Agilent Technologies Singapore (Sales) Pte. Ltd. vs Ashco Niulab Industries Limited

Kathawalla S.J., J.—By the above company petitions, the petitioner seeks winding up of the respondent Company-Ashco Niulab Industries Ltd. (''the company'') on the ground that the company is unable to pay its debts. The company has raised a preliminary issue in the above company Petitions namely that in the statutory notice, the petitioner has called upon the company to pay its purported dues within a period of 7 days and not 21 days, as required u/s 434(1)(a) of the Companies Act, 1956 (''the Act'') and therefore the said statutory notice served by the petitioner on the company is not a valid notice.

The learned Advocate appearing for the company has emphasized that this Court should first decide the preliminary objection raised by the company. In view thereof, this Court has proceeded to hear the learned Advocates appearing for the Parties on the aforestated preliminary objection.

The learned Advocate appearing for the company, in support of his contention that a statutory notice issued to a company providing a period of less than 21 days for payment of dues to the petitioner, is defective and bad in law, requiring the company-petition itself to be dismissed on that ground alone, has relied on the decision of the Hon''ble Supreme Court in The Collector of Customs, Baroda Vs. Digvijaysinhji Spinning and Weaving Mills Ltd., wherein the Apex Court has inter alia held that if the words of a statute are in themselves precise and unambiguous, nothing more is necessary than to expound those words in their natural and ordinary sense, the words themselves in such a case-declare the intention of the Legislature. Moreover, where alternative constructions are equally open, that alternative is to be chosen which will be consistent with the smooth working of the system which the statute purports to be regulating; and that alternative is to be rejected which will introduce uncertainty, friction or confusion into the working of the system.

The learned Advocate appearing for the company has also relied on the decision of Hon''ble Supreme Court in Mohan Kr. Singhania and others Vs. Union of India and others, wherein the Hon''ble Supreme Court referred to the case of Commissioner of Income Tax, Delhi Vs. S. Teja Singh, expressing that a construction which would defeat the object of the Legislature must, if possible, be avoided.

The learned Advocate appearing for the company has submitted that allowing the petitioner or any party to issue a statutory notice to the company setting out therein a period less than 21 days to pay the purported dues of the petitioner, would be against the intent of the Legislature, which requires the petitioner to give 21 days clear notice to a company and the same will also introduce uncertainty, friction and confusion into the working of the system.

The learned Advocate appearing for the company, also relied on the decision in The Sandu Manganese and Iron ores Limited, Yeshwantnagar, Karnataka Vs. Maganese Ore (India) Limited, Nagpur, wherein a Division Bench of the Karnataka High Court has held that if a creditor wants the benefit of the legal fiction u/s 434(1)(a), that a company is unable to pay its debts, he has to strictly fulfill all the conditions stipulated therein for raising such legal fiction. When the stipulated conditions for raising such legal fiction are not strictly and fully complied with, no legal fiction will arise. Paragraph 8 of the said judgment on which the learned Advocate for the company has relied upon, is reproduced hereunder:

It is well settled that a legal fiction can be raised as provided under a statute, only when the conditions stipulated for raising such legal fiction are strictly and fully complied with. Where the specific requirements are not complied with, no legal fiction will arise. A legal fiction cannot be raised when the conditions specified do not exist, on the ground that there is substantial compliance or implied or inferred compliance of the requirements to be fulfilled for raising the legal fiction, unless such lesser or alternative compliance is permitted by an explanation or another deeming provision. As observed by the Supreme Court in Commissioner of Income Tax, Bombay City II Vs. Shakuntala and two Ors. etc., "a legal fiction cannot be created by travelling beyond the language of the section by which it is created. Therefore, if a creditor wants the benefit of the legal fiction u/s 434(1)(a) that a company is unable to pay its debts, he has to strictly fulfill all the conditions stipulated therein for raising such legal fiction.

The learned Advocate appearing for the petitioner has relied on the decision in (Babu Ram and anr. Vs. Krishna Bharadwaj Cold Stores and General Mills Co. (Pvt) Ltd. and ors.), (1965)11 Com. L.J. 215 wherein it is inter alia held by the Allahabad High Court that the provisions of law give the company three weeks time to pay up its debt which is thus, a statutory period fixed for the company. If the statutory notice fixes any other time period for the same, such specification will not override the statutory provision and consequently will have no legal effect. Therefore, the fact that the statutory notice mentions a shorter period for payment does not vitiate the statutory notice.

