In Re: C.A. Galiakotwala and Co. Pvt. Ltd.

Rele, J.—This company petition for winding-up raises some interesting questions of law.

In regard to the defence by way of counter-claim taken up by the company, Shri Subramaniyam has submitted that there is no defence to the petition on account of the claim by the company which is not fructified into a decree. Secondly, that an award in favour of the company and against the petitioning creditor is not a valid defence to the winding-up petition. Thirdly, to be a defence to a winding-up petition, it must arise out of a substantive right to a cross-claim and, according to Shri Subramaniyam, a substantive right must be a right which arises out of some contract. It must be a right arising out of a provision of law like s. 59 of the Sale of Goods Act. In the absence of a substantive right to a cross-claim, there is no defence to a winding-up petition. He has then contended that there is no provision in the Arbitration Act for a cross-claim. His next contention is that there is no stay of winding-up proceedings and an application for the stay of winding-up proceedings was dismissed and hence the winding-up proceedings must necessarily follow all principles analogous to the principles of res judicata. Shri Subramaniyam has also submitted that the award decree obtained by the petitioning creditor was on one contract while the award in favour of the company was in respect of a totally different contract and there being two different contracts, there could be no counter-claim to a winding-up petition and, consequently, no defence to the winding-up petition.

In order to appreciate the contentions of Shri Subramaniyam, it would be necessary to state a few facts. It appears that the petitioning creditor was appointed as the commission agent of the company under two agreements both dated March 24, 1975, bearing contract Nos. 29 and 30 of 1975. There were also dealings of sale and purchase of textile goods between the petitioning creditor and the company under two contracts dated March 15, 1975, and March 20, 1975. Disputes and differences arose between the parties in respect of all those contracts and the disputes and differences were referred to the arbitration of the Cotton Textile Export promotion Council.

Shri J. M. Shah and Shri Tejkumar Sethi were appointed as arbitrators to arbitrate upon the disputes between the parties.

In regard to the sale of goods, the learned arbitrators passed an award in favour of the company and against the petitioners for Rs. 55, 000. In regard to the commission agency contract, the learned arbitrators awarded a sum of Rs. 26,083.83. These two awards came to be passed because there were two separate references. However, both these awards were passed on one and the same day, viz., November 30, 1975. The company did not challenge the award and, consequently, a decree in terms of the award in favour of the petitioning creditor was passed on February 4, 1979, by the City Civil Court in which court the award was filed. The award in favour of the company was filed in this court and the petitioners raised objections to the award being Petition No. 48 of 1979. That petition is expedited and it is pending.

On the strength of the decree in terms of the award, the petitioners sent a demand notice dated August 1, 1980. This was replied to by the company by their letter dated August 5, 1980, stating that the petitioners were not entitled to execute the decree because the company has a claim under award for Rs. 55,000. The petitioners, in its rejoinder dated August 6, 1980, denied that they were not entitled to execute the decree. On August 29, 1980, the company filed Petitioner No. 111 of 1980 for stay in the Award Petition No. 48 of 1979, and for expediting the hearing of Petition No. 48 of 1979; for an order and injunction restraining the petitioners from executing the decree or from filing a winding-up petition. This petition was dismissed, excepting that, Petition No. 48 of 1979; for setting aside the award was expedited. The company also made an attempt for a stay of execution of the award by taking out a Chamber Summons on August 12, 1980, in the said City Civil Court being Chamber Summons No. 717 of 1980. By order dated April 13, 1981, the said Chamber Summons was dismissed. The company preferred an appeal against the said order and the appeal also was dismissed. On June 13, 1981, the petitioners served upon the company a statutory notice under s. 434 of the Companies Act, 1956. This was replied to by the company by their letter dated June 19, 1981, stating that negotiations for settlement were in progress and hence the company has not preferred any appeal. This was denied by the petitioners by their letter dated June 26, 1981, and thereafter, on July 22, 1981, the petitioners filed the petition for winding-up.

