Fibex Inc. vs A.B.K. Publications Ltd.

Krishna Saran Shrivastav, J.—This is an application under Sections 433(e), 434(1)(a) and 439(b) of the Indian Companies Act, 1956 (for short, "the Act"), for winding up the respondent-company.

The admitted facts of the case are that on June 5, 1996, the respondent-company had placed an order for purchasing 2,000 mts. of newsprint. On June 11, 1996, the respondent-company had requested the petitioner to arrange supply of the goods on credit. The newsprint ordered to be purchased was to be supplied in three consignments namely 0094A for 750 mts., 0094B for 750 mts. and 0094C for 500 mts. The consignment 0094A for 750 mts. of newsprint was settled at US$ 530 per mts. amounting to US$ 397500 equivalent to Rs. 1.45 crores. Sanghi Polyesters had executed a deed of guarantee in favour of the petitioner-company. The ship carrying the consignment reached the Mumbai port on August 15, 1996. The consignment was delivered to the respondent-company from August 16, 1996, to August 26, 1996. The amount of Rs. 1.45 crores was agreed to be paid by the respondent-company on or before August 15. 1996, But after negotiations, the petitioner-company had agreed for payment upto September 15, 1996. On October 8, 1996, the respondent-company had paid US$ 128451.86 towards the price of the goods and US$ 2068.93 towards interest and bank charges. The respondent-company had consumed the newsprint supplied to it weighing 750 mts. The consignments 0094B for 750 mts. and 0094C for 500 mts. had arrived at the Mumbai port but the petitioner-company had sold the same to other persons. On October 21, 1996, the petitioner-company demanded the balance amount of goods sold on credit and finally on November 19, 1996, sent a notice u/s 434(1)(a) of the Act for the payment. On December 15, 1996, the respondent-company had replied denying the claim of the petitioner-company. It is also an admitted fact that the petitioner-company has instituted summary Suit No. 980 of 1997 against the respondent-company and its guarantor Sanghi Polyesters Limited in the civil court of Ahmedahad, for the recovery of the balance amount of the goods supplied on credit, for interest and damages for breach of the contracts 0094B and 0094C amounting to Rs. 1,04,23,419 and it is pending there.

The case of the petitioner-company, in brief, is that the agreement 0094B for supply of 750 mts. and the agreement 0094C for supply of 750 mts. of newsprint were separate contracts. The respondent-company has failed and neglected to pay the balance price of the goods sold on credit. The respondent-company has lost its substratum and, therefore, it is liable to be wound up. It has also been pleaded that the petitioner-company had to sell 1,250 mts. of newsprint at the rate of US$ 514 per mts. which was a lower price as compared to the rate at which the respondent-company had agreed to buy the same from the petitioner-company. Therefore, it had to suffer substantial loss due to breach of the contract. The petitioner-company had to sell US$ 1,250 mts. of newsprint to others because of the failure of the respondent-company to make payment for the purchase of 750 mts. of newsprint covered under the agreement 0094A.

The respondent-company has denied its liability to pay the dues. It is alleged that there was a single contract for supply of 2,000 mts. of newsprint though it was in three parts, that is 0094A, 0094B and 0094C, all dated June 11, 1996. The price for supply of 750 mts. of newsprint under Part-B of the contract 0094 was agreed at the rate of US$ 516 per mt. The estimated time of delivery of the cargo in India was August 7, 1996. The petitioner-company had also sent the documents to the respondent on July 25, 1996, but it had committed breach of the contract by demanding a higher price that is US$ 530 per mts. for the second lot of 750 mts. of newsprint. The respondent-company through its letter dated August 31, 1996, had informed the petitioner that the newsprint supplied was giving lot of problems during running, print quality was getting affected and though the brightness was good, fluff was more. Thus, specific complaint with respect to the quality of the newsprint supplied was made to the petitioner-company in accordance with Clause 7 of the contract and within the 45 days'' period contemplated for making such protest. The petitioner never made any attempt to rectify the defect. The notices were suitably replied. It has denied the allegation that newsprint covered under Parts-B and C of the contract 0094 had to be withdrawn on account of the non-payment of the balance price of the first lot. Though the petitioner had extended time for payment upto September 15, 1996, it had sold the second and third lots in the month of August, 1996, itself. Therefore, the respondent-company is entitled to claim damages. The questions in controversy can be gone into in O. S. No. 980 of 1997 pending on the file of the civil court of Ahmedabad and, therefore, the company petition is liable to be dismissed.

