988
Equivalent citations: (1988)2CALLT424(HC), [1990]69COMPCAS757(CAL)
JUDGMENT Satya Brata Mitra, J.
1. This is an application of N. K. Gossain and Co. Pvt. Ltd. for winding up of Dytron (India) Ltd. on the ground of inability to pay the debts due to the petitioning creditor.
2. The case of the petitioning creditor is that on February 6, 1986, the company placed orders to the petitioning creditor for printing of 38,000 copies of the annual reports of the company. The petitioning creditor, after completing the printing job, delivered those materials to the said company in the month of March, 1986, and the company received those materials and accepted them without raising any objection. It is the case of the petitioning creditor that the company utilised the said materials and must be deemed to have accepted the printing job of these materials. Thereafter, the petitioning creditor raised bills on March 28, 1986, for a sum of Rs. 3,68,670.02 which were received by the company on March 31, 1986. The petitioning creditor states that the company made a part payment of Rs. 50,000 on September 20, 1986, and, thereafter, no payment has been made towards the said bills by the company. On demand being made for payment of the outstanding dues, the company, by letter dated December 11, 1986, informed the petitioning creditor that the company had received the necessary sanction from financial institutions regarding their project which was explained to the representatives of the petitioning creditor. It was stated in the said letter that the company was expecting to receive funds in the month of January, 1987, and will be releasing payments to the petitioning creditor in the month of January, 1987. Thereafter, on January 28, 1987, the company again wrote to the petitioning creditor reiterating the statements made in their letter of December 11, 1986, but due to delay in receiving the sanctioned letter from the Industrial Credit and Investment Corporation of India and processing delay, the company were yet to receive the fund and expected to receive the same within February/March, 1987, but in case they received the money at an earlier date, they would make payment forthwith and regretted the inconvenience caused to the petitioning creditor. In spite of this assurance made, the company did not make payment and thereafter the petitioning creditor issued the statutory notice under Section 434 of the Companies Act, 1956, on October 17, 1987. Not having received any reply to the statutory notice, the petitioning creditor waited till December 18, 1987, when they filed the instant petition for winding up of the company.
3. At the outset, learned advocate, Mr. Sarkar, appearing on behalf of the petitioning creditor, has very fairly and in the true tradition of the Bar submitted before me that due to some inadvertence or otherwise, the outstanding amount claimed in the statutory notice was paid within 7 days from the receipt of the notice and he also submitted that this might not be in the usual form of notice but asserted that there is nothing in the Act under Section 434(1)(a) of the Companies Act whereby the said notice could be impeached as not having mentioned the deadline of 21 days as appears under Section 434(1)(a) of the Companies Act. Learned advocate appearing for the company had taken a point that the said notice was bad and not in conformity with the provisions of the Act. Therefore, the matter was allowed to be adjourned for some time for consideration of the import of the said notice by the learned advocates appearing for both the parties. Thereafter, the matter came up before me for hearing on the limited question of admissibility of the winding up petition.
4. Mr. Sarkar, learned advocate appearing for the petitioning creditor, submitted that while construing the provisions of Section 434(1)(a) of the Companies Act, there is nothing in the Act to show that the notice under Section 434 should mention the period within which the company would have to pay off the dues of a creditor. The true import of Section 434(1)(a) of the Act is that a company shall be deemed to be unable to pay its debts, if a demand by way of notice is kept outstanding by the company for three weeks or the company neglects to pay the sum so demanded within three weeks after the service of the said notice at the registered office of the company by registered post or otherwise. In order to consider the implications of the said provisions of the Act, it is necessary to set out Section 434(1)(a) of the Act hereinbelow :
"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 ;"
5. Mr. Sarkar submitted that, whether or not any period is mentioned in the notice or even where a lesser period is mentioned in the notice for the company to pay off its dues, that will not materially affect the validity of the notice. The requirement of the Act is that the company shall have to keep the demand made in the notice outstanding for a period of three weeks after the same was served on the company in order to make them liable or to brand the company as being unable to pay off its debts within the meaning of the said provision as quoted above. Mr. Sarkar submitted that the true import of the said provision is that the time for payment by the company is postponed till three weeks after the service of such notice on the company or, in other words, the company must get 21 days' time to make payment after receipt of the notice. The liability of the company, therefore, will arise after the expiry of 21 days from the service of the said notice. Therefore, Mr. Sarkar contended that whatever period might be mentioned in the impugned notice was of no consequence. The requirement under the Act is that the time for the company to pay off the dues is postponed till three weeks after the service of the notice on the company.
