Evans Fraser (India) Limited vs Trig Detectives Private Limited

Swatanter Kumar, C.J.—M/s. Trig Detectives Private Limited, hereinafter referred to as "the respondent-company", a company incorporated under the provisions of the Companies Act, 1956, hereinafter referred to as "the Act", filed a petition for winding up under Sections 433, 434 and 439 of the Act. ,The respondent-company gave its offer on March 16, 2000 to M/s. Evans Fraser and Co. (India) Ltd. (hereinafter referred to as "the appellant-company")/ for supply of security services. This offer was accepted by the appellant-company on April 13, 2000 and security guards and supervisors were provided by the respondent-company to the appellant-company with effect from April, 2000. The bills were raised from time to time. During the period, when the bills were raised, some payments were also made. However, the entire dues of the respondent-company were not cleared. On this premise, the respondent-company through its advocates served a statutory notice dated February 3, 2006, u/s 434 of the Act calling upon the appellant-company to make the payment of an amount of Rs. 70,75,456.90 within a period of 21 days from the date of service of the notice failing which they stated that they would be filing a winding up petition. This notice was served upon the appellant-company but the appellant-company failed to make the payment and, in fact, vide its reply dated February 15, 2006, it stated that no amount was due from it and that the claim of the respondent-company was without any basis. Again vide their advocates letter dated March 20, 2006, the respondent-company called upon the appellant to make the payment which they failed and vide their advocates letter dated April 25, 2006, the appellants made a claim of Rs. 30,00,000 for having caused damage to their reputation and to the extent of Rs. 9,00,00,000 for loss of business suffered due to loss of reputation and called upon the respondent-company to pay the same.

According to the respondent-company, they were covered by the exemption notification dated August 26, 2003, in relation to providing of security guards services to the principal employer and they had intimated to the appellant-company all details required for that purpose to show that the claim raised by them in their notice was fully justified. As the appellant-company failed to make the payment in terms of the notices issued, the respondent-company filed the petition praying for winding up of the appellant-company and for appointment of official liquidator in accordance with the provisions of the Companies Act. The transactions related to a considerable period.

This winding up petition was contested and a detailed reply was filed on behalf of the appellant-company. Various objections were taken in the reply including that the claim raised by the respondent-company was barred by time. It was also stated that the amounts claimed in the winding up petition were not due and this position was duly clarified in the reply given on behalf of the appellant-company in response to the notice for winding up. Besides claiming the amount of Rs. 30 lakhs for loss of reputation and Rs. 9 crores by way of damage for loss of business, they stated that no amount was recoverable from the appellant-company and the provisions of Section 433 of the Act were not attracted. It is stated that in Writ Petition No. 3050 of 2003, the court had suo motu issued notice to the respondent-company and also issued a show cause notice why action under the Contempt of Courts Act, 1971, be not initiated against them for perjury under the relevant provisions of the Indian Penal Code. These proceedings are pending. However, vide order dated October 4, 2004, the court had passed an order in favour of the appellant-company and the entire amount payable to the security guards of Rs. 4,63,760 were directed to be paid which, in fact, were paid and the amount was deposited by the appellant-company in court. The relevant part of the order passed in that petition which has been reproduced in the reply reads as under:

(i) Pursuant to our previous order, respondent No. 2 had deposited Rs. 5,35,791 with the Prothonotary and Senior Master. Learned Counsel appearing for the petitioner has handed over a chart which indicates the name of the security guards and the amount which is due and payable to each one of them.

(ii) We direct the Prothonotary and Senior Master to check the names of these security guards and pay their dues out of the monies deposited by respondent No. 2. According to the chart submitted by the petitioner, the total amount due and payable to the security guards is Rs. 4,63,760.We direct the Prothonotary and Senior Master to refund the balance amount to respondent No. 2.

The appellant-company also pleaded that the payments in relation to the bills raised for providing services of security guards were paid from time to time and nothing was due from them to the respondent-company. The winding up petition stated to contain misrepresentations. At no point of time, the appellant-company had conceded to pay any amount to the respondent-company. On the contrary, according to the appellant-company, the respondent-company was liable to pay the amounts as claimed. The services of providing security guards were given by the respondent-company to the appellant-company during the period March, 2000 to 2004.

