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Naresh Fabs Vs. Gudiya Exports P. Ltd. - Court Judgment

LegalCrystal Citation
Subject Company
CourtDelhi High Court
Decided On
Case NumberCompany Petition No. 113 of 1982
Judge
Reported in[1986]60CompCas114(Delhi)
Acts Companies Act - Sections 433 and 434; Companies (Court) Rules, 1959 - Rule 101 and 102
AppellantNaresh Fabs
RespondentGudiya Exports P. Ltd.
Excerpt:
.....the company failed to meet it irrespective of what may be its reasons. no form is prescribed for notice of a claim nor is necessary that the notice must specify the period envisaged by section 434 to transform the mere failure of the company to meet a claim into a deemed inability to pay its debts. this contention must, thereforee, fail and is accordingly rejected. mere failure to pay a claim, howsoever unjustified, is not necessarily commercial insolvency. where a company fails to pay within a period envisaged by section 434, its failure to pay is transformed into a deemed inability to pay; two states are clearly distinguishable. as for the claim of credit on account of 'differences in rate' and 'inferior quality of goods',the claims is prima facie equally lacking in bona fide as well..........in which the amount was claimed. notice of the application was issued to the company and the company filed its reply disputing the claim, as indeed, the right of substitution. subsequently, when sardari lal & sons sought to withdraw from the proceedings, the petitioner made yet another application for substitution, being c.a. no. 78 of 1984, seeking substitution. in this application again, the petitioner set out the details of the claim and a notice of this was also issued to the company. it is not disputed that the company has had more than 21 days' notice of the claim of the present petitioner before the order of substitution was made khanna j. on march 13, 1984. the requirement of section 434 was, thereforee, substantially complied with when, on being notified of the claim of.....
Judgment:

H.L. Anand, J.

1. Naresh Bhatia, carrying on a sole proprietary business in the name and style of Naresh Fabs, seeks to wind up Gudiya Exports (P.) Ltd., for short, 'the company', on the grounds of deemed inability of the company to meet the claim of the petitioner for a principle sum of Rs. 90,000 odd and for interest amounting to Rs. 43,000 odd, the commercial insolvency of the company, and even otherwise under the just and equitable clause of section 433 of the Companies Act.

2. Nita Wear was the original petitioner which sought winding up of the company on the ground of the company's deemed inability to meet its claim of Rs. 68,000. In the course of proceedings on that petition, at the stage of show cause, the claim of Nita Wear was settled by the company. During the pendency of the proceedings, Sardari Lal & Sons, claiming to be the creditors of the company, and the present petitioner, in the name of his business style, Naresh Fabs, sought substitution under rule 101 of the Companies (Court) Rules, 1959, by C.A. No. 189 of 1983 and C.A. No. 385 of 1983 respectively. These applications were resisted by the company primarily on the ground that rule 101 was inapplicable at the show-cause stage and before the admission of the petition. Khanna J., who heard the applications, by an order of September 5, 1983, ruled, on an examination of the provisions of rule 101 and the scheme of the Chapter in which the said rule occurs, and relying on an earlier unreported decision of this court in C.P. No. 84D of 1966, decided by H. R. Khanna J., as he then was, on January 27, 1967, that the operation of the rule was not dependent on the admission of the petition and if at the show-cause stage, the requirements of the rule were satisfied, the substitution would be in order. Khanna J. further found that the application of Sardari Lal & Sons, C.A. No. 189 of 1983, was earlier in point of time than that of the present petitioner and, thereforee, directed the substitution of Sardari Lal & Sons in the place of the original petitioner. This is how the petition was kept alive. The company, however, made a settlement with Sardari Lal & Sons as well, who withdrew from the proceedings, and by an order of March 13, 1984, the present petitioner, who continued to be an scene, and sought substitution by C.A. No. 78 of 1984 under rule 101, was ordered to be substituted. The present petitioner was directed to comply with the requirements of rule 102 of the Rules pursuant to which the present petitioner filed an amended petition setting out the allegations on the basis of which the petitioner seek to wind up the company. The admission of the petition is opposed.

