Mosenthals Wool and Mohair S.A. Pty. Ltd. vs C.L. Jain Woolens Mills P. Ltd.

Surya Kant J.—The petitioner is a company incorporated under the laws of South Africa and through this petition under sections 433, 434 and 439 of the Companies Act, 1956, it seeks the winding up of the respondent-company on the ground of inability to pay the principal debt of US$ 53,228.15 along with interest at 24 per cent. per annum. The brief facts which are broadly not in dispute may be noticed. The respondent-company is incorporated under the Companies Act, 1956 and its registered office is at Ludhiana (Punjab). The respondent placed an order for supply of 60 bales of Scoured Mohair (Wool), weighing 9,831 kgs. with the petitioner vide purchase Order No. 073/96 dated March 30, 1996. The material was to be supplied at US$ 6.07 per kilogram amounting to US$ 63,228.15. The consignment was to be shipped to Mumbai and the payment was to be made within ninety days from the date of bill of lading. The petitioner shipped the goods from South Africa to Mumbai under the invoice dated September 10, 1996, which were got released by the respondent from Mumbai port. It appears that due to adverse market conditions where Hosiery market had crashed, the respondent could not make payment of the amount due as per the agreed terms and sought extension vide letter dated August 8, 1997 (annexure P5) with a promise to pay US$ 10,000 before September 30, 1997 and the balance amount before December 30, 1997. The respondent after paying US$ 10,000 requested the petitioner vide letter dated January 19, 1998 (annexure P6) to extend the period of payment till April 30, 1998.

The respondent-company, however, did not pay anything towards the balance liability within the extended period also and sent another request dated August 11, 1998 (annexure P7) promising the petitioner to pay the remaining dues as per the following schedule:

US$ 8228.15 in September, 1998

US$ 15000 in December, 1998

US$ 15000 in January, 1999

US$ 15000 in February, 1999

The respondent sent one more letter dated August 31, 1998 (annexure P8) to the Indian representative of the petitioner assuring to remit the balance payment as per the schedule given above.

The respondent, however, did not adhere to the revised schedule too, whereupon the petitioner got a legal notice dated October 4, 1999 (annexure P9) served, calling upon it to pay the balance amount with interest at 25 per cent. per annum from December 10, 1996, onwards, failing which it would be presumed that the respondent was unable to pay the sum so due and would be liable to be proceeded against in a court of competent jurisdiction.

The respondent sent its reply to the legal notice (annexure P10) for the first time taking a plea that the material supplied by the petitioner was not of the agreed specifications nor was it supplied "within the agreed period". The reply claimed that due to an inordinate delay in the supply of material the consignment had to be stored in a rented premises and meanwhile there was a heavy slump in the hosiery market and in the month of September, 1998 when the bales were opened it was "found that the goods contained in the bales were not up to the mark and were not as per the specifications given at the time of placing the order. The goods were found to be of much inferior quality. There was a latent defect in the entire consignment as the goods contained brown, black, dead, discolour and short fibre...."

The petitioner thereafter filed this winding up petition on February 28, 2002, inter alia, alleging that as the respondent is unable to liquidate the outstanding dues and has no means to discharge its debt liability, it is liable to be wound up under the orders of this court.

The respondent-company has filed its written statement taking preliminary objections that (i) the winding up petition is not maintainable; (ii) the verification of the affidavit is not proper and in the format prescribed under the Rules; (iii) the material facts have been concealed by the petitioner as the factum of civil suit filed by the respondent-company for the recovery of the loss of Rs. 10,58,000 suffered by it as it had to sell the consignment sent by the petitioner at Rs. 19.50 per kilogram, have not been disclosed in this petition; (iv) the civil suit was filed on July 10, 1999, i.e., prior to issuance of the winding up notice; and (v) that the present petition is barred by period of limitation. On merits, it has been reiterated that due to delay in the delivery of consignment the respondent suffered a huge loss as the hosiery market in India had meanwhile crashed and when the bales were opened in September, 1998, it was found that the material supplied by the petitioner was defective and not of the quality agreed to between the parties. It has been further averred that against its total loss of Rs. 12,50,000 even after adjusting the price for which the consignment was sold in the Indian market, the answering respondent is entitled to recover a sum of Rs. 10,58,000 from the petitioner, for which a civil suit had already been filed.

The petitioner in its rejoinder has controverted the petitioner''s preliminary objections besides disputing the reply on merits and has reiterated its claim as contained in the petition.

I have heard learned counsel for the parties and gone through the record.