6. In this connection, Mr. Sarkar relied upon the case of Babu Ram v. Krishna Bharadwaj Cold Stores and General Mills Co. P. Ltd. [1965] 2 Comp LJ 215 (All). He relied on the headnote and second paragraph at page 219. The headnote reads as follows :
"Held, it is just and equitable that the company should be ordered to be wound up.
The notice required to be given by the creditor under Section 434(1)(a) of the Act has only to make a demand upon the company for the payment of the amount due and need not specify the time for the payment. The mention of any period in the notice will not affect the validity of the notice. The demand will be a valid demand, only the right of action on the part of the creditor is postponed by three weeks from the date of service of the notice. The law does not also require that the notice must recite a threat of a proceeding for winding up in the case of non-payment.
The validity of a notice of demand by the creditor sent to the materially and substantially correct address of the company cannot be impeached, particularly when it has evoked a reply also. The notice should be construed reasonably and its validity cannot be made to depend on the splitting of a straw.
There is no requirement that the winding up petition must be filed soon after the expiry of three weeks. A mere delay will not constitute a waiver of the statutory demand made by the creditor."
7. In the second paragraph at page 219 of the said judgment, the learned single judge of the Allahabad High Court went on to discuss the effect of the notice as follows :
"The notices sent by the petitioners were also challenged on various grounds. It was urged that the notice did not give 21 days' time to the company to pay. The notice dated April 19, 1962, demanded payment soon. The notice sent on October 20, 1962, requested payment within one week of its receipt. The third notice dated October 5, 1963, again asked for payment within four days of its receipt. Learned counsel urges that the notices are hence invalid. Section 434(1)(a), Companies Act, 1956, asked a creditor to serve on the company a demand requiring the company to pay the sum due. The company is deemed to be unable to pay its dues if it neglects to pay the same for three weeks thereafter. This provision does not require the notice to contain any period for paying the debt. The notice need not mention any time. The mention of any period not being of the essence, the recital of any period will not nullify the notice. The creditor is only to make a demand for payment. The demand will remain a good demand, no matter whether any specific period for its payment is stated on the face of the notice or not. The provisions of law give the company three weeks to pay. If it takes three weeks for payment, it cannot be castigated as being unable to pay its debts. There is thus a statutory period of three weeks fixed for the company. If the notice fixed any other time, such specification will not override the statutory provision and will hence be of no legal effect. The right of the creditor to take any action on the ground of the company's inability to pay its debts is postponed by three weeks from the date of service of the notice. The fact that these notices mention a shorter period for payment does not vitiate them."
8. Mr. Sarkar, therefore, contended that whatever period was mentioned in the notice asking the company to pay within that date is immaterial and if a lesser period was mentioned in the notice asking such payment, that did not invalidate the notice.
9. The next branch of the argument of Mr. Sarkar is that even if it is held that the notice is bad on the ground that it fixed a period lesser than 21 days or on any other grounds, the petitioner can very well present a winding-up petition within the provision of Section 434(1)(c) of the Act. Section 434(1)(c) reads as follows :
"434. (1) A company shall be deemed to be unable to pay its debts-- ...
(c) If it is proved to the satisfaction of the court that a 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."
10. Mr. Sarkar submitted that it was on record that the company had not replied to the statutory notice given by the petitioning creditor. Even if it was held that the said notice was bad, Mr. Sarkar contended that the company never raised any dispute or challenged the legality or correctness of the claim of the petitioning creditor. On the contrary, the company, by letters dated December 11, 1986, and January 26, 1987, had categorically and in clear terms admitted their liability to pay and explained that they were expecting to receive funds in the month of January, 1987. But, due to delay in receiving this sanction-letter from the Industrial Credit and Investment Corporation of India and/or the delay in processing, the company was not in a position to pay off the dues of the petitioning creditor. The company further stated that the company expected to receive the said fund during February-March, 1987, and that in case they received the money at an earlier date, they would make payment forthwith and the company further regretted the inconvenience caused to the petitioning creditor for the delay by the company in making payments. The said con tention of the company contained in the said letter January 28, 1987, is set out hereinbelow:
"Ref : SM/FIN/3954/87 Date 28-01-1987 To M/s. N. K. Gossain Co. Private Ltd.
13/7, Ariff Road, Calcutta-700 067.
Dear Sirs, This has reference to our letter No. SM/FIN/SKG/86, dated 11th December, 1986, regarding outstanding payment. We had mentioned in our abovementioned letter that we are expecting to receive the funds in the month of January and will be able to make payment in the month of January, 1987. But due to delay in receiving the sanction-letter from the Industrial Credit and Investment Corporation of India, vide their reference BOD/ 2434, dated 9th January, 1987, and processing delay, we are yet to receive the funds and expect to receive the same during February/March, 1987. In case we receive the money at an earlier date, we shall make payment forthwith. This is for your information and regret the inconvenience caused to you.