3. I have heard learned counsel for the parties and I have also gone through the records with their assistance.

4. The first question that the company raises is as to the maintainability of an application for substitution under rule 101 and the validity of the substitution of the petitioner before the admission of the petition. Counsel for the company was, however, unable to carry this contention any further when it was pointed out that the judgment of Khanna J., ruling in favor of the petitioner on the question of substitution, was between the parties and was, thereforee, binding on them. It was not disputed that the order Khanna J. was upheld in appeal and that the appellate order has since become final. Even otherwise, in spite of the arrangement of the Rules, there is nothing in the body of rule 101 which may confine its operation to the proceedings on a petition for winding up only after it has been admitted. Such a contention would be clearly contrary to the purpose intended to be achieved by the rule. There is no force in this contention which is accordingly rejected.

5. It was next urged on behalf of the company that the petition was not maintainable on the ground of deemed inability of the company to pay its debts because the petitioner never gave a statutory notice to the company as envisaged by section 434 of the Companies Act. Section 433 provides that the company may be wound up, inter alia, if it is 'unable to pay its debts'. Section 434 introduces a fiction when it provides an instance of deemed inability where the company fails to pay a debt within a requisite period of receipt by it of a notice of demand requiring the company to pay. Ordinarily, mere failure to pay a debt would not be inability to pay a debt, but section 434 introduces the fiction of deemed inability even where the company may be solvent and able to pay its debts. Now, it is true that the demand inability is dependent not only on a notice to the company of a claim but also on the expiry of a requisite period after company has notice of the claim. Neither the Act nor the Rules provide for the form of a notice nor would anything turn on form alone. It is axiomatic that the essence of a matter is the substance and not the form unless there is something mandatory in the form in which an act must be done. There is no doubt that in the present case, the petitioner did not give a specific notice to the company before knocking at the door of this court, much less a notice specifying the requisite period for payment. But I do not see any reason why the form of the notice should be allowed to defeat the object of the provision or to frustrate the substance of the matter. When the present petitioner sought substitution by C.A. No. 385 of 1983, the petitioner set out in the application the particulars of its claim specifying the amount it claimed from the company as well as the account in which the amount was claimed. Notice of the application was issued to the company and the company filed its reply disputing the claim, as indeed, the right of substitution. Subsequently, when Sardari Lal & Sons sought to withdraw from the proceedings, the petitioner made yet another application for substitution, being C.A. No. 78 of 1984, seeking substitution. In this application again, the petitioner set out the details of the claim and a notice of this was also issued to the company. It is not disputed that the company has had more than 21 days' notice of the claim of the present petitioner before the order of substitution was made Khanna J. on March 13, 1984. The requirement of section 434 was, thereforee, substantially complied with when, on being notified of the claim of the petitioner, the company failed to meet it irrespective of what may be its reasons. No form is prescribed for notice of a claim nor is necessary that the notice must specify the period envisaged by section 434 to transform the mere failure of the company to meet a claim into a deemed inability to pay its debts. This contention must, thereforee, fail and is accordingly rejected.

6. It is next urged on behalf of the company that the substratum of the company is gone, it is commercially insolvent, and is, in any event, liable to be wound up under 'just and equitable' clause of section 433. While there is no doubt that the backward of this petition establishes that there were at least 2 creditors of the company whose legitimate claims had not been paid until after the present proceedings but that, by itself, would neither indicate any loss of substratum nor indicate a state of commercial insolvency. A company may have a variety of reasons for not meeting a claim, including a bona fide dispute, a misapprehension with regard to liability or temporary financial stringency without in any manner affecting its credit or established its operations. Mere failure to pay a claim, howsoever unjustified, is not necessarily commercial insolvency. There is nothing inconsistent in a commercial solvent company refusing or declining to meet a claim, whether disputed or otherwise, or even its inability at a given point of time to meet it. Where a company fails to pay within a period envisaged by section 434, its failure to pay is transformed into a deemed inability to pay; when the company would be liable to be wound up because of its deemed inability to pay such deemed inability is not to be confused with a state of commercial insolvency. Two states are clearly distinguishable. The material on record, thereforee, would not justify the admission of the petition on the ground of commercial insolvency.