The learned Advocate appearing for the petitioner has pointed out that the Calcutta High Court has in the case of [N.K. Gossain and Co. Pvt. Ltd. Vs. Dytron (India) Ltd., In re), (1995) 84 Comp. Cas. 766 after following the decision of the Allahabad High Court in Babu Ram''s case (supra), held that the statutory notice need not give or specify any particular date within which the company has to pay, and that mention of a lesser period in the said notice will not invalidate such a notice. It is pointed out that the Calcutta High Court has not followed the view taken by the Patna High Court in (Parry & Co. Ltd. Vs. India Machinery Stores (P) Ltd.) (1990) 69 Comp. Cas. 757 wherein the Patna High Court has held that as only a fortnight''s time was allowed by the letter dated 13th December, 1976 to the company to pay its dues, which was against the statutory period allowed u/s 434, it cannot be contended that the winding up proceeding should be maintained on the basis of that letter.

The learned Advocate appearing for the petitioner also relied on the decision in the case of (Devendra Kumar Jain Vs. Polar Forgings and Tools Ltd.), (1979)49 Comp. Cas. 21 where the learned Single Judge of the Delhi High Court held, that section 434(1)(a) of the Act, does not require the creditor to state in the notices as to what would be the consequences if the sum due is not paid by the company to the creditor. u/s 434(1)(a), a presumption about the insolvency of the company is liable to be drawn in cases where the creditor has served on the company a demand notice requiring it to pay the sum due, and in case the company for three weeks after the service of such demand notice, neglects to pay the sum or to secure or compound for it, to the reasonable satisfaction of the creditor. In the said judgment, the Delhi High Court has reiterated the stand taken by the Allahabad High Court in Babu Ram''s case (supra) and held that the letters written by the petitioner to the company constitute a valid demand u/s 434(1)(a) of the Act.

It is therefore, submitted on behalf of the petitioner that the statutory notice issued by the Advocate for the petitioner to the company and served at the registered address of the company, is a valid notice and that the contention advanced on behalf of the company to the contrary, be rejected.

I have gone through the pleadings in the matter, the case laws relied upon by the Parries and the submissions advanced by the-learned Advocates appearing for the Parties. It would be relevant to reproduce section 434(1)(a) of the Act, which reads thus:

Company when deemed unable to pay its debts - (1) A company shall be deemed to be unable to pay its debts (a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding [one Lakh rupees] then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor;

(b)...

A plain reading of the section makes it clear that the Legislature does not require the petitioner/creditor to state in the statutory notice the period within which the company should make payment to the petitioner/creditor u/s 434(1)(a). If the company neglects to pay the amount as called upon by the respondent-company within a period of three weeks from the date of receipt of the notice by the company, the company shall be deemed to be unable to pay its debts. Therefore, when the creditor or his Advocate records in a notice that such notice is issued u/s 434 of the Companies Act, 1956, the creditor or his Advocate is not required to mention any period during which the company is required to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor because under the statute, if the company neglects to pay the sum so demanded for a period of three weeks from the date of the receipt of the notice, the company shall be deemed to be unable to pay its debts. In view thereof, even if a shorter period is mentioned in the notice, it cannot be said that the notice has defeated the intention of the Legislature or is likely to introduce any uncertainty, friction or confusion into the working of the system. The decision of the Hon''ble Supreme Court relied on by the learned Advocate appearing for the company pertains to the principle of construction, where alternative constructions are equally open. The Hon''ble Supreme Court has held that in such cases, the alternative to be chosen should be consistent with the system which the statute purports to be regulating and that alternative is to be rejected which will introduce uncertainty, friction or confusion into the working of the system. Therefore, both the decisions of the Hon''ble Supreme Court do not in my view, assist or advance the cause of the petitioner. The decision of the learned Single Judge of the Karnataka High Court in the case of The Sandu Manganese and Iron Ores (supra) relied upon by the Advocate for the company pertains to a matter where a statutory notice was not delivered at the registered office of the company, but was delivered at its administrative office. Section 434(1)(a) mandates service of a statutory notice at the registered office of the company. If a statutory notice is served at the registered address and if 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, the legal fiction can be raised as provided under the statute, namely that a company is deemed to be unable to pay its debts. It is in this context, that the Karnataka High Court has held that if the creditor wants the benefit of the legal fiction u/s 434(1)(a) of the Act, then the creditor has to strictly fulfill all the conditions stipulated therein, for raising such legal fiction.

In the instant case, as discussed herein-above, section 434(1)(a) of the Act, does not require any period to be set out in the statutory notice within which the company has to pay its creditor. It only provides that the company shall be deemed to be unable to pay its debts if the company for the period of three weeks after the receipt of the said notice neglects to pay the sum called upon to be paid by the said statutory notice. In view thereof, the decision advanced in the case of The Sandu Manganese and Iron Ores (supra) relied upon by the learned Advocate appearing for the company, is also not applicable to the facts of the instant case and does not lend any assistance to the company.