Shri Subramaniyam has leaned rather heavily upon the decision of Vimadalal in Company Petition No. 1 of 1974, decided on March 27, 1974, Crompton Greaves Ltd., In re in support of his contentions stated above. In that case, the petitioners had paid to the company Rs. 60,500 on his tender for removal of the scrap accepted by the company. However, the company cancelled the contract and wrote to the petitioner that he should collect the amount from the company. The company, however, failed to pay the amount and, ultimately, the petitioner in that case was driven to give to the company the statutory notice under s. 434(1). It was, therefore, that the company for the first time raised a dispute that the petitioner was liable to pay to the company an amount of about Rs. 2.5 Lakhs, on an allegation that the petitioner had practiced fraud systematically upon the company by producing manipulated and false weighment slips. It was on these facts that Vimadalal J. considered whether the company had a reasonable cause for refusing to pay the claim of the petitioner. While considering the reasonable cause, Vimadalal J. considered whether the company had neglected to pay the amount to the petitioner within the meaning of s. 434(1)(a) of the Companies Act, 1956. There are some observations of Vimadalal J. on which Shri Subramaniyam had learned very heavily and those observations are that :

"Only if it has a substantive right to withhold payment or to claim a deduction or extinction of the other person''s claim on that account only, then it can be said that it has a reasonable cause or excuse for not paying the petitioner''s claim."

Shri Subramaniyam has referred to the observations of Vimadalal J. with some emphasis that unless the claim of the petitioner arising out of the one and the same contract is disputed, then alone can the dispute be said to be a bona fide dispute, but where the cross-claim relates to a totally different and independent contract which has nothing to do with the contract on which the petitioner''s claim is based, then it does not furnish a reasonable cause or excuse to the company for non-compliance with the statutory notice.

It must at once be stated that Vimadalal J. has sounded a note of caution towards the end of the judgment and this is what Vimadalal has stated :

"I have, therefore, come to the conclusion that it cannot be laid down as a general proposition that the existence of a cross-claim of the company against the petitioner is a reasonable cause or excuse for non-compliance with a statutory notice u/s 434(1)(a) of the Companies Act."

Therefore, the observations and the findings of Vimadalal J. must be read in the light of these observations and, therefore, those observations must be read on the facts and circumstances of that case. This is more so because Vimadalal J. has quoted with approval the observations of the Calcutta High Court in the case of Bangasri Ice and Cold Storage Ltd. Vs. Kali Charan Banerjee, and this is what Vimadalal J. has stated :

"To the extent to which it is stated in the judgment in the said case, that, in certain circumstances, a counter-claim may provide a reasonable excuse for non-payment by a company of a petitioner''s claim, I have no quarrel with that decision. I do not think it necessary to discuss that decision any further."

The decision of Vimadalal J. must, therefore, be read on the facts and circumstances of that case.

The question that arises for consideration in this petition is whether the defence of the company that it has an award against the petitioners for Rs. 55,000 which is far in excess of the award decreed in favour of the petitioner and, therefore, the company is not liable to pay to the petitioners the said amount of the decree and hence the winding-up petition should be dismissed, is a bona fide defence to the winding-up petition.

Section 434(1)(a) provides :

"434. 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 five hundred 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."

Now, the word "neglected" has not been defined in the Companies Act. However, judicial pronouncements have interpreted the word "neglected" to mean that if there is a refusal to pay without any reasonable cause then it could be said that the company had neglected to pay the amount. The mere omission to pay is not a neglect to pay. If the company bona fide disputes its liability to pay the amount, even though the amount may be a decretal amount, then in that case it cannot be said that the company has neglected to pay within the meaning of s. 434(1)(a). It is all a question of fact as to whether the company has a bona fide dispute and in order to ascertain whether the company has a bona fide dispute to the amount claimed by the petitioning creditor, it would be necessary for the court to consider the facts and circumstances of each case and to come to a decision whether the company has a bona fide dispute to the claim of the petitioner. If there is a genuine cross-claim, then it amounts to this that the claim of the petitioner is a disputed claim and a disputed claim can never be a good subject-matter of a winding-up petition.

In re L. H. F. Wools Ltd. [1969] 39 Comp Cas 934, the observations of Lord Denning In re Portman Provincial Cinemas Ltd. [1964] 108 SJ 581, were quoted with approval. Lord Denning had stated (see p. 938 of 39 Comp Cas) :

"As I understand the law on the matter, it is this : if this is a genuine cross-claim with substance in it, then let it be tried out in the Queen''s Bench Division, this petition must be rejected. But if there no substance in cross-claim, then let the court do justice to the petitioners in this case and not give heed to so insubstantial a cross-claim."

If the claim of the company "overtops" the claim of the petitioner in the petition, the petition must be dismissed.