Thanking you, Yours faithfully, for Dytron (India) Limited.
(S. Mukhopadhyay), Deputy Finance Manager."
11. Therefore, Mr. Sarkar submitted that it was a proved fact that an admission had been made on behalf of the company by the said letter that the company was unable to pay its debts and that admission was totally unqualified and unconditional.
12. Mr. S. Mitra, on behalf of the company, opposed this application on several grounds. The first attack is that a notice had been served mentioning a period of 7 days within which the company was required to pay its dues which was contrary to law. In this connection, Mr. Mitra relied upon a case, viz., Parry and Co. Ltd. v. India Machinery Stores (P.) Ltd. [1979] 49 Comp Cas 21 (Patna). This was a judgment of Mr. Justice M. Sahai of the Patna High Court wherein a question arose as to the effect of a notice shorter than 21 days. He relied on a portion of the headnote which reads as follows : "Moreover, the notice of demand under Section 434 had been superseded by the letter written on December 13, 1976. As only a fortnight's time was allowed by the letter dated December 13, 1976, to the company to pay its dues which was against the statutory period allowed under Section 434, it cannot be contended that the winding-up proceeding should be maintained on the basis of that letter."
13. Mr. Mitra further relied upon the second paragraph at page 29 of the said judgment which reads as follows :
"The learned Advocate-General tried to contend that, in any view of the matter, the letter (annexure F) could be treated as a notice of demand under Section 434 of the Act. I am unable to agree with this submission. Firstly, the present petition is based on the notice of demand (annexure D) said to have been made expressly in terms of Section 434 of the Act. Not only no reference has been made in annexure F to any proceeding which could be taken under the Companies Act, but only a fortnight's time was allowed to the company to pay the dues in this letter which is against the statutory period allowed to a debtor-company to pay the debt after service of notice of demand on it under Section 434 of the Act."
14. Therefore, Mr. Mitra submitted that if the notice mentioned a shorter period, the notice is liable to be held bad. Mr. Mitra next submitted that the notice was also bad from the point of view that its service was not proved and no extraneous evidence could be looked into for the purpose of ascertaining whether such notice had been served upon the company. In this connection, Mr. Mitra relied upon the case of Bukhtiarpur Bihar Light Railway Co. Ltd. v. Union of India, , headnote 'A' of AIR 1954 Cal of which is set out hereinbelow : -
"If a notice of demand is to operate as a valid statutory notice under Section 163(1)(i), it is to be delivered to the company at its registered office. A letter addressed to a place other than the company's registered office cannot be relied upon by the creditor for the purposes of Section 163(1)(i)." This was a case under the old Act.
15. Mr. Mitra next had submitted that the admission by the company in the letters annexed to the petition was no proof of insolvency and that admission by the company of its indebtedness in the letters did not prove its inability to pay or its insolvency. Negligence to pay was not to be equated with the inability to pay. Mr. Mitra contended that nothing had been shown by the petitioner that the company was unable to pay its debts or to meet its present liabilities. Mere alleged admissions in the letters written by the company could not entitle the petitioning creditor to present a winding up petition without sufficient proof that the company was commercially insolvent. In this connection, Mr. Mitra contended that nothing had been proved by the petitioning creditor to show that the company was either commercially or financially insolvent so as to justify an order for winding up in the instant case. Mr. Mitra next contended that in order to found a case of inability to pay by the company within the meaning of Section 434(1)(c) of the Act, financial insolvency has to be proved to the satisfaction of the court to the effect that having regard to the peculiar circumstances of the company including the circumstances of the company being involved in contingent and prospective liabilities, the company can be branded as one which is unable to pay its debts to entitle the petitioner to present a winding-up application. Otherwise, the company would be deemed to be a solvent company. Mr. Mitra further submitted that the company's inability must be such inability to pay amounts as amounting to say that the company is in a state of insolvency in order to sustain a winding-up petition within the meaning of Section 434(1)(c) of the Act. Mr. Mitra submitted that if the notice under Section 434(1)(a) is bad, the presumption of insolvency as in Section 434(1)(c) would perish with it.