It is too well settled that, where there is a bona fide dispute put forward by the company, it would be a valid excuse for non-payment and inability to pay will not be inferred, Where the company produces prima facie proof of facts on which the defence depends and there is likelihood to succeed in point of law, it cannot be said that the company has neglected to pay within the meaning of Section 434(1)(a) of the Act. Bona fide dispute implies the existence of a substantial ground for the dispute raised.

The question is whether the respondent-company has succeeded in establishing that the claim for non-payment of the debt in question is bona fide disputed by it ?

It has been urged on behalf of the petitioner-company that, under the agreement 0094A, the respondent-company is liable to pay an amount of US$ 400978.68 including interest because it has consumed the newsprint weighing 750 mts. supplied to it and the dispute regarding the poor quality of the newsprint is an afterthought. Though the shipment was delayed, the respondent-company never denied to pay the price of the newsprint on the ground of delayed delivery. The respondent-company through several letters had sought extension of time for payment of the dues. The agreements 0094B and 0094C are separate agreements and the agreements as produced and claimed by the respondent-company are not genuine documents. It has further been urged that action against the respondent-company can be taken simultaneously in the company court as also in the civil court.

On the other hand, it has been submitted by learned counsel for the respondent-company that, on July 12, 1996, in a meeting held at Bhopal, between the representatives of the petitioner-company and the respondent-company, the price of the newsprint to be supplied under the contracts 0094B and 0094C was reduced to US$ 516 per mt. and this fact was communicated to the petitioner-company by its letter dated July 15, 1996, but the petitioner-company in answer to this letter sought to go back from the agreement reached at Bhopal, and claimed that the price of the newsprint at the rate of US$ 516 per mts. was settled for future transactions only. The petitioner-company through fax dated July 17, 1996, informed the respondent-company that it would seek advice of its principal but later no reply was sent by the petitioner. Thereafter, on July 25, 1996, the respondent-company prepared the documents at US$ 516 per mts. as had been agreed upon at Bhopal, and despatched the same to the petitioner. The respondent again on July 27, 1996, confirmed this rate. The contract 0094B is not a fabricated document, The petitioner-company had wrongly sold the newsprint covered by contract 0094B in black market and thus committed breach of the contract and, therefore, the petitioner-company is answerable for the damages arising out of this contract particularly when the petitioner-company had extended time for payment of the price of the newsprint of the first lot up to September 15, 1996, which newsprint was defective. These questions can be gone into in the civil court, Ahmedabad, wherein O.S. No. 980 of 1997 is pending. Reliance has been placed on the cases of State Trading Corporation of India Ltd. v. Punjab Tanneries Ltd. [1989] 66 Comp Cas 634 (P & H) and K. Appa Rao and Others Vs. Sarkar Chemicals Pvt. Ltd.,

As noted above, it is an admitted fact that, under the contract 0094A, newsprint weighing 750 mts. was purchased by the respondent-company on credit at the rate of US$ 530 per mt. The respondent-company has also furnished bank guarantee of Sanghi Polyesters Ltd. The respondent-company had received the goods between August 16, 1996, to August 26, 1996, and had consumed the whole newsprint. It is pertinent to note that, at no point of time, the respondent-company had specifically claimed damages on account of delayed delivery of goods.

The respondent-company relies on the letter dated August 31, 199G. In this letter, it is mentioned that, the newsprint supplied was giving a lot of problems. During running and printing, quality was getting affected, that though the brightness was good, fluff was more, it was taking lot of ink and breakages were more. The paper was very soft and after printing, while reading it was getting folded causing lot of inconvenience to the readers. A request was made to depute a person from the factory to advise them as to how to make use of it. The receipt of this letter is denied by the petitioner-company. The respondent-company had sent a letter on September 2, 1996. The second letter was sent on September 6, 1996, the third letter on September 12, 1996, and the fourth letter was sent on September 14, 1996. But it is pertinent to note that in none of these letters, any reference has been made regarding the alleged letter dated August 31, 1996. No acceptable documentary proof of sending the letter dated August 31, 1996, has been filed by the respondent-company. It is noteworthy that in the letter dated September 2, 1996, though there is a reference to the fax message dated August 30, 1996, no grievance regarding the alleged quality problem of the newsprint has been made in it. Under these circumstances, it appears highly doubtful that the respondent-company had sent the letter dated August 31, 1996, alleging poor quality of the newsprint supplied to it under the agreement 0094A.