An identical issue came up for consideration first before the Allahabad High Court in the case of Babu Ram (supra). In that case, a statutory notice was issued by the petitioner to the company calling upon the company to make payment within four days from the date of receipt of the said notice. It was urged on behalf of the company that the statutory notice was invalid since the said notice was for a period shorter than 21 days as provided in section 434(1)(a) of the Act. The contention raised by the company was correctly rejected by the Allahabad High Court in the following terms:

The notices sent by the petitioners were also challenged on various grounds. It was urged that the notices did not give 21 days time to the company to pay. The notice dated 19th of April, 1962 demanded payment soon. The notice sent on 20th October, 1962 requested payment within one week of its receipt. The third notice dated 5th October 1963 again asked for payment within four days of its receipt The 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 fixes 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 the service of the notice. The fact that these notices mention a shorter period for payment does not vitiate them.

The decision in Bapu Ram''s case is not only followed by the Calcutta High Court in N.K. Gossain and Co. Pvt. Ltd. Vs. Dytron (India) Ltd. (supra) and the Delhi High Court in the case of Devendra Kumar Jain (supra), but is also followed by our own High Court in the case of (Lyka Labs Limited Vs. Rokadia Chemical Company Pvt. Ltd.), (1990) 4 C.L.A. (Snr.) 58 (Bom.) Paragraph 6 of the said decision is reproduced hereunder:

It has also been argued on behalf of the company that the statutory notice dated 26th July, 1989 is not a valid notice, as by the said notice the company was called upon to pay the amount of Rs. 1,92,049.50 P. within 48 hours of the receipt of the said notice. It has been argued that the Petitioning-creditor was bound to specify 21 days time in the said notice served u/s 434(1) of the Companies Act (I of 1956). Relying on the judgment of the High Court of Allahabad in the case of Babu Ram (supra), I hold that the specification of the shorter period in the notice of demand is of no consequence and the Petitioning-creditor can file a petition for winding up, if the demand remains uncomplied with for a period of 21 days. In this respect, all that is necessary is that the company must get three weeks'' time to pay and it is of no consequence that the lesser time is specified in the notice. Since I am in agreement with the principles of law laid down in the above referred judgment of the High Court of Allahabad, it is not necessary to pursue this discussion any further.

In the instant case, paragraph Nos. 14 and 15 of the statutory notice dated 09th September, 2011 issued by the Advocate for the petitioner on the company is relevant and is reproduced hereunder:

Thus, the sums of US$ 378,306 (US Dollars Three Lacs Seventy Eight Thousand Three Hundred and Six only) is payable by you along with an interest of 24% per annum from the due date of payment till the date of receipt thereof by our clients. We hereby called upon you to remit the same to our clients within 7 days of receipt hereof, failing which our clients shall be constrained to take such civil and criminal action against you and/or your Director/s and/or officer/s in charge as they may be advised for the costs, including legal costs, and consequences whereof you alone shall be entirely responsible. Further our clients will be taking steps to inform the concerned Indian Authorities including the Stock Exchanges/SEBI about the same.

Please also treat this as a notice u/s 433 and 434 of the Companies Act, 1956.

From the aforesaid clause, it is clear that under paragraph 14, the Advocate for the petitioner, has called upon the company to pay the outstanding dues within seven days, failing which the petitioner would be constrained to take such civil and criminal action against the company, as may be advised. Paragraph 15 of the said notice clarifies that the company should also treat the said notice under sections 433 and 434 of the Companies Act, 1956. The Advocate for the petitioner has therefore, not stated in the said notice that if the amount as called upon, is not paid within 7 days, he shall initiate winding up proceedings against the company, but has stated that he will take such civil and criminal action against the company as advised.

Paragraph 15 of the said notice is independent of paragraph 14. Paragraph 14 intimates the company that the said notice should also be treated as a notice under sections 433 and 434 of the Act. This is independent of criminal/civil action threatened against the company for non-payment of its debts/dues within seven days from receipt of the said notice. Thus, in my view, the period of seven days referred to in paragraph 14 extend to the threatened civil/criminal action and cannot be construed as the time given under sections 433 or 434 of the Act.

Under the circumstances, I am in respectful agreement with the view taken by Allahabad High Court in Babu Ram''s case [supra], followed by the Calcutta High Court, the Delhi High Court and also by this Court and I hold that the statutory notice dated 9th September, 2011 is a valid notice. The said notice is also a valid notice for the reasons set out in paragraphs 17, 18 and 19 above. I therefore, reject the preliminary objection taken by the company that the statutory notice dated 9th September 2011 issued by the Advocate for the petitioner to the company is not a valid notice. The above company petitions be placed for admission on 20th July 2012.