It was urged on behalf of the petitioner that the factum of placing of order by it; supply of material; acceptance of consignment; utilisation of the material sent; terms and conditions including the price rate of the goods are not disputed by the respondent-company. Similarly, the payment of US$ 10,000 or its failure to pay the balance amount; seeking extensions one after the other with the promise to pay the last instalment of US$ 15,000 in February, 1999 or acknowledgments in writing (annexures P4 to P8), too are undisputed facts. The respondent is thus said to have failed to discharge its admitted debt liability, for which it was liable to be wound up. It was urged that the subsequent and afterthought plea(s) taken by the respondent in its reply to the legal notice, namely (i) delay in the delivery of consignment; or (ii) defect in the quality of consignment have no factual basis. These objections are only a cloak to avoid the inevitable consequences.

Learned counsel for the respondent countered the petitioner''s claim and asserted that it is a case where the debt is bona fide disputed which can not be termed as "neglect to pay" within the meaning of section 433(1)(a) of the Companies Act, 1956. He argued that the jurisdiction of this court cannot be invoked to serve as a debt collecting agency as it amounts to abuse of the process of court, as held in the following decisions:

(i) IBA Health (I) Pvt. Ltd. Vs. Info-Drive Systems Sdn. Bhd.,

(ii) German Homoepathic Distributors Private Limited Vs. Deutsche Homeopathic-Union Dhu Arzneimittel GmBH and Co. KG,

(iii Gleason Works Vs. Punjab Tractors Ltd.,

(iv) Dee Print Asia Vs. Curefast Remedies Ltd.,

(v) Madhusudan Gordhandas and Co. Vs. Madhu Wollen Industries Pvt. Ltd.,

(vi) Mediquip Systems Pvt. Ltd. Vs. Proxima Medical System GMBH,

It was argued that the respondent is a running company whose substratum is intact and it is a profit making unit. It has employed a large number of workers, directly or indirectly, and has been timely discharging all its statutory liabilities including taxes. The respondent-company statedly possesses sound financial position and, therefore, should not be ordered to be wound up as held in Tata Iron and Steel Co. Vs. Micro Forge (India) Ltd.,

The principal issue that arises for consideration and which emanates from the preliminary objection taken by the respondent is whether the winding up petition filed by the petitioner is barred by limitation ?

According to the respondent articles 14 and 15 of the Schedule to the Limitation Act, 1963, are relevant to determine whether or not the winding up petition has been filed within limitation as it could be instituted within the period of three years prescribed for filing of civil suit for the recovery of price of goods, sold and delivered with or without fixed period of credit, under both the articles. In the instant case, the goods were delivered on September 10, 1996 and the three years'' period expired on September 9, 1999. As regard the letters dated August 11, 1998 and August 31, 1998 (annexures P7 and P8), it was maintained that even if these letters were taken as the acknowledgment of debt, yet the limitation period of three years expired on August 30, 2001, whereas the winding up petition was filed on February 28, 2002 and that too in a defective format which was finally removed on May 9, 2002, when the petition was re-filed. Reliance is placed on Bhakti Hari Nayak and Others Vs. Vidyawati Gupta, S.C. Agarwala (HUF) and Others,

Learned counsel for the respondent further urged that even for a recovery suit based on the promissory note or the bond payable by instalments including the bond which provides that if default is made in payment of one or more instalments, the whole shall be due, the period of limitation as prescribed by articles 36 and 37 of the Limitation Act is three years. Similarly, the effect of "acknowledgment of debt in writing" within the meaning of section 18 of the Limitation Act in the instant case is to be counted with effect from August 31, 1998, therefore, also the winding up petition is hopelessly time-barred from every angle.

Section 3(1) of the Limitation Act was relied upon to conclude that since the winding up petition was instituted after the prescribed period of limitation, it is liable to be dismissed. The above noted contentions have been strengthened with the aid of the following citations:

(i) Vijayalakshmi Art Productions Vs. Vijaya Productions Pvt. Ltd.,

(ii) Rameswar Prosad Kejriwal and Sons Ltd. v. Garodia Hardware Stores, (2002) 108 Comp Cas 187(Cal)

(iii Hariom Firestock Limited Vs. Sunjal Engineering Pvt. Ltd.,

(iv) Mazboot Packers and Engineers Company Vs. Himachal Pradesh Horticulture Produce Marketing and Processing Corporation Ltd.,