In the letter dated September 6, 1996, it is alleged that the poor quality of the newsprint received had affected their publication quality. But no details have been given in it. It has not been claimed in this letter that the defective newsprint should be replaced. On the other hand, the respondent-company has requested the petitioner-company to allow them time for making the payment of the bills with interest. For the first time, in the letter dated September 12, 1996, the respondent-company has stated in detail about the defects of the newsprint, yet, it did not ask the petitioner-company to replace the unused defective newsprint. Then, on September 14, 1996, the defects in the newsprint have been mentioned in detail, but, at the same time, it has been specifically mentioned in it that the payments would be released as soon as the financial position improves and it was requested by the respondent-company that the petitioner-company should wait till then for payment. The respondent-company through its letter dated October 5, 1996, read with letter dated October 8, 1996, has paid an amount of US$ 128885.40 as also interest for 52 days amounting to US$ 1424.18 and bank charges of US$ 211.11, total US$ 130520.69 and requested for some more time for payment of the bills, but has not claimed any adjustment by way of damages due to the defective newsprint supplied under the contract 0094a. The respondent-company has not filed any matter printed on the newsprint supplied under this contract in an attempt to demonstrate the allegations made by it regarding the poor quality of the newsprint as alleged in the letters dated September 12, 1996, September 14, 1996, and in the counter.

From what is stated above, I find that the respondent-company has accepted the consignment of 750 mts. of newsprint between August 16, 1996, to August 26, 1996, without protest regarding the delayed delivery, that it has purchased the said goods on credit, that though the respondent-company had complained about the poor quality of the newsprint in its letters dated September 6, 1996, September 12, 1996, September 14, 1996, and October 5, 1996, it never claimed any amount of compensation for such defective supplies but on the other hand had throughout requested the petitioner-company for time to make payment of the bills with interest and ultimately had paid the aforementioned amount of US$ 130520.69 against principal and bank charges and interest in part against the price of 750 mts. of newsprint purchased by it on credit, that the respondent-company never asked the petitioner-company for substitution of the alleged defective newsprint, but on the other hand, has consumed the whole quantity of the newsprint, that it has not filed in the court any printed matter on the newsprint in an attempt to show the alleged defects, that the respondent company has placed reliance on a highly doubtful letter dated August 31, 1996, and that for the first time, vague allegation regarding the poor quality of the newsprint was made through letter dated September 6, 1996. It is true that, in the letter dated October 5, 1996, the words "without prejudice to our rights" have been mentioned, but as noted above, no amount of compensation has been claimed to be adjusted against the defective newsprint supplied, but on the other hand, some more time for payment of the bills has been sought and when actually the payment was made through letter dated October 8, 1996, no such right has been reserved. Therefore, merely mentioning the words "without prejudice to our rights" is of no help to the respondent-company. Under these circumstances, it is difficult to accept the contention of learned counsel for the respondent that the respondent-company has got a bona fide dispute regarding the poor quality of the newsprint supplied to it on credit.

The petitioner-company claims that the price of the newsprint to be supplied under contracts 0094B and 0094C was at the rate of US$ 530 per mts. The respondent-company claims that, as per the contract No. 0094B, dated June 11, 1996, a xerox copy of which is at page 5 of the material papers supplied by it, the price was settled at US$ 516 per mts. The petitioner-company challenges the genuineness of this document. Had the price been settled at US$ 516 per mts. as on June 11, 1996, the question of reduction of the price to US$ 516 per mts, on July 12, 1996, in the meeting held at Bhopal would not have arisen as stated in para. 3 of the additional counter filed by the respondent on March 28, 1998. The allegation made in para, 3 of this counter belies the price shown in the xerox copy of the agreement 0094B referred to above. It is true that, in the letter dated July 15, 1996, the respondent-company had stated that the price for 750 mts. of newsprint to be supplied subsequently was at the rate of US$ 516 per mts. and reference has been made to its fax No. 388, but in reply to fax message No. 388 of the respondent-company, the petitioner through its fax dated July 15, 1996, had informed the respondent-company that the price of US$ 516 per mts. had been fixed for new orders and it could not be and would not be from the retrospective date. Thus, it is evident that the petitioner-company did not agree for a reduction of rate for supplies to be made in pursuance of the contracts 0094B and 0094C. Yet, the petitioner-company had mentioned the price for the next 750 mts. consignment at US$ 516 per mts. in its letters dated July 17, 1996, and July 27, 1996, and the petitioner-company had again denied through the fax message dated July 30, 1996, for the reduction in the price for the second lot as mentioned in the letter of the respondent-company dated )uly 27, 1996. It is apposite to mention that the respondent-company in its letter dated August 2, 1996, had very specifically mentioned that it would accept the terms for the next 750 mts. only at US$ 516 per mts. CIF, Mumbai, 60 days from the date of bill of lading, free of interest and would not accept any other terms and would accept the documents only if they were prepared on the above lines and not anything else. From this, it can be safely inferred that the respondent-company was not at all prepared to accept the lot of next 750 mts. of newsprint at the originally agreed rate of US$ 530 per mts. and had insisted the petitioner-company sell the newsprint at the reduced rate of US$ 516 per mts. which was not acceptable to the petitioner-company. The alleged agreement dated July 12, 1996, appears to be ah oral agreement. These facts prima facie show that the petitioner-company cannot be blamed for non-delivery of the next 750 mts. of newsprint at the rate of US$ 516 per mts. and it prima facie appears that the respondent-company was not put to any loss for the non-supply of the remaining quantity of the newsprint for the simple reason that it had refused to purchase the same at the originally agreed price of US$ 530 per mts. The respondent-company had made this fact clear on August 2, 1996. Therefore, the contention of learned counsel for the respondent-company that after extension of time up to September 15, 1996, the petitioner-company was wrong in selling the next lot of 750 mts. of newsprint in the last week of August, 1996, itself has no force. It is also noteworthy that the respondent-company did not pay the entire amount of the newsprint supplied under the contract 0094A even after September 15, 1996, and, therefore, it was wholly unnecessary for the petitioner-company to wait till September 15, 1996, for selling the next 750 M.T. of newsprint.

