Skip to content


Gautam Electric Motors Vs. Firm Shantilal and Bros. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtDelhi High Court
Decided On
Case NumberLetter Patent Appeal No. 82 of 1968
Judge
Reported inILR1969Delhi708
ActsCompanies Act, 1956 - Sections 433
AppellantGautam Electric Motors
RespondentFirm Shantilal and Bros.
Advocates: A.R. Lal and; A.B. Lal, Advs
Cases Referred(Shanti Lal & Bros. v. Gautam Electric Motors Pvd. Ltd.
Excerpt:
.....a separate dispute between the company and the creditor may nto perhaps be a good answer to a suit by creditor against the company, but it may be a reasonable excuse for the non-payment of an admitted debt to the creditor by the company, with the result that a court may refuse to hold that the company was deemed to be unable to pay its debt to such a creditor within the meaning of section 434(1)(a) of the companies act, 1956. (15) in the present case, both the parties are commercial concerns. the object of the present winding-up petition is clearly, thereforee, to bring pressure on the company to pay up. in such a case, the cour has clearly a discretion under section 433 of the companies act, which says that a company 'may' be wound up by the court if the company is unable to pay..........a separate dispute between the company and the creditor may nto perhaps be a good answer to a suit by creditor against the company, but it may be a reasonable excuse for the non-payment of an admitted debt to the creditor by the company, with the result that a court may refuse to hold that the company was deemed to be unable to pay its debt to such a creditor within the meaning of section 434(1)(a) of the companies act, 1956.(15) in the present case, both the parties are commercial concerns. there is nothing to show that the appellant-company is commercially insolvent. the sole question is whether it has a reasonable excuse for the non-payment of the admitted debt of the creditor. in view of the other litigation pending between the parties in this court, the company is nto acting.....
Judgment:

V.S. Deshpande, J.

(1) This appeal is directed against the order of Hardy, J. admitting the petition of the respondent-creditor against the appellant-company under Section 433(e) read with clause (a) of sub-section (1) of Section 434 of the Companies Act, 1956 for the winding up of the appellant-company and directing this to be advertised in the newspapers.

(2) Both the parties are commercial concerns having dealings with each other. By one transaction the appellant-company had purchased some Super Enameled wire from the respondentcreditor. After paying the major portion of the price for the same, the appellant-company has to pay to the respondent-creditor the remainder of the price which according to the company is Rs. 22,087.27 and according to the respondent-creditor 4 27,484.21. By another separate transaction, the company had given about 30 tonnes of copper bars to the respondent-creditor to be fabricated into copper wire. The creditor deposited about three lakhs rupees as security with the company. The creditor has filed a suit in this Court against the company for the recovery of Rs. 5 lakhs in the second transaction, which is defended by the company. The defense of the company is that nothing is due to the creditor from the company and on the other hand Rs. 24,000.00 are due to the company from the creditor.

(3) The creditor had also alleged that the company was financially insolvent, but the order of Hardy J. is based solely on the failure of the company to pay the admitted debt of Rs. 22,087.00 .07 within three weeks in response to the notice given by the creditor to the company under clause (a) of sub-section (1) of section 434 of the Companies Act and the appeal was argued on both the sides solely on the question whether this order was justified or not.

(4) The sole question for consideration, thereforee, is whether the company shall be deemed to be unable to pay its bebt on the ground that it neglected to pay the admitted debt of Rs. 22,087 .07 to the creditor within the meaning of Section 434(1)(a) read with Section 433(a) of the Companies Act, 1956.

(5) The law is well settled that the word 'neglected' used in Section 434(1)(a) is nto necessarily equivalent to 'emitted.' It really means emitted to pay without reasonable excuse'. (Sir Georage Jessal. M.R. in the leading case of In re : London Paris Banking Corporation . thereforee, if the company is justified in nto paying the debt, though admitted, it would nto be said to have neglected to pay the same and, thereforee, the conclusive presumption that it is unable to pay its debt shall nto be raised against it under Section 433(1)(a). On the other hand, the mere fact that the company is nto proved to be insolvent or even financially insolvent is no reason why it should nto be deemed to be unable to pay its debts if it has failed to pay the debt without justification after the statutory demand. We have, thereforee, only to consider whether the justification offered by the company in the present case is such that the company cannto be said to have neglected to pay the debt in response to the statutory demand.

(6) The usual justification of a company for non-payment of debt in response to a statutory demand is that the company does nto admit the debt or that there is a bona fide dispute as to whether the debt is payable or nto by the company to the creditor. Most of the decided cases on this point, thereforee, discuss what is a bonafide dispute as to the existence or as to the payment of the debt between the company and the creditor. In re : London Paris Banking Corporation (1874-75) 19 Equity cases, 444 (1) and the Amalgamated Commercial Traders Pte Ltd. v. Ki-ishnaswami. Where there was no bonafide dispute as to the debt, however, the Supreme Court upheld the order admitting the petition and directing the advertisement in newspapers in Hari Nagar Sugar Mills Ltd. v. M. W. Pradan(3).