(v) The Jayabharat Credit Limited Vs. Jalgaon Re-Rolling Industries Ltd.,

(vi) State of Kerala and Ors Vs. V.R. Kalliyanikutty and Anr, and

(vii) New Delhi Municipal Committee Vs. Kalu Ram and Another,

The competent court may wind up a company on any of the grounds prescribed u/s 433 of the Companies Act, 1956, including that it is "unable to pay its debts". Section 434 provides that a company shall be deemed to be unable to pay its debts if after the receipt of a statutory notice from the creditor, it has for three weeks neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor. The company shall also be deemed to be unable to pay its debts if the court after taking into account the contingent and prospective liabilities of the company, is satisfied on its inability to pay debts. There are a string of decisions laying down that the expression "debts" referred to in sections 433 and 434 pertains to the amount due which is "legally recoverable". The Companies Act does not prescribe any period of limitation to institute a winding up petition filed by a creditor on the ground of inability of a company to discharge its debt liability. Since the debt, which the company does not have the capacity to pay has to be legally recoverable, it is to be seen whether the debt claimed by the creditor is within the time-limitation as prescribed under the Limitation Act.

The respondent-company made no payment towards the due amount after the receipt of the consignment within the agreed period and sought extension till December 30, 1997, vide its letter dated August 8, 1997 (annexure P5). The respondent though made a payment of US$ 10,000 but sought postponement of the balance amount till April 30, 1998 (annexure P6). No payment was, however, made even thereafter albeit another extension was requested vide letters dated August 11, 1998 and August 31, 1998 (annexures P7 and P8), for the balance payment to be made in four instalments commencing from September, 1998 till February, 1999. The extended schedule also failed to secure any further payment in favour of the petitioner.

The ancillary question that arises for determination is whether the period of limitation stood revived and deserves to be computed afresh within the meaning of section 18 of the Limitation Act, 1963, in view of the acknowledgment of its liability made by the respondent in the last communication dated August 31, 1998 (P8), Equally important is the question whether for the purpose of "acknowledgment of the debt", the date of letter (P8), namely, August 31, 1998, is relevant or the date namely "February, 1999", in which the respondent agreed to pay the last instalment ?

Section 18 of the Limitation Act says that where before the expiry of the prescribed period of limitation in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed "a fresh period of limitation shall be computed from the time when the acknowledgment was so signed". In Tilak Ram and Others Vs. Nathu and Others, , the hon''ble Supreme Court deciphered the following requirements to attract section 18 of the Limitation Act:

(i) an admission or acknowledgment;

(ii) such acknowledgment must be in respect of a liability regarding a property or right;

(iii) acknowledgment must be made before the expiry of limitation period;

(iv) it should be in writing and signed by the party against whom such right is claimed.

The limitation period to institute proceedings against the respondent as on August 31, 1998, when it lastly acknowledged its debt liability had not admittedly expired for the obvious reason that the respondent had prior thereto also acknowledged such liability on August 8, 1997 and January 19, 1998 and meanwhile even made part payment as well. The letter dated August 31, 1998 (P8), thus, fully satisfies the ingredients of section 18 of the Limitation Act.

The aforesaid conclusion nonetheless falls short of answering the real issue, namely, should the renewed period of limitation be counted from August 31, 1998, or from February, 1999 ?

Whenever a debtor acknowledges his liability and promises to pay the amount due on a future date and the creditor accepts such offer, the cause of action to take legal action for the recovery of such due amount stands suspended. It is only if the debtor fails to honour his promise to make payment on the consented date that the cause of action will arise afresh or revive in favour of the creditor. The respondent though acknowledged its liability on August 31, 1998, but it was preceded with a promise to make the due payment by way of four instalments, commencing from September, 1998 onwards. The cause of action that arose in favour of the petitioner was in September, 1998 only when the respondent failed to pay the first agreed instalment.

Since the respondent-company volunteered to split its debt liability in four parts and promised to pay each part of the due amount on different future dates and since none of the part was contingent or subject to or dependent upon the previous part, it appears to me that every default would give rise to a fresh cause of action in favour of the petitioner to the extent of the defaulted instalment. However, such a cause of action cannot renew the period of limitation for the previous abandoned cause of action if the petitioner-creditor had failed to initiate legal action within the prescribed period of limitation in relation thereto.