7. That leaves for consideration the question as to the deemed inability of the company to pay and the further question if the petition would deserve admission on the ground. It is not in dispute that the petitioner and the company have been business dealings since March, 1981, or even earlier and the books of accounts of each of the parties have folios for the other reflecting the various transactions between the parties over the years indicating the supply of goods by the petitioner to the company and payments by the company to the petitioner from time to time, either against the individual bills or in account. C.A. No. 385 of 1983 was the first occasion when the petitioner quantified its claim against the company at Rs. 93,000 towards the price of fabrics and garments supplied by the petitioner to the company, which was said to have remained unpaid, in spite of demands. Petitioner also claimed interest on the amount of 21% p.a. The claim was reiterated by the petitioner in C.A. No. 78 of 1984, when the petitioner sought substitution following the withdrawal from the proceedings by Sardari Lal & Sons. Pursuant to the order of substitution, the petitioner filed an amended petition, claiming Rs. 90,000 and odd from the company on account of the principal amount besides Rs. 43,000 and odd on account of interest on the outstanding amount at the said rate of interest. It was further mentioned by the petitioner that some of the cheque delivered by the company to the petitioner towards part-payment were dishonoured on presentation and that some of these cheques were presented as many as 4 to 6 times on specifies instructions from the company and its managing director but were repeatedly dishonoured. It was further claimed that the managing director of the company took back the cheques and promised to give a draft to the petitioner and also agreed to pay interest. Along with the amended petition, petitioner filed what was described as a 'state meant of account' and 'statement of interest account', as annexure A and annexure B respectively. According to statement of account for the period March 5, 1981, to June 20, 1983, there was a debit balance of Rs. 93,942.09. According to the statement of interest account, for the said period, a sum of Rs. 43,982.39 was shown as outstanding on account of interest' at 24% p.a.'. Petitioner also filed a copy of the company's letter of June 29, 1983, to the petitioner confirming the statement arrived at between the parties and promising to pay the petitioner Rs. 4,000 p.m. effective from August 10, till the entire payment had been made. The latter, however, did not quantify the amount nor make a reference to the claim of interest. In its reply to the show-cause notice, the company denied the claim of the petitioner, as also the allegation that the cheques delivered by the company to the petitioner had been dishonoured. The company, however, claimed that some of the cheques were not encased 'due to misunderstanding and quality dispute between the parties'. It was also denied that there was any promise for payment of any amount with interest. The statement of interest enclosed with the petition was described as 'false, baseless, manufactured and untenable'. The agreement to pay interest was also denied. It was claimed that whatever business was transacted between the parties, payment had been made by the company from time to time and attention was invited to the two bills which were said to have been cleared in the month of July, 1983, for a sum of Rs. 19,966 on July 13, 1983, and another for Rs. 15,000 on July 28, 1983. With the reply, the company, however, did not file copy of the account of the petitioner in the books of accounts of the nor did the company file copies of any correspondence that it may have had with the petitioner. There was also no mention in the reply that the goods supplied by the petitioner to the company had been rejected by the importers or that the importers had made any claim in relation to it against the company. In his order of May 25, 1984, Khanna J. noticed that the company had taken 'indefinite and vague stand as to the extent of goods received and payments made'. He further observed that a copy of the account of the petitioner in the books of account of the company had also not been filed. The company was accordingly directed to file copy of the account of the petitioner in the books of account of the company and to furnish details of the goods actually received and paid for. A further direction was made that separate details be given of the goods received in the form of fabrics and those in the form of garments.