16. In reply, Mr. Sarkar has produced before me the postal acknowledgment card which showed that the notice in question was properly delivered at the registered office of the company and was received by the person in the name of Dhananjoy Ghosh who is the secretary of the company and who has affirmed an affidavit-in-opposition in that matter. Mr. Sarkar further pointed out that the notice was dated October 17, 1987, which was posted under registered post and was received by the said secretary, Mr. Ghosh, on October 23, 1987, and that this petition was filed on December 18, 1987. Therefore, from the above facts, it would appear that the company duly received the said notice and the company was allowed 55 days from the service of the said notice to pay the dues of the petitioning creditor. The notice was received all right and the company had 55 days from the service of the said notice which was more than 21 days as contemplated under the Act.
17. Therefore, Mr. Sarkar submitted that the company had more than 21 days from the date of service of the said notice upon the company to pay off the dues of the petitioning-creditor. So, the said notice could not be assailed as bad and not according to the tenor of Section 434(1)(a) of the Companies Act. On the question as to extraneous evidence to be taken to prove the service of the notice, Mr. Sarkar submitted that certainly the acknowledgment card evidenced the service of the notice and could not be looked into by the court when it involved a question as to its sufficiency.
18. On the next question whether the petitioner can come within the ambit of Section 434(1)(c) of the Companies Act by way of an alternative remedy, Mr. Sarkar has referred me to various admissions made by the company in the letters annexed to the petition and to the fact that the company did not reply to the statutory notice. Reliance was placed in this connection upon the case of Gulamhussein Ahmedalli and Co. v. Canhag P. Ltd. (1972 ] 42 Comp Cas 136 (Bom), the headnote of which is set out hereinbelow.
"Where, in spite of service of a statutory notice under Section 434(1)(a) of the Companies Act, 1956, the company failed and neglected to pay to the substituted creditors a sum of Rs. 24,000 due to them with interest and failed to secure or compound for it to the reasonable satisfaction of the creditors, it was a clear case where the company was unable to pay its debts and it should be ordered to be wound up."
19. In that case, it was observed at page 138 thereof as follows :
"As the above ground is sufficient to dispose of this petition, it is unnecessary to consider the further contention of the substituted petitioners that the company is commercially insolvent and is unable to pay its debt As, in spite of service of a statutory notice as required by Section 434(1)(a) of the Act, the company has failed and neglected to pay to the substituted creditors a sum of Rs. 24,000 due to them with interest and has failed to secure or compound for it to the reasonable satisfaction of the creditors, this is a clear case where the company is unable to pay its debt."
20. Mr. Sarkar submitted that if he had succeeded in making out a case under Section 434(1)(a), he need not take refuge under Section 434(1)(c).
21. Mr. Sarkar next dealt with the branch of argument advanced by Mr. Mitra on behalf of the company that in order to enable the petitioning-creditor to come within the scope of Section 434(1)(c) of the Act, it must prove to the satisfaction of the court that the company had become insolvent to pay its debt in order to entitle the petitioning-creditor to an order of winding up. In this context, Mr. Sarkar relied upon the case of Bengal Luxmi Cotton Mills Ltd. v. Mahaluxmi Cotton Mills Ltd., . The headnote at the second paragraph of the said case reads as follows :
"The basis of an order for winding up against a company is that the company has ceased to be commercially solvent and, accordingly, it is fit and proper in the interest of the creditors and shareholders not to allow it to function further as a company. When there has been a failure to pay a debt in accordance with a statutory notice of demand, insolvency is to be presumed, but it may also be proved in other ways. The basis of a winding-up order on the ground of a company's inability to pay its debt is, however, always insolvency."
22. In paragraph 6 of the said judgment, Chakravartti C. J. held as follows (at page 274) :
"In order to appreciate the passage correctly, it may be useful to recall what the position is as to making a winding-up order against the company on the ground of its inability to pay its debt. The basis of such an order is that the company has ceased to be commercially solvent and, accordingly, it is fit and proper in the interest of the creditors and the shareholders not to allow it to function further as a company. When there has been a failure to pay a debt in accordance with a statutory notice of demand, insolvency is to be presumed, but it may also be proved in other ways. The basis of a winding up order on the ground of a company's inability to pay its debt is, however, always insolvency."
23. In this connection, Mr. Sarkar further relied upon the case of T. P. Sahu and Sons Private Ltd., In re [1982] 52 Comp Cas 182 (Cal), the headnote of which is set out hereinbelow :
"In a winding up petition, where a company accepted the supply of goods by a petitioning creditor without any objection as will appear from the challan, weighment certificate and bill and there was no difference in the description of the goods between the petitioning-creditor and the company and in fact the company never raised any objection -- and it also never raised any objection to the bill at any point of time and various dates were given by the company asking the petitioning-creditor's representative to call for payment, as would appear from the endorsement on the said bill cover and, only after the statutory notice was served, the company had manufactured a document alleged to have been sent under certificate of posting, on a date which was a public holiday, alleging that the goods were not according to the specification and seeking thereby to dispute the claim, the dispute would not be in good faith and the winding-up petition could not be said to be an abuse of the process of the court. The company must be held to be unable to pay its debt as it had not raised any bona fide dispute to the claim of the petitioning-creditor and the winding-up petition should be admitted."
