Venkateswara Flexo Pack P. Ltd. vs Sampre Nutritions Ltd.

B. Seshasayana Reddy, J.—This company petition under Sections 433(e), 434(1)(a) and 439 of the Companies Act, 1956 (for short "the Act") read with Rule 95 of the Companies (Court) Rules, 1959, has been taken out by M/s. Venkateswara Flexo Pack P. Ltd., seeking an order of winding up against the Respondent-company, viz., M/s. Sampre Nutritions Ltd., and to appoint the official liquidator attached to this Court as its liquidator to take charge of the assets, properties, income and business of the Respondent company.

The Petitioner is a private limited company carrying on the business of manufacturing of various packing materials such as laminated films, pouches, PVC shrink sleeves and allied items, etc. The Respondent is a private limited company carrying on the business of manufacturing various kinds of chocolates. The Respondent-company represented by its directors approached, induced and persuaded the Petitioner-company to supply its products on credit under a running account assuring to pay the value of the products supplied. The Petitioner-company supplied its products to the Respondent-company on credit basis. During the business transactions, the Respondent-company indebted to a tune of Rs. 2,08,31,551 together with interest to the Petitioner-company. The Petitioner-company through its directors and personnel made repeated requests to the Respondent-company to clear the outstanding liability. The efforts made by the Petitioner company to recover the amount due from the Respondent-company proved to be futile. The Petitioner-company got issued a legal notice, dated December 22, 2009, to the Respondent-company and all its directors calling upon them to pay the due amount of Rs. 2,08,31,551 with future interest within 21 days from the date of receipt of the notice. The Respondent-company and its directors got issued a reply, dated January 18, 2010, disputing the amount claimed by the Petitioner while admitting the transactions. The Petitioner-company issued a rejoinder, dated January 25, 2010, enclosing the detailed accounts statement, which was received by counsel of the Respondent-company and its directors. The Respondent-company issued a reply to the rejoinder on March 3, 2010. According to the Petitioner, the Respondent-company, having ample means and funds and assets, solvent enough to satisfy the claims of the creditors, lacks intention to pay and thereby the Respondent-company has failed and neglected to pay the amounts, which are legitimately due to the Petitioner-company. The inability of the Respondent-company to pay its debts comes within the meaning of Sections 433 and 434 of the Act and thereby rendering itself liable to be wound up. Hence, this company petition seeking the relief stated supra.

Notice to the Respondent came to be ordered on June 15, 2010. The Respondent-company entered appearance through a counsel and filed counter affidavit.

Mr. B.K. Gurbani, managing director of the Respondent-company has sworn to the counter-affidavit. The sum and substance of the counter-affidavit is: The Petitioner-company came on its own and introduced itself on October 9, 2000, claiming to have the best technology for production of wrappers. The contractual rate was Rs. 175 per kg. The Petitioner-company submitted bills quoting Rs. 205 per kg., to its bankers. The Petitioner-company, right from the inception of the business, started playing foul with the Respondent-company (i) over supply of materials other than orders placed; (ii) supply of substandard materials; (iii) materials different from the one order placed; (iv) colour different and different shades; and (v) smudges in the printing, etc., on the wrappers, which resulted in huge loss to the Respondent-company. As a result, the companies like Indian Airlines rejected the materials causing huge loss to the Respondent-company. Most of the companies rejected the materials stating that it does not look genuine and are fake and thereby the name of the company was tarnished losing its prestigious name. Numerous letters were addressed to the Petitioner-company during the years 2001-05 pointing out inferior quality materials supplied and seeking deputation of its control officer to check the materials sent. The Respondent-company addressed number of letters to the Petitioner-company to take back the rejected materials as it was occupying majority of the godowns, which was meant for storing the finished Cadbury chocolates, eclairs, etc. The discrepancies in the supplies made by the Petitioner-company were pointed out and had given a handwritten note. The Respondent-company requested the Petitioner-company to take back the materials weighing about 12 1/2 tonnes amounting to Rs. 30,00,000 and also requested to take back the rejected unused materials worth of Rs. 10,00,000 to Rs. 12,00,000. The Petitioner-company knowing fully well that it owes lakhs to the Respondent-company, resorted to arm twisting methods to put pressure on the Respondent-company to pay the amount. The Petitioner-company besides filing the company petition on June 11, 2010, also filed criminal case for the offences under Sections 120B, 406, 420, 421 and 506 of the Indian Penal Code, 1860, before the VIII Metropolitan Magistrate, Rajendranagar. The Police of RGI Airport, Shamshabad P.S., arrested the managing director of the Respondent-company. Thereupon, the Respondent-company along with other directors filed an application to quash the proceedings in criminal case and obtained interim stay of the proceedings. It is the Petitioner-company which is due in lakhs of amount to the Respondent-company and not vice versa.