For the foregoing reasons, I reach the conclusion that the respondent-company has failed to establish prima facie that it has got a valid right to put a counter claim on the strength of breach of contract. Therefore, whether there was a single contract for 2,000 mts. of newsprint to be supplied in three instalments or whether each such contract that is 0094A, 0094B and 0094C, was a separate contract in itself, are questions which do not appear to be material to be decided in these proceedings.

In the case of State Trading Corporation of India Ltd. Vs. Punjab Tanneries Ltd., it appears that the State Trading Corporation had filed a civil suit in the year 1987, and, thereafter, had filed in the year 1989, an application for winding up the company u/s 433(e) of the Act. Punjab Tanneries Limited had also made a counter-claim in that suit. Under these circumstances, a learned single judge of the Punjab and Haryana High Court has held that when a civil suit for recovery of a disputed debt was already pending in the civil court, the machinery for winding up will not be allowed merely as a means for recovery of the debt due from the company. Such is not the case here. In the case on hand, the suit has been filed subsequent to the filing of this petition against the respondent-company as also its guarantor Sanghi Polyesters Limited, probably because the guarantor is not a party in these proceedings as also to save limitation. It is also pertinent to note that, in the civil suit filed by the petitioner-company, damages for breach of the contract for the next two supplies totalling to 1,250 mts. of newsprint have also been claimed, whereas in the present company petition, only liquidation of the respondent-company has been sought for the non-payment of, neglect and refusal to pay the unpaid price of the goods sold on credit. Thus, the case of State Trading Corporation of India Ltd. Vs. Punjab Tanneries Ltd., is of no help to the respondent-company. It is not an invariable rule of law that, where a suit for the recovery of a debt on the same cause of action is pending in a civil court, the petition for winding up does not lie. I am, therefore, unable to accept the contention of learned counsel for the respondent-company that the proceedings for winding up need not be entertained merely because a civil suit is pending for the recovery of the debt.

In the case of K. Appa Rao and Others Vs. Sarkar Chemicals Pvt. Ltd., a learned single judge of this court had found that the defence of the company that C. Ramachandra Rao, was never authorised to receive deposits or execute receipts on behalf of the company because he was never a shareholder or director of the company, appeared prima facie tenable and on these facts had held that the winding up shall not be a more expedient substitute for recovery of monies. In all cases where such actions are based on refusal or inability of the company to pay u/s 433(e) of the Act, the court has to be satisfied, at least prima facie, that the liability does exist and the refusal or inability of the company is made out ; in cases where the company has a prima facie sustainable defence or a bona fide dispute of its obligations to discharge the alleged debts or liabilities, the court may not entertain proceedings for winding up much less order winding up. This case is distinguishable on facts because, as noted above, I have found prima facie that the defence of the respondent-company does not appear to be a bona fide or a probable defence.

The question whether the respondent-company has lost its substratum or it has become commercially insolvent is not a question to be decided at the time of admission of the petition, but it may be decided during enquiry.

On considering the aforementioned facts and circumstances of the cases, I am of the opinion that the petition deserves to be admitted. Therefore, the petition is admitted. It is directed that advertisement shall be made in the prescribed form and shall be published in one issue of Deccan Chronicle of the Hyderabad edition and one issue of the Telugu daily, Eenadu, as per rules.