24. Mr. Sarkar submitted that the case in T. P. Sahu and Sons P. Ltd., In re [1982] 52 Comp Cas 182 (Cal) exactly fits in with the instant case in so far as the company never raised any dispute as to the receipt of the goods or as to the payment of the billed price. On the contrary, the company had asked for time to pay off the dues of the petitioning-creditor.
25. Mr. Sarkar also submitted that if the notice is held to be bad, annexure 'C' to the petition, i.e., the letters wherein the company had admitted the claims of the petitioning-creditor would by themselves prove the case of the petitioning-creditor in the instant case. Mr. Sarkar further submitted that those letters would also raise a presumption as to the insolvency of the company in so far as it was unable to pay a particular debt of the petitioning-creditor.
26. In view of what has been discussed above, I am completely in agreement with the submissions of Mr. Sarkar that the statutory notice under Section 434(1)(a) of the Companies Act does not require giving or specifying any particular date within which the company has to pay and that the mention of a lesser period in the said notice will not invalidate such notice. The true purport of Section 434(1)(a) of the Companies Act has been very clearly discussed by the learned judge in the case Babu Ram v. Krishna Bharadwaj Cold Stores and General Mills Co. P. Ltd. [1965] 2 Comp LJ 215 at page 219. The requirement of Section 434(1)(a) is that a demand is to be made by the creditor of the company addressed to the company which has to be left or served at the registered office of the company by registered post. If the company, after such service of the demand, does not pay within a period of 21 days, insolvency will be presumed which will entitle a creditor to present a winding-up petition. Therefore, it is wholly immaterial and unnecessary whether any period is mentioned in the notice under Section 434(1)(a) of the Act. The only requirement of the said section is that the notice has to be served at the registered office of the company and that the right of action of the creditor is only postponed till three weeks from the date of service of such notice. Reading the language of the section and while agreeing with the cases relied on by Mr. Sarkar and considering the surrounding circumstances under which the notice was issued, I hold that the notice in the instant case is a good one and a valid notice and the instant winding-up petition is sustainable on the basis of such notice.
27. In view of my holding in favour of the submissions made by Mr. Sarkar on the notice under Section 434(1)(a) of the Act, it is not necessary for me to discuss and consider the further submission of Mr. Sarkar that if his contention as to the sufficiency and legality of the notice failed, this petition could as well be sustainable under Section 434(1)(e) of the Act.
28. While disposing of this application, I must record my disapproval of the way learned advocate for the company conducted the proceedings. At first, when the matter was taken up and before going into the merits, I asked learned advocate for the company whether he insisted that the matter should be gone into on merits or could it be settled by paying off the dues of the petitioning-creditor when he said that this application could not be sustained on this type of notice and preferred to proceed on this application. But then, when the matter was heard at length on the merits and judgment was delivered, learned advocate for the company prayed for time to pay off the dues of the petitioning creditor in instalments. This conduct on the part of the company or its advocate was not fair as it wasted the court's time for nothing. Having seen the judgment going against the company, the proposal for a settlement came in. Be that as it may, I had to recall my order for admission of the petition and pass the following order. There will be an order that the company shall pay the principal sum of Rs. 2,08,670.00 by monthly instalments of Rs. 25,000 per month, the first of which instalment shall be paid by the 1st June, 1988, and, thereafter, on the 1st of each succeeding month. The company will also pay interest at the rate of 12 per cent, per annum on the principal sum and on the reducing balance thereof from time to time as will remain due after payment of the instalments. Such interest is to be paid along with the monthly instalment. The company will also pay the cost of this application assessed at 30 G. Ms. which shall be paid along with the first instalment. If the payments are made in terms of this order, the winding up application shall remain permanently stayed. In default of payment of any two consecutive instalments or the last instalment including the interest and costs, the petitioning-creditor will be entitled to execute this order as a decree of court. The company will be entitled to deduct income-tax at source from the bills of the petitioning-creditor and will give a certificate to the petitioning-creditor under Section 194A of the Income-tax Act. If no instalment is paid at all in terms of this order, the petitioning-creditor will be entitled to mention the matter for further direction for admission of the petition.
29. All parties concerned to act on a signed copy of the operative portion of this judgment and order on the usual undertaking.