No other case of this court has been cited before me, but three decisions of the Calcutta High Court have been cited before me which give some guidelines in interpreting the term "neglects to pay" in s. 434(1)(a) of the Companies Act, 1956, which is in the same terms as s. 163(1)(a) of the Indian Companies Act, 1913. In Company v. Rameshwar Singh AIR 1920 Cal 1004, an argument was advanced that the company had not neglected to pay the sum demanded within the meaning of s. 163(1) of the Indian Companies Act, 1913, and the Calcutta High Court quoted with approval the judgment of Sir Jessel M.R. In re London and Paris Banking Corporation [1874] LR 19 Eq. 444; 23 WR 643. In that case, Sir Jessel M.R. stated (p. 446.) :

"Negligence is a term which is well known to the law. Negligence in paying a debt on demand, as I understand it, is omitting to pay without reasonable excuse. Mere omission by itself does not amount to negligence. Therefore, I should hold, upon the words of the statute, that where a debt is bona fide disputed by the debtor, and the debtor alleges, for example, that the demand for goods sold and delivered is excessive and says that he, the debtor, is willing to pay such sum as he is either advised by competent valuers to pay, or as he himself considers a fair sum for the goods, then in that case he had not neglected to pay, and is not within the wording of the statute."

The Calcutta High Court then considered the material before it and came to the conclusion that there was a ground for supposing that there was a bona fide dispute to a substantial part of the debt on which the winding-up petition was based. This decision was followed by another Division Bench of the Calcutta High Court in the case of Bangasri Ice and Bangasri Ice and Cold Storage Ltd. Vs. Kali Charan Banerjee, and the position in law with regard to the disputed debt which has been admirably summed up in Palmer''s "Company Precedents", 17th Edn., Part II. At page 27, it is stated :

"The mere omission of a company to compel with a notice requiring payment of a debt, served pursuant to the above para, is not ''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. It is now well settled that a petition for winding-up with a view to enforcing payment of a disputed debt is an abuse of the process of the court, and should be dismissed with costs. But, of course, if it is shown that the alleged dispute is not a bona fide one, the objection to the petition fails. Thus, it is not uncommon for a company, after again and again begging for time for payment of a debt, to spring on the petitioner, at the last moment, the assertion that the debt is a disputed one. Such a defence is naturally open to great suspicion, and meets with no favour from the court."

The Calcutta High Court, in this case Bangasri Ice and Cold Storage Ltd. Vs. Kali Charan Banerjee, has observed (at p. 616) :

"Now, under certain circumstances, a counter-claim may also amount to a bona fide dispute."

The third case of the Calcutta High Court is In re Bharat Vegetable Products [1952] 22 Comp Cas 62. In this case, an argument was advanced on behalf of the petitioner that the debt cannot be said to be disputed where the debt in substance is admitted, but a counter- claim is set up. This contention did not find favour with the Calcutta High Court. The Calcutta High Court observed (at p. 67) :

"If the counter-claim is good the petitioner having the amount of the counter-claim in its hands ought to satisfy it as a claim to that extent and in that sense its debt is disputed."

I may also refer to the decision of the Allahabad High Court In re Federal Chemical Works Ltd. [1964] 34 Comp Cas 963. The Allahabad High Court held (headnote) :

"In order to raise the presumption u/s 434(1) as to company''s inability to pay its debts, it is not sufficient to show merely that the company has omitted to pay the debt due to the petitioner despite service of the statutory notice : it must be shown that the company has omitted to pay without reasonable excuse. The existence of valid counter-claims would clearly constitute reasonable excuse of non-payment."

The Allahabad High Court has observed that (at p. 965) :

"... the company, by setting up counter-claims which are prima facie valid, has raised bona fide disputes regarding its liability to pay the debts claimed by all three of the petitioners. It has reasonable excuses for non-payment and cannot be deemed unable to pay its debts on account of any legal presumption arising u/s 434(1)."