The winding up petition in the instant case was instituted on February 28, 2002, though returned by the registry due to some objections and finally it was re-filed after the removal of those objections, on May 9, 2002. Even if the respondent''s objection regarding the date of institution of the winding up petition is overruled, yet the three years'' period of limitation in respect of the three instalments, which the respondent-company agreed to pay during the months of September, 1998, December, 1998 and January, 1999, stood expired on or before January 31, 2002. The petitioner''s claim qua the instalments agreed to be paid by the respondent in the months of September, 1998, December, 1998 and January, 1999 thus was time barred after the expiry of the limitation period of three years as on January 31, 2002. Hence the winding up petition instituted on February 28, 2002, in relation to these three claims, is held to be barred by limitation.

On the same analogy and reasons, a suit for recovery or a winding up petition for non-payment of the admitted and acknowledged debt of US$ 15,000 which the respondent promised to pay in February, 1999, could be instituted within limitation till February 28, 2002. The winding up petition in relation to the fourth instalment agreed to by the respondent was, thus, instituted within the prescribed period of limitation.

The respondent''s objection that the instant winding up petition has not been instituted or is deemed to have not been instituted within the limitation period when it was re-filed after removal of objections on May 9, 2002, in my considered view, is wholly misconceived and untenable. If the plaintiff or petitioner, as the case may be, fails to comply with the substantive law while presenting a plaint or petition, which is crucial for determining inter se rights of the parties, it can be safely inferred that no such plaint or petition is deemed to have been presented in the eyes of law. However, if the non-compliance pertains to a procedural lapse only, the inter se legal rights of the parties would remain unaffected. Suffice it to say that the Rules not only are the hand-maid of justice but are also the tools to secure substantial justice. The respondent has no where pointed out the non-observance of a substantive law by the petitioner as on February 28, 2002, when the petition was returned by the registry.

It is equally well-settled that the winding up jurisdiction of a company court cannot be invoked for realising debts due from the company though a company in debt can be ordered to be wound up if it is incapable to repay the admitted debt. It would be wholly immaterial whether the substantial part of the petitioner''s claim is time-barred and only a part thereof is legally recoverable. The acknowledgment of its debt by the respondent-company in communications one after the other clearly establishes that the extensions were sought by the respondent-company as it was in financial crisis and unable to pay the due amount.

The plea that the respondent has bona fide disputed its debt merely deserves to be noticed and rejected. There was not even a whisper by the respondent after the receipt of the consignment on December 10, 1996, that there was a delay to its detriment or that the bales sent were of inferior quality contrary to the agreed terms and conditions. The respondent claims to have stored the consignment till it was opened in September, 1998 and if there was any adverse impact on the quality of material, it could be as a result of sheer and gross negligence of the respondent as well. The fact of the matter is that all these issues were raised only after October, 1999 in the reply to the legal notice which is ex facie a coined excuse of the respondent.

The third and last plea taken by the respondent, namely, that a running and profitable company should not ordinarily be ordered to be wound up, deserves favourable consideration. The cited case law indeed supports the plea that where the company is capable to discharge its debt liability or when it is a profit making company, which has generated employment, the company court should in public interest, be reluctant in admitting the winding up petition or issuing resultant directions like the appointment of a provisional liquidator.

In view of the categoric and uncontroverted plea taken by the respondent regarding its sound financial condition, it appears expedient at this stage to direct the respondent-company to make payment of US$ 15,000 to the petitioner as a part of its admitted debt liability along with interest at 8.25 per cent. per annum, which the respondent-company had agreed to pay for the credit period of 90 days. The interest shall be calculated from December 10, 1996, till actual payment of the principal amount of US$ 15,000.

It may, however, be also noticed that the respondent-company had filed a suit for recovery of Rs. 3 lakhs along with interest at 18 per cent. per annum against the petitioner in the Civil Courts at Ludhiana on July 16, 1999, which was decreed ex parte on September 28, 2011 and a decree for recovery of Rs. 3 lakhs with pendente-lite interest at 18 per cent. per annum from the date of institution of the suit till the date of decree, with a future interest at 6 per cent. thereafter, till the actual realisation, was passed. Since the petitioner has not challenged the ex parte decree, the respondent while liquidating the claim of the petitioner shall be at liberty to set-off and adjust the amount receivable in terms of the civil court decree. The due amount shall be paid to the petitioner within a period of two months from the date of receipt of a certified copy of this order.

With a view to enable the respondent to comply with this order, further direction to admit the winding up petition, publication of notice of winding up or appointment of the provisional liquidator to take over the respondent-company, are kept in abeyance till further orders, though with liberty to the petitioner that in the event of non-compliance of this order by the respondent-company, it may move an appropriate application for further directions. Disposed of. Dasti.