There is no dispute that the respondent-company had submitted its offer dated March 16, 2000 to the appellant-company for providing security guard personnel at the stated rates to the appellant-company. The appellant-company vide its letter dated April 13, 2000, had agreed to the terms and conditions and had modified the rates as stated. The total amount payable per month was Rs. 49,770, inclusive of reliever duty charges and service charges. This was operative for a period of six months initially. The payments were increased from time to time which is also evident from the documents placed on record including exhibit D. The amounts in excess of agreed amounts were also charged. Further, it is also clear that the security guard services were provided from 2000 to 2004. The ledger accounts of the respondent-company had also been placed on record to show and substantiate the plea that it was a running account. These accounts show that the last payment of Rs. 1,50,600 was made by cheque on October 27, 2003 in relation to bill No. 203440 and thereafter no payment has been made by the appellant-company to the respondent-company. The appellant-company has also placed on record, even in winding up petition, their accounts to show that each bill was being treated as separate transactions between the parties and payment against that bill was being made. The respondent-company also produced before us the photo copies of the receipts issued by them in favour of the appellant-company wherein they referred to particular payments and stated that full payment was made against the bill and/or that the monthly amount due and payable by the appellant-company.

In order to meet the plea that the claim is barred by time, the respondent-company had submitted that there was running account between the parties and as such, the plea of limitation taken by the appellant-company was without any substance. At this stage, we may usefully refer to paragraph 31 of the petition which reads as under:

That there are continuous transactions between the petitioners and the respondents. That all the transactions are reflected in the books of accounts of the petitioners. That the transactions are not disputed. Repeatedly, part payments have been received. Services have been provided. Accordingly, bills have been issued. The same are reflected in the books of account. As per the petitioners'' books of account as on August 31, 2004 a sum of Rs. 59,86,149.23 is due and payable by the respondents to the petitioners. The books of account and the amount payable by the respondents to the petitioners was not disputed till the winding up notice issued by the petitioners. That the winding up notice was issued on February 3, 2006. In the circumstances, the petitioners claim is within the period of limitation and not barred by law of limitation.

We have already noticed that the statement of account filed on behalf of the respondent-company does not show any credit payment after October, 2003 though it claims to have raised number of bills thereafter on the basis that it was a running account of mutual interest. The payment was also made in the court under the directions of the court for a sum of Rs. 5,35,791. Thereafter, except service of the legal notice and reply thereto, there is no correspondence between the parties which would substantiate that there was mutuality of account and any payments had been made on behalf of the appellant-company. The learned single judge in the impugned judgment noticed that neither there is specific denial of the petitioner''s claim nor a specific defence is taken on the point of limitation in the reply affidavit. Thus, the plea of limitation was liable to be rejected. It was further noticed that part payment in lump sum from time to time were made and not against the bills. On this premise, the learned company judge rejected the plea of limitation. These findings are challenged on the ground that they are contrary to the record and in fact, are not supported even by the documents produced on behalf of the respondent-company. We find some substance in the submission made. Certainly, evidence was required to show that there is mutuality in the running account and that the payments were not made bill to bill but on account. It has already been noticed that as per the statement filed by the appellant-company, the payments were being made against the bill as demonstrated by exhibit 6. That the statement of account does not show any payment or raising of a bill subsequent to August, 2004 while the statement of account filed by the respondent-company before this Court again reflects no payment of credit after October, 2003. These were the matters which ought to have been established by leading cogent oral and documentary evidence and the plea could not be rejected summarily in the manner in which it has been rejected under the impugned order. Furthermore, the order passed by the Division Bench of this Court in Civil Writ Petition No. 3050 of 2003 also to a great extent supports the plea/defence taken by the appellant-company that it is not sham but is bona fide. In the said writ petition, the respondent-company was a party and no pleadings even were filed on their behalf to show that the amounts were due to the respondent-company from the appellant-company. On the contrary, parties to the writ petition felt satisfied by the order of the court in directing the appellant-company to make a payment of Rs. 5,32,791.

It is a settled principle of law that, in a winding up petition, unless the disputes raised are without substance, it must be apparent from the record that, before the winding up petition is admitted, the company is unable to pay its debt. The petition for winding up cannot be equated with a petition simplicitor for recovery of money. A Division Bench of the Delhi High Court in the case of the Bank of Nova Scotia v. RPG Transmission Ltd. Company Appeal No. 2 of 2003 with Company Appeal No. 34 of 2004, decided on November 23, 2004 - since reported in [2006] 133 Comp Cas 172 - held as under (page 185 of 133 Comp Cas):

To the same effect is the decision of the learned single judge of the Kerala High Court in The Industrial Credit and Investment Corporation of India Limited and etc. Vs. Vanjinad Leathers Ltd. and etc., . A Division Bench of the Calcutta High Court decided the case of Maxlux Glass P. Ltd. v. ICICI Ltd. [2002] 1 BC 182 wherein a similar plea was raised as to whether the company court under the Companies Act will have jurisdiction to entertain a petition filed by the bank for winding up of a company. After considering the provisions of Sections 17, 18 and 34 of the RDB Act and Sections 433 and 434 of the Companies Act and decisions rendered by different courts including that of Supreme Court, it was held by the Division Bench of the Calcutta High Court in paragraph 26 as follows (page 191):