8. In the course of hearing the parties on the question of admission, the petitioner filed a letter said to have been issued by the auditors of the company admitting liability. This letter had not been produced at the earlier stage. The later was, however, taken on record and the counsel for the company was given an opportunity to make a verification. Counsel for the company confirmed that the auditor's letter confirming that the company was indebted to the petitioner to the extent of Rs. 72,774.65 according to its books of account 'as on June 30, 1984' was genuine. It was, however, claimed on behalf of the company that the recital in the letter 'as on June 30, 1984' was a mistake for 'as on June 30, 1983' and that after the auditor's certification, payments totaling Rs. 49,000 odd had been made to the petitioner by the company between July, 1983 and August, 1983, which were allegedly not reflected in the books of account of the company when the auditor's certificate was issued. The company produced its auditor's letter explaining that the letter of confirmation to the petitioner has been sent as it was 'customary' and that the auditors were unable 'to confirm whether the balance shown in out statement was correct or not as the audit is still continuing ..... and we didn't have time to vouch/verify all the entires by the time of our letters to parties and, thereforee, we asked for parties' confirmation to account.' A further controversy was raised on behalf of the company that there were two separate accounts between the parties, one relating to the supply of fabrics and garments and the other relating to the letters of credit. Petitioner was accordingly directed to file a copy of the folio relating to the letter of credit and after both the parties filed copies of the account of the other in their books of accounts, I heard counsel for the parties further in an attempt to reconcile the conflicting accounts to determine if the company bona fide disputed its liability and had a substantial defense to the claim. It further transpired that the document filed by the company purporting to be a copy of the folio was in fact only a statement of account and was not a copy of the folio or of the account. The company was accordingly directed to file a copy of the account of the petitioner in the books of account of the company up-to-date covering the main account and the letter of credit account. The matter was heard further after copy of the account was filed by the company. I scrutinised the rival accounts with the assistance of counsel for the parties and found that besides a minor discrepancy, the accounts, by and large, converged and the only dispute that emerged was with regard to the interest component of the claim of the petitioner. At this stage, it was urged on behalf of the company that there were disputes between the parties with regard to the 'quality' of goods and the rate differential on account of which the company claimed a credit of Rs. 35,000 odd. It was then claimed by the company that the parties had exchanged correspondence in relation to this aspect of the dispute. The company sought and was given an opportunity to file copies of the correspondence that the company may have had with the petitioner with regard to the complaint about the quality of the goods, etc., and the credit in relation thereto to which the company may be entitled. The company accordingly filed a number of letters said to have been sent by the company to the petitioner between April, 1983, and April, 1984. The company also filed copies of the letters allegedly sent by it to the Indian Consulate in certain countries to which the goods were said to have been exported by the company.

9. After hearing learned counsel for the parties and after going through the records with their assistance, it appears to me that the claim of the petitioner for Rs. 43,000 and odd on the interest account, set out in the petitioner's statement account, annexure-B to the petition, is bona fide disputed by the company and prima facie the company has quite a substantial defense to this part of the claim in that the petitioner has not been able to show any agreement with regard to the interest and no notice is claimed to have been sent to the company under the Interest Act which may entitle the petitioner to interest on the amount may be found to be outstanding from the company. Moreover, the letter of the company referring to the 'settlement' makes no mention of the interest component of the claim and the petitioner has not been taking a consistent stand in relation to the rate of interest. In the pleadings, the petitioner claimed interest at 21% p.a. but in annexure-B to the petition, interest is claimed at 24% p.a. The principal amount of Rs. 93,000 odd which is at places described as Rs. 90,000 odd is sought to be disputed by the company on three counts. In the first instance, it is urged that certain payments has been made to the petitioner which are not reflected in the books of account of the petitioner and the total credit claimed on this account is Rs. 49,942.95. Secondly, it is urged that the petitioner has entered excess amount to the extent of Rs. 3,724.49 in his books of account. Thirdly, it is urged that the company is entitled to credit of Rs. 35,774.65 on account of difference in 'rate' and damages on account of the 'inferior quality' of goods supplied by the petitioner. The claim of the company in respect of the first two items of credit does not appear to be either bona fide or based on substantial defense because the comparison of the two accounts reveals a complete convergence to the two accounts apart from minor discrepancies here and there of inconsequential extent. As for the claim of credit on account of 'differences in rate' and 'inferior quality of goods', the claims is prima facie equally lacking in bona fide as well as substance because the documents filed by the company do not show that there was any reply from the petitioner, which would prima facie confirm the contention of the petitioner that these letters were in fact never sent to the petitioner and had now been manufactured to bolster up a false defense. The company also never this question of 'rate' and 'quality' at the earlier stage of the proceedings except en passant and filed these documents at a late stage when it found that its claim of credit to offset the claim of the petitioner was not holding any ground. There is also no indication from the letter said to have been sent by the company to the Consulate of India that these related to the goods or fabrics supplied to the company by the petitioner. The claim of the petitioner to the principal amount is also squarely confirmed by the auditor's letter at least to the extent of the amount confirmed therein and in view of the confirmation of the auditors, the dispute appears to be tainted.