The Petitioner-company filed reply affidavit contending, inter alia, that the materials supplied to the Respondent-company was of good quality and as per the purchase order placed by the Respondent-company with the Petitioner-company. The memorandum of understanding entered into and executed between the managing directors of the Respondent-company and the Petitioner-company confirms the amount outstanding on account of the supplies made by the Petitioner-company. As per the terms and conditions of the memorandum of understanding, the Respondent-company agreed to pay the cost of cylinders to the Petitioner-company at the time of return of the same in good condition and that interest will be calculated at 15 per cent, per annum on the amount outstanding for more than 90 days against any bills for supplies, but none of the alleged claims were contended in counter affidavit whatever raised by the Respondent-company at the time of entering into the said memorandum of understanding, dated February 9, 2008, relied on by the Respondent-company.

Heard learned Counsel appearing for the Petitioner-company and learned Counsel appearing for the Respondent-company.

It is contended by learned Counsel appearing for the Petitioner-company that the Respondent-company indebted to the Petitioner-company to a tune of Rs. 2,08,31,551 together with interest being the value of the products supplied by the Petitioner-company on credit basis under a running account and thereupon, the Petitioner-company got issued a legal notice dated December 22, 2009, to the Respondent-company and its directors calling upon them to pay the due amount of Rs. 2,08,31,551. The Respondent-company and its directors received the notice, but failed to make payment within the stipulated time and thereby cause of action has arisen to the Petitioner-company to initiate appropriate legal proceedings, including proceedings for winding up of the Respondent-company. He would also contend that the Respondent-company and its directors gave a vague and illusive reply, dated January 18, 2010 and the plea advanced by them, in the reply notice does not constitute a bona fide dispute, in which event, this company petition deserves to be admitted and further proceeding is required to be taken up. In support of his contentions, reliance has been placed on the decision of the Supreme Court in IBA Health (I) Pvt. Ltd. Vs. Info-Drive Systems Sdn. Bhd., wherein the Supreme Court held that the dispute should be substantial and genuine if it is bona fide and not spurious, speculative, illusory or misconceived. The company court at the stage of a winding up petition is not expected to hold a full trial of the matter. It must decide whether the grounds appear to be substantial. The grounds of dispute must not consists of some ingenious mask invented to deprive a creditor of a just and honest entitlement must not be a mere wrangle. If there is no dispute as to the company''s liability, the solvency of the company might not constitute a stand alone ground for setting aside a notice u/s 434(1)(a), meaning thereby, if a debt is undisputedly owing, then it has to be paid. If the company refuses to pay on no genuine and substantial grounds, it should not be able to avoid the statutory demand. The law should be allowed to proceed and if demand is not met and an application for liquidation is filed u/s 439, in reliance of the presumption u/s 434(1)(a) that the company is unable to pay its debts, the law should take its own course and the company of course will have an opportunity on the liquidation application to rebut that presumption. Learned Counsel also placed reliance on the judgment of the Supreme Court in Vijay Industries Vs. NATL Technologies Limited, for the proposition that failure to pay agreed interest on the principal amount resulting from supply of goods would come within the purview of the word debt.

Learned Counsel appearing for the Respondent-company submits that the Petitioner-company suppressed the memorandum of understanding dated February 9, 2008, whereunder the parties arrived at some settlement and thereafter the Petitioner-company committed breach of the terms of the memorandum of understanding, in which case, the Petitioner-company is to be categorised as a defaulting party and it is impermissible for the defaulting party to approach this Court invoking the provisions under Sections 433(e), 434(1)(a) and 439 of the Act. He would also submit that there is a bona fide dispute with regard to the rate charged by the Petitioner-company and thereby over billing occurred, which is required to be adjusted as per the memorandum of understanding dated February 9, 2008. Learned Counsel refers the copy of the memorandum of understanding dated February 9, 2008 and also calculation sheet annexed to it. Learned Counsel would submit that even as per the annual report of the year 2009-10, the Respondent-company has earned net profit of Rs. 9.40 lakhs. He would also submit that the petition averments do not indicate that the Respondent-company has been indebted to various other creditors and that the existing assets, probable assets are less than the existing liabilities of the Respondent-company. In the absence of such an allegation, it cannot be said that the Respondent-company has become commercially insolvent. Learned Counsel refers the relevant portion of paragraph (7) of the petition to buttress his submissions that the Respondent-company has ample means and funds and assets and solvent enough to satisfy the claim of the creditors. It is useful to refer paragraph (7) of the petition, which reads as hereunder:

"7. The Petitioner further submits that apart from the lawful dues payable to the Petitioner-company, the Respondent also owes huge amounts to many of its other creditors, whom it has been avoiding by concealing and shifts its assets. It is pertinent to mention here that the Respondent is having ample means and funds and assets and solvent enough to satisfy the claims of the creditors, but it lacks intention to pay. The Respondent has failed and neglected to pay the amounts which are legitimately due to the Petitioner. The Petitioner submits that all their efforts to secure payment of the dues of sum of Rs. 2,08,31,551 (rupees two crores eight lakhs thirty one thousand five hundred and fifty one only) from the Respondent proved futile."

In support of his submissions, apart from referring the decisions cited by learned Counsel appearing for the Petitioner, placed reliance on the judgments of this Court in Walnut Packaging P. Ltd. v. Sirpur Paper Mills Ltd. [2009] 148 Comp Cas 330 : [2009] 4 ALD (NOC 49) and National Research Development Corporation Vs. Electro Flux (P) Ltd.,

The issue that calls for adjudication in this company petition is:

"Whether the Petitioner made out prima facie case for admission of this winding up petition against the Respondent-company--M/s. Sampre Nutritions Ltd.?"

Points

This petition has been filed under Sections 433(e), (f), 434(1)(a) and 439 of the Companies Act, 1956, read with Rule 95 of the Companies (Court) Rules, 1959. Section 433 of the Act deals with the circumstances in which a company may be wound up by the court and it reads thus:

"433. Circumstances in which company may be wound up by court--A company may be wound up by the court--

(a) if the company, has, by special resolution, resolved that the company be wound up by the court;

(b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting;

(c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;

(d) if the number of members is reduced the case of a public company, below seven and in the case of a private company, below two;

(e) if the company is unable to pay its debts;

(f) if the court is of opinion that it is just and equitable that the company should be wound up."

From the above, it follows:

(1) There must be a debt; and

(2) The company must be unable to pay the same.

An order under Clause (e) is discretionary. A debt under this section must be a determined or a definite sum of money payable immediately or at a future date. What then is inability, when the section says "unable to pay its dues?" That should be taken in the commercial sense. In that, it is unable to meet current demands. As stated by William James V.C., it is "plainly and commercially insolvent--that is to say, that its assets are such, and its existing liabilities are such as to make it reasonably certain--as to make the court feel satisfied that the existing and probable assets would be insufficient to meet the existing liabilities. The Supreme Court in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries P. Ltd. AIR 1971 SC 632 : [1972] 42 Comp Cas 125, while dealing with the scope of Section 433(e) of the Companies Act, 1956, has held that if the debt is bona fide disputed and the defence is a substantial one, the court will not wind up the company. The court has to dismiss the petition for winding up where the creditor claimed a sum for goods sold to the company and the company contended that no price had been agreed upon and the sum demanded by the creditor was unreasonable. Where the debt is undisputed, the court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt. It is beyond dispute that the machinery for winding up will not be allowed to be utilised merely as a means for realising its debts due from a company. In Amalgamated Commercial Traders P. Ltd. v. A.C.K. Krishnaswami [1965] 35 Comp Cas 456, the Supreme Court quoted with approval the following passage from Buckley on the Companies Acts, 13th edition, page 451 (page 463):

"It is well-settled that a winding up petition is not a legitimate means of seeking to enforce payment of the debt which is bona fide disputed by the company. A petition presented ostensibly for a winding up order but really to exercise pressure will be dismissed, and under circumstances may be stigmatized as a scandalous abuse of the process of the court."