...filing of a petition under Sections 433 and 434 of the Companies Act, 1956 before the company court cannot be said to be inconsistent with the provisions of the Act of 1993. Once it is held that the petition is not only for the recovery of debts but they are more than that as mentioned above then in that case it cannot be said that the jurisdiction of the company court is ousted by virtue of Section 34 read with Sections 17 and 18 of the Act of 1993. Had it been a case where the petition was filed for recovery of debts only then perhaps the arguments raised by learned Counsel for the appellant would derive support from the decisions given in the case of Allahabad Bank Vs. Canara Bank and Another, , but it has been the consistent view of the apex court that the petitions filed under Sections 433 and 434 of the Companies Act are not petitions for mere recovery of debts then in that case the provisions contained in the Act of 1993 cannot prevent the banks or financial institutions in approaching the company court for an order of winding up.

In paragraph 29, it was held that when the matter is closely examined with reference to both the Acts, it appears that the provisions of Section 433(e) has been interpreted by their Lordships in a number of decisions that such petitions under Sections 433 and 434 of the Companies Act, 1956 are not merely for recovery of debts and it is meant for the benefit of the public at large that such institutions who are unable to pay their debts should not be allowed to function for public purpose. Accordingly, it was observed that the petitions filed under Sections 433 and 434 of the Companies Act are not inconsistent with the provisions of the RDB Act rather both the provisions of the Acts can co-exist without doing any harm to the provisions of the RDB Act.

Wherever the disputes raised are bona fide and, prima facie, on the basis of the record, it cannot be assumed that the company is in debt and has failed to repay or is unable to pay its debt despite service of a legal notice.

The principles relating to winding up of a company in terms of Section 433 of the Act has received a consistent interpretation by the courts of law right from the judgment of the Supreme Court in Madhusudan Gordhandas and Co. Vs. Madhu Wollen Industries Pvt. Ltd., . In Madhusudan''s case, while discussing the impact of improper motive for filing such a petition, the Supreme Court also enunciated the principles for winding up of the company as under (page 131):

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 see A Company In re [1894] 2 Ch. D 349 : [1894] 94 SJ 369 (Ch. D). Where, however, there is no doubt that the company owes the creditor a debt entitling him to a winding up order but the exact amount of the debt is disputed the court will make a winding up order without requiring the creditor to quantify the debt precisely see Tweeds Garages Ltd. In re [1962] 32 Comp Cas 795 (Ch. D) : [1962] Ch. 406. The principles on which the court acts are first that the defence of the company is in good faith and one of substance, secondly, the defence is likely to succeed in point of law and thirdly the company adduces prima facie proof of the facts on which the defence depends.

Another Rule which the court follows is that if there is opposition to the making of the winding up order by the creditors the court will consider their wishes and may decline to make the winding up order. u/s 557 of the Companies Act, 1956 in all matters relating to the winding up of the company the court may ascertain the wishes of the creditors. The wishes of the shareholders are also considered, though, perhaps, the court may attach greater weight to the views of the creditors. The law on this point is stated in Palmer''s Company Law, 21st edition, page 742 as follows:

This right to a winding up order is, however, qualified by another rule, viz., that the court will regard the wishes of the majority in value of the creditors, and if, for some good reason, they object to a winding up order, the court in its discretion may refuse the order.

The wishes of the creditors will however be tested by the court on the grounds as to whether the case of the persons opposing the winding up is reasonable; secondly, whether there are matters which should be inquired into and investigated if a winding up order is made. It is also well settled that a winding up order will not be made on a creditor''s petition if it would not benefit him or the company''s creditors generally. The grounds furnished by the creditors opposing the winding up will have an important bearing on the reasonableness of the case see P. & J. Macrae Ltd. In re [1961] 31 Comp Cas 424 (CA) : [1961] 1 All ER 302.

In the present case the claims of the appellants are disputed in fact and in law. The company has given prima facie evidence that the appellants are not entitled to any claim for erection work, because there was no transaction between the company and the appellants or those persons in whose names the appellants claimed the amounts. The company has raised the defence of lack of privity. The company has raised the defence of limitation. As to the appellants, claim for compensation for use of shed the company denies any privity between the company and the appellants. The company has proved the resolution of the company that the company will pay rent to Ravi Industries for the use of the shed. As to the three claims of the appellants for invoices one is proved by the company to be utterly unmeritorious. The company produced a receipt granted by the appellants for the invoice amount. The falsehood of the appellants'' claim has been exposed. The company however stated that the indebtedness is for the sum of Rs. 14,850 and the company alleges the agreement between the company and the appellants that payment will be made out of the proceeds of sale. On these facts and on the principles of law to which reference has been made the High Court was correct in refusing the order for winding up.