10. What then is the course to be followed in the circumstances of this case The petition is still at the preliminary stage of admission. The court is not called upon to decide if, in the circumstances, the company would be liable to be wound up or not. The court is concerned with a more limited question if in the totality of the circumstances, disclosed by the pleadings and the material on record, the petition would deserve to be admitted or not as also if the citation should be deferred for the present, even if the petitions admitted. It is no doubt true that a winding up jurisdiction is not a forum for the enforcement of the claim of a creditor of company. This jurisdiction is not a substitute to a civil court which is entitled to give relief to a creditor. The company court is concerned with a limited question if the circumstances would justify winding up the company. It may be one of the vagaries of the law that an ordinary debtor can resist the claim with impunity and compel his creditor to invoke the dilatory, as well as costly civil court process, and wait for years, even after heavy costs, to obtain a decree which may best be an illusory satisfaction because the decree does not solve the problem of the creditor but is considered the beginning of the creditor's problems. The execution of a decree involves not only further time but may even prove abortive and, thereforee, frustrating for a variety of reasons. A creditor of a corporate body is, on the other hand, in a much better position in that he can use and, at times, even misuse the forum of the company court to compel a reluctant company to pay on pain of admission of a winding up petition, which by itself, and if coupled with citation, may affect the credibility of the company and even disturb its financial arrangements with bankers, and destabilize its functioning and even pose a threat to its solvency. It is, thereforee, necessary to exercise caution in dealing with the claim for winding up on the ground of deemed inability to pay so as to ensure that the proceedings do not degenerate into an instrument of arm-twisting of a corporate body or to blackmail it into submission, even though it may have either a bona fide defense in which there is substance or legitimate internal reasons of temporary lack of liquidity to meet its immediate demands. Where, however, a company has a substantial defense to a claim, and acts in good faith, the company court would provide the necessary protection to the company and compel the petitioner to seek his remedy by an ordinary civil action, even while putting the company to terms in a fit case. Where, however, a claim has two components, one of which is bona fide disputed on the basis of a substantial defense, while the dispute with regard to the other is neither made in goods faith nor based on substantial defense, it would be open to the court to direct admission of the petition, even while giving option to the company to have the petition deferred pending payment of part of the amount and adequate security in respect of the balance. It is necessary in such cases to strike a reasonable balance between the desirability that the company, in the absence of unusual features, meets its legitimate claims, and the imperative that the proceedings are not allowed to become an instrument of illegitimate pressure.

11. I would, thereforee, admit the petition and direct notice of the petition to the company for May 27, 1985. The notice would be published in the Delhi Gazette and in the Statesman and Navbharat Times, for the said date. This is, however, subject to the condition that if the company pays to the petitioner Rs. 30,000 and furnishes security to the satisfaction of the Registrar of this court to the extent of the balance of the claim of Rs. 60,000 odd, within 10 days, the aforesaid order of admission and citation would remain and the petition would be adjourned since die with liberty to the parties to have it revived on the conclusion of any proceedings that may be initiated by the petitioner for the recovery of the amount.


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