(7) None of these decisions are applicable to the present case, inasmuch as the company does nto dispute that it is obliged to pay the creditor as price of the goods at any rate a sum of Rs.22,087.07. It also does nto say that it has any set off or counter claim against the creditor in the first transaction in which it has to pay this amount to the creditor. What it says is that in the second transaction, which on its own admission is completely different from the transaction, a dispute is going on between the parties. Can it be said that a dispute between the parties, which is nto a part of the transaction out of which the demand of the petitioning-creditor has arisen can never be a reasonable excuse for non-payment of the petitioning-creditors' debt which in itself is admitted. In partial support of this extreme position we have come across the decision of a single learned Judge in re: Douglas (Griggs) Engineering Limited (1962) All E.R.498 ( 1963) Ch. 19. The petitioning creditor's debt in that case was based on a judgment obtained by him against the company and for that reason the debt was undisputed. The company however, resisted the petition on the ground that in a third party proceeding the company was claiming a much larger sum against the petitioning creditor. Pennycuick, J. observed as follows:-

'IT seems to me that the matters raised by the company do nto afford a sufficient answer to the petition. It would have been open to the company to apply in the action brought by the petitioning creditor for leave to defend by raising a set-off, but the company did nto elect to do so. In the event the petitioning creditor has obtained judgment and possesses all the remedies of a judgment creditor. In particular the petitioning creditor is entitled to present a petition for winding-up the company based on that judgment, and prime fade is entitled to a winding-up order against the company based on that judgment. It seems to me that this prima fade right of the petitioning creditor to a winding-up order is nto displaced merely by showing that the company has a disputed claim against petitioning creditor which is the subject of litigation in the other proceedings.'

(8) The above statement of law has been adopted by Pennington at page 633 of the second edition of his 'Company Law'. We may, however, point out that the decision in the above mentioned case was also influenced by the fact that the company's solicitors had informed the petitioning creditor's solicitors that there were no assets of the company on which execution could be levied either at their own office or at the company's place of business. The learned Judge, thereforee, observed as follows :-

'IN so far as the court has a discretion on the foregoing facts whether or nto a winding-up order should be made, there appear to be no facts which would warrant exercising that discretion in favor of the company.'

(9) It is clear, thereforee, that the mere fact that the dispute between the parties was nto connected with the debt, which form the foundation of the winding-up petition, was nto conclusive. The Court still had a discretion to refuse the prayer for winding-up, though in this particular case such facts were absent. We can, however, easily think of cases in which the company may have a reasonable excuse for non-payment of a debt, though consisting of a dispute between the parties nto directly connected with the debt, the payment of which is demanded by the petitioning creditor under Section 434(1)(a) of the Companies Act. The Company v. Sir Rameswar Singh, was one such case. The claim of the petitioning creditor was the subject matter of his suit against the company, while the claim of the company against him was the subject matter of another suit by the company against the petitioning creditor. If an account of both these opposing claims were to be taken, hardly any money would be found due to the petitioner from the company. Greaves, J. in the first Court held that he could nto say that the petition for winding-up was nto brought bona fide but Sanderson C.J. and Woodroffe, J. in the appeal held that there was a bonafide dispute between the parties and that the proper course for the petitioning creditor was to file a suit for the recovery of the amount due to him. Such suit had been filed by him, but its hearing was postponed until after the hearing of that an order for winding-up the company ought to be made on the petition until the litigation involved in the two above mentioned suits had been disposed of.

(10) Even a clearer case is Thakur Gobind Singh v. The Merchant Mohani Flour Mills Ltd. (6) 14 Cc 184, the petitioning creditors were ex-directors of the company to whom certain sums were undoubtedly due from the Company. The company, however, resisted the winding-up petition on the ground that certain other sums were due to the company from the Directors. Din Mohammad, J. (with whom Mehar Chand Mahajan, J. agreed) pointed out that under Section 162 of the Companies Act, 1913 (corresponding to section 433(e) of the Companies Act, 1956), it is obvious that even if a company is declared to be unable to pay its debts, no statutory obligation is laid on the Court to wind it up. The 'neglect' contemplated in Section 163(1)(i) of the Companies Act, 1913 (corresponding to Section 434(a) of the Companies Act, 1956) is nto established. The learned Judge posed the following question and answered it as follows :-