In the present case, I have been saved the trouble of going through the materials to find out whether the claim is a bona fide claim. The reason is that it is an admitted fact that there is already an ward in favour of the company and against the petitioners for Rs. 55,000. Both these awards on the different contracts were made and published on one and the same day, viz., November 30, 1978. The arbitrators to the two awards were the same arbitrators, Mr. Shah and Mr. Tejkumar Sethi. Ordinarily, what the arbitrators would have done would be to set off the amount found to be due and owing by the company to the petitioner as against the larger amount found to be due and owing by the petitioners to the company and after deducting that amount an award in favour of the company would have been passed. But, it appears that, since there were two separate references, the arbitrators found it difficult to adopt this procedure and, therefore, these two awards have been passed. Undoubtedly, in the present case, there is an award decree in favour of the petitioning creditor. That award decree has not been challenged and it has become final. Even before me in this winding-up petition, the company has not challenged that there is a decree for Rs. 26,083.83 in favour of the petitioners, but what the company states is that the company has an award against the petitioners for a much larger amount, and that is of Rs. 55,000. Therefore, it cannot be said that the company has not a bona fide claim against the petitioners. What is required to be seen is whether the company is liable to pay and in considering the liability to pay, the court must also necessarily consider the liability of the petitioners to pay to the company. It is after all a question of liability of the one to the other and in considering the bona fide dispute to a winding-up petition on the basis of the liability of the company to pay to the petitioners, the court cannot shut its eyes to the fact that the petitioners also are liable to pay to the company, a much larger amount than the amount of the decree they hold. Merely because an appeal is pending and perhaps the award may be set aside, it is not a good reason for me not to hold today that the dispute raised by the company is not a bona fide dispute to the liability of the company. Since it is an admitted fact that there is already an award in favour of the company, the dispute must be held to be a bona fide dispute and, consequently, it must be held that the company had a reasonable cause for not making payment of the decree to the petitioners and further that the company was not negligent within the meaning of s. 434(1)(a) of the Companies Act, 1956, in not making payment of the amount on receipt of statutory notice.

I may now refer to some of the authorities which have been cited before me by Shri Subramaniyam. In Sarkar Estates (Private) Ltd. Vs. Kusumika Iron Works (Private) Ltd. and Others, it was held (headnote) :

"The mere fact that the company has put forward a claim against the decree-holder and the claim is pending adjudication by the court, does not make the claim based on a judgment debt which arises out of a decree passed after contest, a disputed debt."

In that case, an argument was advanced that the company has filed a suit against the respondent company claiming a certain sum, and if that suit, which was pending, succeeded, the appellant company would be entitled to set off the amount of the decree that may be passed against the claim of the respondent company. It was on these facts that those observations have been made by the Calcutta High Court, which are distinguishable on the facts of this case.

The next case is the case of Unique Cardboard Box Mfg. Co. P. Ltd., In re [1978] 48 Comp Cas 599. In that case, it was held that (headnote) :

"It is not correct to say that if there is a decree in favour of a creditor, he must execute the said decree before he can present a winding-up petition on the ground that the company is unable to pay its debts Clause (b) of section 434 of the Companies Act, 1956, is disjunctive and an alternative ground for the deeming provisions u/s 434 of the Act. A creditor has got an option either to execute the decree upon serving a notice u/s 434(1)(a) in respect of the decretal claim or to wait for three weeks after the date of the service of the notice. If the company fails to satisfy the claim, then he can present a winding-up petition. It is now well settled that a winding-up petition is an equitable mode of execution in respect of the claim of a creditor of a company."

There is no quarrel with this proposition. The third case referred to by Shri Subramaniyam is Ko Ku La Ltd., In re [1953] 23 Comp Cas 81. In that case, it was held that (headnote) :

"Judgment-creditors for a very large sum are prima facie entitled ex debito justitiae to a winding-up order and it is impossible to displace that prima facie position without the very strongest proof that the petition is being improperly made use for some ulterior motive. Mere allegation that the judgment was obtained by fraud does not require the court to enquire into its foundation and validity. The allegations must be attended with such particulars as will not only amount to a proper averment in law of fraud but also show a prima facie case of fraud requiring investigation. Even in the case of a charge of collusion it must be shown that the judgment was obtained by collusion. If the petition is allowed to stand over the respondent should undertake to bring an action to set aside the judgment."

This case is clearly distinguishable on the facts of the present case. In the present case, there is already an award in favour of the company and, as already stated above, the non-payment of the amount by the company in compliance with the statutory notice is not on the ground that it has a large claim against the company on award is, in my opinion, a bona fide dispute. Refusal to pay the amount is a bona fide dispute and, therefore, it must be held that company was not negligent in payment of the amount.

In the result, the winding-up petition is dismissed with costs.