To raise a presumption of a company''s inability to pay its debts, it is not enough merely to show that the company has omitted to pay the debt despite service of statutory notice, it must be further shown that the company omitted to pay without reasonable excuse and conditions of insolvency in the commercial sense exist. The petition must disclose the assets of the company and whether they are insufficient to meet the liabilities including contingent and prospective liabilities, and further it must disclose the position of fixed assets as well as valuation of plant and machinery of the company. The question is not whether at a given time the company can pay all its debts whether presently due or only in future and still to continue to function but the question is whether it is able to meet the current demands. It would of course be insolvent if it cannot do that even if it has assets not presently available but more than ample to pay its debts.

The company court exercises an equitable jurisdiction. Materials have to be placed on record by the Petitioner to prima facie substantiate the grounds raised in a petition for winding up. If details as to insolvency are wanting and no supporting documents are produced, then that petition without supporting documents, cannot, prima facie, prove insolvency and the same cannot be construed as satisfying the legal requirements and the company court should not permit the Petitioner to have a roving inspection into the company''s documents for ulterior purposes.

When the court is called upon to wind up a company under Clause (e) of Section 433, what is to be considered is not whether the company if it converted all its assets into cash would be able to discharge its debts but whether in a commercial sense the company is insolvent and whether it is unable to meet its current demands although the assets when released may exceed its liabilities. The Petitioner has to place prima facie evidence that the company is commercially insolvent, that its existing assets, probable assets are insufficient to meet the existing liabilities, that the company is heavily indebted to various creditors, its assets being in mortgage or in pledge and that there is no possible chance of profit being made or its business being carried on. If from the materials on record it cannot be made out that the company is commercially insolvent, then the petition could be dismissed even before issuing notice regarding admission. There is a responsibility and duty on the courts to find whether the concerned company has become commercially insolvent for purposes of winding up. At the initial stage the court would be circumspect and judicious in exercising discretion and should take all relevant facts and circumstances into consideration before even issuing process regarding admission.

The Petitioner claims that the Respondent is due and liable to pay a sum of Rs. 2,08,31,551. When the Petitioner issued a statutory notice, the Respondent issued a reply disputing its liability. The Respondent also referred the memorandum of understanding dated February 9, 2008. As per the terms of the memorandum of understanding, the accounts between the parties are required to be re-settled by adjusting the over-billing against the outstanding amount.

The dispute between the parties is with regard to the unit price quoted in the purchase order. For better understanding, I may refer the terms of memorandum of understanding, dated February 9, 2008, which read as hereunder:

"(1) The parties shall take out few bills of each year of transaction as a comparative rate and shall arrive at the rate that existed during that period for computation of a rate that would be taken as a bench-mark for calculation of difference, if any, and would apply at the total quantities supplied during each year of transaction.

(2) The cost of cylinders, made by second party for supplying laminates, for those varieties of candies where order quantity was less than one ton each, is agreed to be payable by the first party. The price of cylinder shall be based on purchase price of second party and at the same time, the second party shall return the cylinder to the first party in good condition.

(3) Interest shall be calculated at the rate of 14 per cent. per annum on the amount outstanding for more than 90 days against any bill for supplies.

(4) On the basis of the abovementioned terms, the parties shall arrive at a final amount that first party owes to second party.

(5) The first party agrees to pay the second party, the final outstanding amount, within a period of 60 days from the date of this memorandum of understanding.

(6) Incase the first party is not able to repay the entire outstanding amount within the abovementioned period, the first party shall mortgage its property and take loan for clearing the outstanding amount that it owes to the second party."

The Respondent in reply to the statutory notice has referred the memorandum of understanding. The Respondent specifically pleaded that the dispute is with regard to the rate quoted by the Petitioner-company. The memorandum of understanding indicates that the dispute between the parties is in respect of price quoted by the Petitioner-company. According to the Respondent, the agreed rate is Rs. 175 and whereas according to the Petitioner, the agreed rate is Rs. 205. The difference amount is Rs. 30 per kg. It is stated in the reply affidavit that if the value of the goods supplied by the Petitioner is calculated at Rs. 175 per kg., the Petitioner-company is due to the Respondent-company certain amounts. Because of the serious dispute with regard to the rate, it cannot be said that the amount claimed by the Petitioner in the statutory notice is undisputed amount or admitted amount. The very liability of the Respondent is in dispute. The dispute, in the given facts and circumstances, is bona fide and it is based on substantial grounds.

Therefore, the company petition does not warrant admission and accordingly, the same is hereby dismissed at the stage of admission. No costs.