This view has been reiterated by the Supreme Court in the case of Dolphin International Ltd. Vs. Gavs Laboratories (P) Ltd., .

In the case of Naresh Fabs Vs. Gudiya Exports P. Ltd., the court has cautioned in relation to the exercise of the winding up jurisdiction by the court and held as under (headnote):

It is necessary for the court to exercise caution in dealing with claims 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 defence in which there is substance or legitimate internal reasons of temporary lack of liquidity to meet its immediate demands. Where a company has a substantial defence 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 defence, while the dispute with regard to the other is neither made in good faith nor based on substantial defence, 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 claim, and the imperative that the proceedings are not allowed to become an instrument of illegitimate pressure.

In the case of the Pradeshiya Industrial and Investment Corporation of U.P. Vs. North India Petrochemical Ltd. and Another, , the Supreme Court reiterated the principle that the machinery for winding up of a company cannot be utilised merely as a means of realising of the debt. The court has to determine the correctness of the debt and inability of the company to pay such a debt despite notice. A party is expected to elect its remedy in terms of filing of a petition for winding up of the company as opposed to filing of a suit for such recovery. This election is a conscience exercise of decision by a person who invokes the remedy of filing petition for winding up and thus, the burden is upon a person approaching for such relief to establish the ingredients of Section 433 of the Companies Act.

In the present case, the defence raised by the appellant-company was bona fide and cannot be said to be a sham defence taken in abstract, de hors the correspondence between the parties. Most of the payments were made against bills or at least for the dues relatable to the month in which the security guards services were provided. The photo copies of the receipts, seen in the light of the statement of account and correspondence exchanged between the parties and the fact that the appellant-company had disputed at the very outset their liability towards any debt and in fact had raised claims against the respondent-company in reply to the legal notice served upon the appellant-company in terms of Section 434 of the Act are indicative of the fact that the defence raised by the appellant-company is supported by prima facie material and, therefore, is bona fide. The legal and factual issues raised by the appellant-company show bona fide disputes in relation to the debt claimed by the respondent-company. We have noticed 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 to exert pressure on the other side would tantamount to improper exercise of special jurisdiction and as such would not be liable to be admitted. The admission of the petition and consequential appointment of a liquidator jeopardizes the interests of the company to a great extent. Winding up of a company would even amount to a civil death of the company. Wherever the company has not been able to show any bona fide dispute to an apparently payable debt, the matters may be different. But where there are disputes raised bona fide and that too of a serious nature and parties would have to lead complex evidence, documentary and oral, to substantiate their claim or counter claim, it may not be proper to admit the company petition. The respondent-company sat quiet for a considerable time, i.e., from the year 2004 and served the legal notice after a lapse of nearly two years, i.e., February 3, 2006, and the petition for winding up was filed in November 2006. It is not even the case of the respondent-company in its pleading that the appellant-company is incapable of paying its debts stricto sensu. In response to the legal notice served on the appellant-company, the company had disputed the claim. There is no document on record to show that the appellant-company had even admitted the debt payable to the respondent-company. Once a bona fide dispute is raised by the company which appears to be genuine, the order of winding up should not be passed. The previous litigation between the parties also indicates that the stand taken by the company in the winding up petition is not without any basis. The basic defence raised in the winding up petition is bona fide. Of course, we are not commenting upon the counter claims raised by the appellant-company. They appeared to be vague but that itself would not be a sufficient ground to reject the principal plea of the appellant-company which, in our opinion, raises a bona fide dispute. In the case of Pradeshiya Industrial and Investment Corporation of Uttar Pradesh v. North India Petro Chemical Ltd. [1994] 79 Comp Cas 835 the Supreme Court had clearly spelled out the principle that the jurisdiction u/s 433(e) of the Act is discretionary and there must be a debt due and the company must be unable to pay the same. A debt under this Section must be determined for a definite sum of money payable. It is also evident that the discretion of the company court under this provision is normally guided by the principles, viz., (i) that the defence of the company is in good faith and is one of some substance; (ii) the defence is likely to succeed in a point of law; and (iii) the company produced prima facie proof of the facts on which the defence depends.

Examining the factual matrix of the present case in the light of the above principles, we have no hesitation in coming to the conclusion that these principles have not been correctly applied by the court in admitting the winding up petition as the appellant-company had raised a bona fide dispute which can more appropriately be gone into by leading cogent and detailed documentary or oral evidence by the parties. It would be difficult to determine these questions prima facie on the basis of the documents placed on record.

As a result of the above discussion, we allow this appeal and set aside the impugned order dated November 22, 2007. The respondents are at liberty to take such other steps as are permissible to them in accordance with law. No order as to costs.