'SUPPOSE, a person has a fixed deposit with a bank and has also stood surety for a debtor, who later turns out to be impecunious, to the extent which goes far beyond the deposit. If in the face of this situation, the bank refuses to pay the amount of the fixed deposit unless the debt due to the bank is first discharged, will it nto be repugnant to common sense to hold that the bank by virtue of its refusal brings itself within the ambit of this definition. The Legislature could nto be so neglectful as nto to contemplate such cases while enacting this provision. It is the fundamental cannon of the interpretation of statutes to avoid all such constructions as at once looked absurd, unreasonable or ridiculous and the construction suggested by the appellants' counsel appears to me to be of this description. As I look at the matter, the Directors would have rendered themselves liable to the share-holders if they had thrown the Inspector's report over-board and readily yielded to the appellants' demand. In my opinion, thereforee, there has been no neglect in this case as contemplated by Section 163(1)(i) '

(11) Another reason why the learned Judges refused to grant the prayer for winding up was that the company actually deposited the amounts claimed by the petitioning creditors in Court to prove its bona fides. Even a more recent decision is in re : Federal Chemicals Works Limited. In that case also the demands made by the creditors were admitted but the company had other claims against each of the creditors. The company's claims could nto be said to arise out of some transaction out of which the creditor's demand has arisen. It was held that the company had a reasonable excuse for nto paying up the creditor's claim.

(12) On a consideration of the above decisions, the following statement of law in Palmer's Company Precedents, 17th Ed. part Ii, page 27, appears to be correct :-

'THE mere omission of a company to comply with a notice requiring payment of a debt, served pursuant to the above para (a), is nto 'neglect' within the meaning of that paragraph if there is reasonable cause for the omission, and the fact that the debt in question is bona fide disputed is a reasonable cause'.

(13) While the reasonable cause or excuse for non-payment of the debt is the genus, the bone fide dispute regarding the creditor's demand itself is only a species of the same genus. A dispute of the company with the creditors regarding another claim by the company against the creditor, though nto connected with the creditor's demand, may constitute another species of the same genus.

(14) This legal position would be supportable also on general principle. If a creditor were to file a suit against the company and the claim in the suit were admitted by the company, the company could resist the suit only by pleading a set-off or counter-claim in the same suit. If the company had a separate claim against the creditor, normally the creditor's suit against the company could nto be resisted or stayed unless some legal provision for defense or stay of the same is found such as one under Section 10 of Code of Civil Procedure, Section 34, Arbitration Act. or otherwise. The same analogy, however, cannto be applied to a winding up petition presented by the creditor against the company. For, the nature of such a winding-up petition and the consequences of the order of winding-up are quite different from the nature of a suit and the result of a decree passed upon the same. It would nto be possible, thereforee, to apply the same test to both these proceedings. A separate dispute between the company and the creditor may nto perhaps be a good answer to a suit by creditor against the company, but it may be a reasonable excuse for the non-payment of an admitted debt to the creditor by the company, with the result that a Court may refuse to hold that the company was deemed to be unable to pay its debt to such a creditor within the meaning of Section 434(1)(a) of the Companies Act, 1956.

(15) In the present case, both the parties are commercial concerns. There is nothing to show that the appellant-company is commercially insolvent. The sole question is whether it has a reasonable excuse for the non-payment of the admitted debt of the creditor. In view of the other litigation pending between the parties in this Court, the company is nto acting unreasonably in thinking that the amount due to the creditor should nto be paid inasmuch as the company would stand to gain something on balance from the creditor if the other dispute between the parties is decided. The object of the present winding-up petition is clearly, thereforee, to bring pressure on the company to pay up. The petition is nto genuinely motivated to obtain a winding up of the company in the interests of all the creditors. In such a case, the Cour has clearly a discretion under Section 433 of the Companies Act, which says that a company 'may' be wound up by the Court if the Company is unable to pay its debts and even if the company is deemed to be unable to pay its debts under Section 433(1)(a) We are of the view that the ends of justice in the present case would be served if on the one hand the claim of the creditor against the company is secured and on the other hand the company is nto forced to go into liquidation. We, thereforee, order that if the appellant-company gives a bank guarantee within 15 days to the respondent-creditor to the satisfaction of the Register of this Court for the payment of a sum nto exceeding Rs. 25,000.00 with interest at 6 per cent per annum from the date of the presentation of the winding-up petition till its disposal, the winding-up petition shall be stayed till the disposal of suit No. 361 of 1968 (Shanti Lal & Bros. v. Gautam Electric Motors Pvd. Ltd.) pending in this Court for the expeditious disposal of which due steps will be taken both by the parties and this Court. To this extent the appeal is allowed, but without any order as to costs. If, however, the appellant-company fails to give such security, the appeal would stand dismissed with costs.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //