Sampat Trading and Co. vs Talayar Tea Company Ltd.

M. Sathyanarayanan, J.—Company Petition No. 137 of 2000, which has been filed for winding up the respondent company and for

appointment of Official Liquidator, was dismissed by this Court on 25.6.2002 and aggrieved by the same, the applicant has preferred this appeal.

The facts which are necessary for the disposal of this appeal are given hereunder:

In the petition filed in C.P. No. 137 of 2000, it is stated that the respondent company is engaged in the manufacture and sale of tea to various

parties and the petitioner/appellant is engaged in the tea brokerage business for a considerable period of time, was acting as the agent of the

respondent and in that capacity, they used to buy and sell tea on behalf of the respondent to various customers. They also maintaining a running

account. The respondent also used to borrow money on a regular basis from the petitioner to meet their fund requirement and the petitioner was

also advancing monies periodically to the respondent to meet such requirements. It is further averred in the petition that the respondent had

accumulated huge dues and in respect of consignment coffee supplied by the respondent, there was a short supply and in that regard also, amounts

were due to the petitioner. The petitioner after crediting certain payments made by the respondent, got execution of pronotes in their favour by the

respondent.

The petitioner further averred that in the year 1997, a Reconciliation Statement was preferred after verification of the accounts of both the

petitioner and the respondent. Thereafter, it was agreed by the respondent that a sum of Rs. 73,32,810.05 was due and payable by them to the

petitioner and the respondent also agreed to pay interest at the rate of 24% per annum on the above said amount. The respondent confirmed and

accepted a sum of Rs. 99,47,312.67 due and payable as on 27.11.1997 to the petitioner. The respondent also confirmed that a further sum of Rs.

67,537.33 was due and payable to the petitioner in respect of short supply of Coffee and after crediting payments made for renewal of pronotes.

The respondent confirmed and accepted that a total sum of Rs. 1,00,14,850/- was due and payable by the respondent to the petitioner as per the

statement of account verified and confirmed on 27.11.1997 by the Managing Director of the respondent on behalf of the respondent company.

The petitioner also averred that a liquidated debt due and payable to the petitioner, which the respondent has failed and neglected to pay the

same. The respondent through its Managing Director, on 27.11.1997 confirmed that a sum of Rs. 1,00,14, 580/- was due and payable to the

petitioner and on 15.12.1997, the respondent made part payment of Rs. 60,00,000/- by way of Demand Drafts drawn in favour of the petitioner.

However, no further payments has been made by the respondent to the petitioner regarding the balance dues. Therefore, the petitioner sent

reminders and in response to the same, the respondent in its letter dated 27.7.1999 for the first time has stated that the petitioner is due and

payable a sum of Rs. 31,86,000/- to them. The said statement according to the respondent is made with a mala fide and oblique motive in order to

defeat their claims.

The petitioner sent a suitable reply on 3.8.1999 and followed by a further letter dated 16.8.1999 wherein the petitioner brought to the

knowledge of the respondent about the letter dated 27.11.1997 in which, the Managing Director of the company has confirmed and certified that a

sum of Rs. 1,00,14,850/- was due and payable by them to the petitioner. However, there was no response to the said letters.

It is further stated by the petitioner that the respondent became commercially insolvent as their balance sheet for the year ended 31.3.1999

would disclose that as against the paid up capital of Rs. 12,50,000/- and Reserves of Rs. 12,55,442/-, the respondent has loans outstanding

secured and unsecured to the extent of Rs. 1,26,13,182/-. Further, as against the current assets, loans and advances of Rs. 1,80,87,017/-, current

liabilities and provisions are Rs. 5,00,55,958/-. That apart, during the said year, the respondent company suffered a loss of Rs. 44,45,080/- and

the said figure coupled with carry forward losses to the extent of Rs. 2,38,65,494/- and the loss transferred to the balance sheet as on 31.3.1999

is Rs. 2,83,10,574/-. Therefore, the above figures given in the balance sheet clearly establish that the respondent company become commercially

insolvent and the petitioner and other creditors will not be able to recover anything from the assets. Hence, for the said reasons, the petitioner

herein prayed for winding up of the respondent company and appointment of Official Liquidator to proceed further in the matter.

The respondent has filed its counter. In the counter statement, it has been averred that the respondent company is financially very sound and that

there is no debt due to the petitioner but on the contrary, the petitioner owes the respondent a sum of Rs. 37,36,292.62 as per the revised

statement of accounts. It is further averred in the counter that the present management took over the respondent company from the previous

management. In the previous management, two of the partners of the petitioner were Directors till 12.12.1997 and as such, there was a collusion

between them and the previous management of the respondent. It is further averred in the counter that the alleged due of Rs. 1,00,14,850/- as

confirmed by the respondent and its Managing Director were prior to December 1997 during which period, the respondent company was under

the old management. After take over of the respondent company by the new management, a sum of Rs. 60,00,000/- was paid to the petitioner

with a specific understanding that further to finalisation of accounts and subject to verification of the same, the respondent''s dues to the petitioner

will be ascertained and will be settled in full. At the time of take over on 12.12.1997 by the present management, auditing of accounts was over

only up to 1995-1996 and the present management had finalised the accounts subsequently for the years 1996-97, 1997-98 and 1998-1999.

The respondent also averred that the agreed rate of interest is only 12% and the petitioner was accepting monies due to the respondent from

various third parties such as Tamil Nadu Tea Brokers Ltd., under the pretext of setting of its dues from 30.5.1996 and 31.1.1997 and the amount

involved is Rs. 15,17,402.45 and if the said amount is taken into account, a sum of Rs. 2,90,109.24 has been paid in excess to the petitioner as on

15.12.1997 and the respondent has to refund the same with interest. The respondent supplied tea valued at Rs. 6,64,310.44 on 1.2.1998 to the

petitioner through M/s. Woodbriar Estate Ltd. It is further averred in the counter that as per the statement of accounts annexed to the counter

statement, a sum of Rs. 37,36,292.82 is due and payable by the petitioner to the respondent and that apart, the petitioner has also included certain

personal loans given to the respondent''s Managing Director and his family members prior to 12.12.1997.

The respondent has sent a detailed reply to the lawyer''s notice dated 20.7.1999 and also sent reply to the statutory notice dated 18.9.1999.

The sum and substance of the counter statement of the respondent is that since there is bona fide dispute on the amount due and payable to the

petitioner by the respondent, and that actually the petitioner is liable to pay amounts to the respondent, and also, the respondent company is

financially sound, the petition for winding up the company is not maintainable. Therefore, the respondent prayed for dismissal of the application for

winding up.

The petitioner has filed its reply to the counter statement stating among other things that the transaction between the petitioner and M/s.

Woodbriar Estates Ltd., has absolutely no connection with the respondent company. It is further averred in the reply statement that the respondent

requested the petitioner who had a bank account at Coonoor to deposit the cheques pertaining to the transaction with Tamil Nadu Tea Brokers

Ltd. Accordingly, the cheques were deposited in the accounts of the petitioner and later on a sum of Rs. 15,17,402.45 received by the petitioner

from Tamil Nadu Tea Brokers Ltd., has been transferred to the respondent in terms of the above said understanding except a sum of Rs. 535.80.

The respondent has also acknowledged the same vide their letter dated 3.2.1997. The petitioner further denied the allegation that certain personal

loans given by the petitioner to the Managing Director of the respondent were included.

The learned Judge after consideration of the averments made in the petition, counter and reply, held that there is a bona fide dispute as regards

the existence of the debt and it is for the petitioner to prove by production of accounts and other documents that monies were due to the petitioner.

The learned Judge further found that the collusion between the previous management of the company with the petitioner cannot be decided in

summary proceedings and it is for the petitioner to establish the same in a properly instituted suit. The learned Judge further found the financial

condition of the respondent is neither week nor unsound to order winding up of the respondent company and for the said reasons, has dismissed

the company petition filed by the petitioner for winding up of the respondent company. The petitioner aggrieved by the same, has preferred this

appeal.

Heard the submissions of Mr. Aravind P. Dattar, learned senior counsel appearing for the appellant and Mr. Sivam Sivanandaraj, learned

Counsel appearing for the respondent.

The learned senior counsel appearing for the appellant has made the following submissions:

(a) The respondent company has paid a sum of Rs. 60,00,000/- in terms of the agreement dated 12.12.1997 after the new management took

administration and affairs of the company and as per clause No. 2, the new management has to take over all liabilities. In clause No. 6.1 of the said

agreement it has been admitted that a sum of Rs. 60,00,000/- has been paid and further undertaking was given to pay the balance due. If really the

truth and validity of the agreement dated 12.12.1997 is under dispute, the respondent should not have paid a sum of Rs. 60,00,000/- and

promised to pay the balance dues to the appellant.

(b) The respondent has written a letter dated 3.2.1997 to the appellant, confirming the receipt of a sum of Rs. 15,16,855.85 and there were cash

receipts/acknowledgements in respect of individual amounts paid by the respondent. The erstwhile management had also given acknowledgement

from 1.6.1996 to 14.12.1996 and the new management took the administration and affairs of the respondent company on 12.12.1997 and the

said terms are not in dispute.

(c) There is no bona fide dispute to the amount due and payable to the appellant as the admitted balance as on 27.11.1997 was Rs. 1,00,14,850/-

and the finding of the learned judge that it is not clear as to whether payments of Rs. 5,000/- and 1,500/- on 9.6.1997 and 1.9.1997 respectively

have been taken into account while determining the balance on 27.11.1997, on the face of it unsustainable as the said amounts are insignificant and

irrelevant to adjudicate the issue with regard to the bona fide dispute of the amount payable.

(d) There is no bona fide dispute with regard to the balance of principle amount due and payable and assuming that there is a dispute on the

quantum of interest, the same cannot be against the claim of the appellant.

(e) With regard to the dispute in respect of payment by M/s. Woodbriar Estates Ltd., it is an independent transaction with another company and

the respondent company has nothing to do with the said payment. There is no question of any adjustment between the payments and receipts with

regard to the M/s. Woodbriar Estates Ltd., as they are two different and independent transactions in two different companies.

(f) The agreement dated 12.12.1997 read with letter of confirmation dated 27.11.1997 are prima facie sufficient to constitute an admitted liability

on the part of the respondent.

(g) The former Managing Director as well as new Managing Director had admitted the liability and the said admission has been made on behalf of

the respondent company and the same is binding on them.

(h) In respect of amounts due from Tamil Nadu Tea Brokers Ltd., acknowledgement/cash receipts show full payment of the amount of Rs.

15,16,866.85.

(i) As regards the commercial insolvency of the respondent, it is submitted by the learned senior counsel appearing for the appellant that as per the

55th Annual Report for the financial year 2000-2001, the share capital was shown as Rs. 12.5 lakhs and the loss for the year 2000-2001 was

shown as Rs. 58.24 lakhs and the total carry forward loss is Rs. 5.57 crores. According to the learned senior counsel appearing for the appellant

when the annual loss is 4.5 times more than the share capital amount and the carry forward loss is 40 times, it cannot be said that the company is in

sound position.

(j) Lastly it is submitted by the learned senior counsel appearing for the appellant that for deciding the petition for winding up, the Court has to

proceed only the prima facie case and there is no question of appreciation of evidence involved while adjudicating the said petition. In any event,

the petition for winding up cannot be ordered straight away and only an advertisement is ordered to be issued and thereafter, after adjudicate the

claims of the other creditors and the contention putforth by the debtor, the Court has to decide the winding up of the company. Therefore, the

learned Judge ought to have ordered issuance of the advertisement according to the learned senior counsel appearing for the appellant.

The learned senior counsel appearing for the appellant in support of his submissions, has took us through the typed set of documents and also

placed reliance upon the following judgments:

i. (1994)3 Company Law Journal page 438 (Delhi)

ii. (1999) Vol. 95 Company Cases page 172 - Ashoka Agencies & Business Forms Ltd.,

iii. TDICI Limited v. Neptune Inflatables Ltd. reported in (1999)1 Comp LJ 240 (Mad.),

iv. Mahesh Nathani Vs. Sir Edward Dunlop Hospitals (India) Ltd., .

v. In Re: United Western Bank Ltd., ,

vi. In Re: Wastinghouse Saxby Farmer Ltd., .

vii. Registrar of Companies Vs. KT. Financiers Private Ltd., ,

viii. Imperial Corporate and Services (P) Limited Vs. Aruna Sugars and Enterprises Ltd., .

The judgment reported in (1994)3 CLJ 438 (Delhi) came to be decided on the facts of the case as the High Court of Delhi in the said decision

found that debt has been admitted and proved and therefore ordered winding up of the company.

In (1999) 95 Comp Cas 172 - Ashoka Agencies & Business Forms Ltd., the petition for winding up was filed against the respondent

company on the ground of its failure to pay the balance of Rs. 24,32,416.01 on a running account which was acknowledged by the said company

by its communication dated 21.9.1992. The company raised defence, that the said communication was not a promise to pay and at the most, it

was an acknowledgement of a time-barred debt. The Calcutta High Court on the facts of the said case held that in the light of the petitioner''s

affidavit that there was continuous and running transactions; there could be no presumption that the acknowledgement was of a time-barred debt.

The High Court of Calcutta citing the said reasons, ordered issuance of advertisement.

In TDICI Limited v. Neptune Inflatables Ltd. reported in (1999) 1 Company Law Journal page 240 (Mad.), this Court on the facts of the said

case held that various letters of undertaking sent by the respondent pay the debts would prove that the respondent is unable to pay its debts and

the admission of debt voluntarily, recorded by the respondent in their letter, will prove they are unable to pay the debts and therefore, this Court

has ordered issuance of advertisement as contemplated in Rule 96 read with Rule 24 of the (Company Courts) Rule 1959.

In [2006] 129 Company Cases page 678 (Delhi) - Mahesh Nathani v. Sir Edward Dunlop Hospitals (India) Ltd., a non-resident Indian has

remitted money for allotment of shares in respondent company and later on the said person has withdrawn his intention to subscribe shares.

However, the company has not repaid the amount. The High Court of Delhi held that even tough the company was a solvent but has not chosen to

pay the amount and therefore, admitted the petition for winding up and ordered publication in newspapers.

In [1978] vol.48 Company Cases page 378 (Bomb.) - United Western Bank Ltd., In re., the High Court of Bombay underlying the principles

for ordering the winding up of the company, which are as follows:

On a petition u/s 483 of the Companies Act, 1956, where the defence is that the debt is disputed, the court has to see first whether the dispute on

the face of it is genuine or merely a cloak to cover the company''s real inability to pay just debts. The inability is indicated by its neglect to pay after

a proper demand and a lapse of three weeks. Such neglect must be judged on the facts of each case. Merely seeking to raise certain disputes for

putting off liability for payment of the debt or creating a kind of defence to the claim will not make the debt a disputed one. Disputes which appear

to have been created or manufactured for the purpose of creating pleas to cover up the liability for payment of the debt can never be considered to

be bona fide and will be of no avail in resisting a winding-up petition.

In [1982] Vol.52 Company Cases page 479 (Calcutta) - Wastinghouse Saxby Farmer Ltd., In re., the High Court of Calcutta, on the facts of

the case, held that there is no bona fide dispute based on material on record and therefore, ordered winding up of the company.

As regards Commercial Insolvency, reliance was placed upon the judgment reported in [1978] Vol.48 Company Cases, page 129

(Allahabad) - Registrar of Companies, U.P. v. KT. Financiers Private Ltd., wherein the balance sheet of the company showed that the total

realisable assets of the company was over Rs. 6.00 lakhs as against the liabilities of over Rs. 11 lakhs and none of the Directors, responded to the

statutory notices issued u/s 439(5) of the Companies Act, 1956. The Allahabad High Court on a perusal of the material on record found that the

company had become financially unsound and was unable to carry on its business. Therefore, the company should be wound up.

In (2002) 3 MLJ 750 - Imperian Corporate and Services (P) Limited v. Aruna Sugars and Enterprises Ltd., this Court has placed reliance

upon the decision of the Hon''ble Supreme Court of India, reported in 1971 Manu (Supreme Court) page 33 - M. Gordhandas and Company v.

M.W. Industries, and in the said decision, it has been held as follows:

Two rules are well settled. First if the debt is bona fide disputed and the defence is a substantial one, the Court will not wind up the company.

The Court has dismissed a petition for winding up where the creditor claimed a sum for goods sold to the company and the company contended

that no price had been agreed upon and the sum demanded by the creditor was unreasonable (See London and Paris Banking Corporation (1874)

19 Eq.444). Again, a petition for winding up by a creditor who claimed payment of an agreed sum for work done for the company when the

company contended that the work had not been done properly was not allowed. (See Re. Brighton Club and Norfolk Hotel Co. Ltd. (1865) 35

Beav. 204)

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 Re. A company 94 SJ 369). 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 qualify the debt precisely (See Re. Tweeds Garages Ltd. 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.

This Court in the said decision also placed reliance upon a Division Bench decision of this Court reported in Sree Shanmugar Mills Ltd., by

Managing Agents Sri Alagai Ltd. Vs. S.K. Dharmaraja Nadar and Another, and held that the test of inability to pay the debt u/s 433(e) of the

Companies Act was not whether the company, if it converted all its assets into cash, would be able to discharge its debts, but whether in a

commercial sense the existing liabilities could be paid by it while continued to carry on as a company. In the said decision it has been found that the

company has failed and neglected to pay the sums due to the petitioner and therefore ordered publication.

Per contra, Mr. Sivam Sivanandaraj, learned Counsel appearing for the respondent has submitted the following:

(a) Two partners of the appellant were Directors of the respondent company as evidenced from form 32 filed before the Registrar of Companies

and hence it can be safely assumed that the appellant had close nexus with the old management and had access to the office of the respondent

including its stationary and records. (b) As per the agreement dated 12.12.1997, it has been stated that a sum of Rs. 60,00,000/- was due to the

appellant and if there is any balance due, the same will be paid to the appellant within sixty days. The appellant after receipt of Rs. 60,00,000/-,

had transferred all share certificates pledged with them as security, to the new management of the respondent and this was done due to the reason

that the entire liability had been cleared and if anything was found to be due, it was only a meagre amount. Any prudent person will not transfer all

share certificates pledged, in the absence of full and final settlement of amounts due. The same is evidenced from the letter dated 27.11.1997 and

the statement of accounts even dated.

(c) The statement of accounts produced by the appellant would reveal the date of last transaction was on 25.02.1997 and it was signed by one

Mr. K.A. Narayanan in his capacity as the Managing Director of the respondent who was part of the old management. The balance sheet and

statement of accounts ending up to 31.3.1997 was furnished by the old management at the time of take over and as per the statement of accounts,

the amount due and payable as on 31.3.1997, is only Rs. 49,70,714/- and it was also signed by Mr. K.A. Narayanan. A combined reading of

those documents would clearly exhibit that the statement of accounts dated 27.11.1997 is a fabricated one.

(d) The letter dated 3.3.1997 relied on by the appellant was also issued by Mr. K.A. Narayanan, wherein the rate of interest has been increased

from 20% to 24% and it is also to be pointed out at this juncture according to the learned Counsel appearing for the respondent, the promissory

notes do not mention the rate of interest. The appellant in collusion with Mr. K.A. Narayanan, had created and fabricated those documents to suit

their convenience and to enable them to file a petition for winding up.

(e) The appellants had filed a suit in O.S. No. 15 of 2000 on the file of the Court of District Munsif, Coimbatore, praying for a permanent

injunction restraining the respondent herein from encumbering the shares and also sought a relief of mandatory injunction to return the cheques. If

there is any amount due and payable after the payment of Rs. 60,00,000/-, the suit should have been laid for recovery of money and the appellant

has not reserved its rights to file separate suit by obtaining leave.

(f) The respondent after perusal of records had sent a letter dated 7.2.1998 stating among other things that the company was on strike from

8.9.1997 to 26.12.1997 and the respondent was paying a sum of Rs. 60,00,000/- without verifying the accounts, as the accounts were not ready

on that date. In the said letter, the respondent also made a counter claim of Rs. 22,00,0000/-. The appellant in spite of having received the said

letter, has not chosen to send any reply. The said letter was followed by another letter dated 27.7.1999 sent by the respondent claiming a sum of

Rs. 31,86,255/-. The appellant then woken up and issued a legal notice dated 20.7.1999 calling upon the respondent to crystallise the liability and

there was no demand for payment of the amount. If really the appellant was in possession of the letter dated 27.11.1997, wherein Mr. K.A.

Narayanan on behalf of the erstwhile management had acknowledged the liability of Rs. 1,00,14,850/-, the appellant would have definitely made a

claim for that amount. The respondent has also sent a reply dated 6.8.1999 denying the entire claim.

(g) The appellant had sent a legal notice dated 18.9.1999 wherein for the first time, made a claim for a sum of Rs. 60.47 lakhs and in the said

letter, confirmation of balance as on 27.11.1997 has also been referred to and the same would clearly exhibit that the document evidencing

confirmation of balance dated 27.11.1997 has been put into service for the purpose of issuing statutory notice.

(h) The respondent in response to the statutory notice, had sent a reply dated 4.10.1997 specifically disputing the liability and also made a counter

claim. The reply sent by the respondent to the statutory notice has been deliberately suppressed by the appellant at the time of filing of the winding

up petition and since the appellant has failed to approach this Court with clean hands, it is not entitled to any relief.

(i) As regards the counter claim made by the respondent, the learned Counsel appearing for the respondent would submit that the said counter

claim was made as early as on 7.2.1998 and it is also substantiated by the documents produced by them.

(j) In reply to the submission made by the learned Counsel appearing for the appellant that the respondent company had become commercially

insolvent, the learned Counsel appearing for the respondent has submitted that the respondent company made profit of Rs. 23 lakhs in the year

2007, after taxation and profit of Rs. 75 lakhs in the year 2006 and thereby the respondent is wiping up the loss incurred by the earlier

management. It is further submitted by the learned Counsel appearing for the respondent that the respondent company on an average, produces

around 10 lakh kilograms of tea and is employing 800 employees and further it holds lands of more than 2500 acres valued at Rs. 57 crores ad the

value of the superstructure is Rs. 6,67,25,000/-. In the event of winding up being ordered, the respondent company is bound to lose its business

and thereby put into peril the interest of 800 employees and their families.

(k) Hence it is submitted by the learned Counsel appearing for the respondent that the respondent company need not be ordered to be wound up

and the learned single Judge has carefully analysed the entire materials placed before him and correctly held that the respondent company is not

liable to be wound up and rightly rejected the Company Petition and therefore, no interference is warranted.

The learned Counsel appearing for the respondent in support of his submissions placed reliance upon the following judgments:

(1) 1965(35) Company Cases 456 (SC) (Amalgamated Commercial Traders (P) Ltd. v. A.C.K. Krishnaswami and Anr.).

(2) 1968 Vol. 38 Company Cases 384 (DB) (Lakshmi Sugar Mills v. National Industrial Corporation Limited)

(3) (1970) 1 All E.R. 923 (Chancery Division) In Re Fidles Bros Ltd.

(4) (1971) 3 SCC 632 (Madhusudhan Gordandhas and Co. v. Madhu Woollen Industries)

(5) (1992) 1 MLJ 232 (Viswanathan v. Seshasayee Paper & Bd. Ltd.)

(6) (1992) 73 Company Cases 337 (Delhi) Kalra Iron Stores Faridabad Fabricators (P) Ltd.

(7) (1996) 95 Company Cases 586 (DB) (Malhotra Steel Syndicate v. Punjab Chemi-Plants Ltd.).

(8) (2001) 104 Company Cases 533 (DB) Tata Iron and Steel v. Micro Forge (India) Ltd.

(9) (2003) 113 Company Cases 383 (Mad) SICAL-CWT Distripark Ltd. v. Besser Concrete Systems Limited.

(10) 2004(120) Company Cases 784 (DB) Neg.Micon Limited v. NEPC India)

(11) AIR 2005 SC 4175 (Mediquip Systems (P) Ltd. v. Promima Medical Systems)

(12) (2008) 6 MLJ 633 (DB) (Narsey Brothers v. Nithyalakshmi Textiles Mills (P) Ltd.

In 1965 (35) Company Cases 456 (SC) (Amalgamated Commercial Traders (P) Ltd. v. A.C.K. Krishnaswami and Anr.), the Hon''ble

Supreme Court of India on the facts of the case found that there was a bona fide dispute with regard to the debt and further held as follows:

It is well-settled 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 but really to exercise pressure will be dismissed, and under circumstances may be

stigmatized as a scandalous abuse of the process of the court. At one time petitions founded on disputed debt were directed to stand over till the

debt was established by action. If, however, there was no reason to believe that the debt, if established, would not be paid, the petition was

dismissed. The modern practice has been to dismiss such, petitions. But, of course, if the debt is not disputed on some substantial ground, the court

may decide it on the petition and make the order. (Vide Buckley on the Companies Acts, 13th edition, page 451).

In 1968 Vol. 38 Company Cases 384 (DB) (Lakshmi Sugar Mills v. National Industrial Corporation Limited), the High Court of Punjab on

the facts of the case dismissed the appeal filed by the appellant/petitioner for winding up the respondent company u/s 433(3) read with Section

434(1)(a) of the Companies Act, 1956 on the ground that the debt is in bona fide dispute. It has been further held that in a statutory appeal against

a discretionary order such as the one declining to wind up a company u/s 433 of the Act, interference is not normally justified unless the appellate

court is satisfied that the court below has not exercised its discretion according to sound judicial principles.

In (1970) 1 All E.R. 923 (Chancery Division) In Re Fidles Bros Ltd., it has been held as follows:

If on the facts existing when the petition was presented it was then just and equitable to wind up the company, but subsequently it has ceased to be

so, I do not think a winding up order should be made. Section 222(f) Companies Act, 1948 is cast in the present tense, providing for an order if

the court ''is'' of the opinion that it ''is'' just and equitable that the company should be wound up. No doubt if there were cogent grounds for

complaint at the time when the petition was presented, but they were afterwards melted away, there may be consequences in relation to costs; but

a winding up order under this head must be based on subsisting facts and not on past history.

In (1971) 3 SCC 632 (Madhusudhan Gordandhas and Co. v. Madhu Woollen Industries), claim was made from the company based on

certain invoices and it denied on the ground of fraud. The Court on a perusal of materials placed on record found that the books of accounts did

not support the case of the petitioner who sought winding up of the company and held that the claim of the petitioner is tainted by dishonesty and

the petition for winding up filed only to quash the company to make the payment and it is not bona fide.

In (1992) 1 MLJ 232 (Viswanathan v. Seshasayee Paper & Bd. Ltd.), it has been held that when there is a bona fide dispute with regard to

liability, the petition for winding up is to be dismissed.

In (1992) 73 Company Cases 337 (Delhi) Kalra Iron Stores Faridabad Fabricators (P) Ltd., the defence was raised in respect of a petition

for winding up by contending that fraud has been committed at the time of issuance of predated cheques and it has been held that in view of the

allegations of fraud, civil Court is the competent forum to adjudicate the issues and not the company Court.

In (1996) 95 Company Cases 586 (DB) (Malhotra Steel Syndicate v. Punjab Chemi-Plants Ltd.), the winding up petition was filed on the

basis of the amount due and payable under the dishonoured cheque and on the facts of the case it was held that there was a bona fide and

substantial dispute, which can be adjudicated only by a civil court. The learned Counsel appearing for the respondent submits that the ratio laid

down in the said decision, is ipso facto applicable to the case on hand.

In (2001) 104 Company Cases 533 (DB) Tata Iron and Steel v. Micro Forge (India) Ltd. (Gujarat), the High Court of Gujarat has laid down

the following principles at the time of ordering winding up of the company:

It cannot be gainsaid that winding up of a company is a process in which the life span of it is cut short and its property administered for the benefit

of its creditors, contributories and the shareholders-members by a competent person to be appointed by the court. Winding up of a company

differs from the insolvency of an individual, inasmuch as a company cannot be made insolvent under the insolvency law in India unlike in United

Kingdom. Moreover, even a solvent company may be wound up and administered or a liquidator could be appointed by the competent court who

takes charge of the company and the company remains under his control. He collects its assets and dues and pays the debts and liabilities and

finally distributes any surplus amongst its members in accordance with the respective legal rights of the concerned parties. This is highlighted to

show that once an order of winding up is recorded by the competent court on any one of the grounds enumerated in Section 433 of the

Companies Act, the outcome would be like the death of an individual. Once the winding up order is passed, the entire managerial functioning and

decision-making authority is shifted and, ordinarily, entrusted to the official liquidator or an administrator. No doubt, the impugned order radiates

an imprint of only an admission of winding up petition and directing the publication of the advertisement in leading daily newspapers. It also cannot

be gainsaid that an order admitting a winding up petition and the resultant order for the publication of an advertisement inviting claims from

respective parties by a public notice is, in many cases, from the commercial point of view, the business point of view, from the marketability point

of view, no less injurious than winding up. This proposition could, hardly, be questioned.

The parameters prescribed or propounded by process of evolution of case-law, in order to reach the conclusion of a fit and appropriate case for

declaring a company fit for winding up are also very well settled, extensively explored by a catena of judicial pronouncements. The expression in

Section 433(e) ""inability to pay its debts"" is required to be considered ad examined taking into account various aspects. It may also be mentioned

that at this stage,that a claim to an order of winding up is not a matter of right, but it is the discretion of the court on one or more of the grounds

having been established as mentioned in Section 433 of the Companies Act. Even at the stage of admitting the petition, unlike other petitions, the

company court has to be very alive to the relevant aspects and is obliged to consider many circumstances.

Certain important chronicles and contours to be kept in the mental radar, before reaching the conclusion in a winding up petition can be articulated

as under:

(1) The remedy u/s 433 in general and under Clause (e) in particular is not a matter of right; as such, and it is discretion of the company court. It

does not confer any right on any person to seek order that the company should be wound up. It is a provision empowering the court by a statutory

provision to pass an order of winding up in an appropriate case.

(2) Merely because any one of the circumstances enumerated in Section 433 of the Companies Act exists, the court is not bound to order winding

up of the company. Nobody can aspire to wind up the company as a matter of course. The court has wide power and discretion. In this

connection, inability to pay debts is required to be judged from various sets of facts and circumstances. It may also be stated that inability to pay

debts in all cases, ipso facto, could not be construed as an appropriate case for winding up.

(3) A debt is money which is payable or will be payable in future by reason of a person''s obligation. The expression ""debt"" would refer to liability

to pay and it rests on certain contingencies, conditions and causalities. Even if the debt is proved and even if the inability to pay the debt is also

shown, it is not a launching pad, in all cases, for a successful winding up order. Inability may arise for a variety of reasons and the court is obliged

to consider whether the inability is the outcome of any deliberate or designed action or mere temporary shock and effect of economy and market.

In a given case, it may happen that a party may become unable to pay its debts for a while, but that by itself is not a criterion for exercise of the

power to wind up, ipso facto.

(4) It is necessary for the company court to consider the financial status, strength and substratum of the company, in the overall context. It is

possible, at times, that there may be a cash crunch. It may be also, possible, at times, that there is temporary cash crisis despite high sales and

heavy turnover and, therefore, in such a situation, mere disability or only on the ground of inability to pay would not constitute a ground

empowering the court to wind up the company.

(5) If the company is an ongoing concern having regular business and employment of employees, the court cannot remain oblivious to this aspect.

The effect of winding up would be of putting an end to the business or an industry or an entrepreneurship and, in turn, resulting in loss of

employment to several employees and loss of production and effect on the larger interest of the society.

(6) Even dividend declared by the company regularly and having profit in the light of the profit and loss account, though temporarily, there may be

inability to pay the debt or in the case of any eventuality, the company is unable to make the payment of dues and that by itself could not be

construed as a ground to wind it up.

(7) Winding up of a company, as such, is nothing but a commercial death or insolvency and, therefore, the company court is obliged to take into

consideration not only the temporary inability, or disability to make the payment of debts, but the entire status and position of the company in the

market.

(8) When grounds on which the winding up order can be denied, upon an evaluation of the facts of the case, after admission, exist from the record

already placed before the court, it would be a sound exercise of discretion to reject the petition instead of admitting it. This view is very much

celebrated.

(9) Inability to pay debts in terms of Section 433(e) read with Section 434(1)(a), demand of the debt would raise a presumption as to inability to

pay its debts. But such a presumption is rebuttable. Such a presumption may be rebutted on existing material and what evidence is sufficient

depends on the facts and circumstances of the case.

(10) If the company has shown considerable growth in a reasonable span and is a growth oriented enterprise, even in a case of temporary inability

would not be sufficient to drive it to winding up.

(11) Though, ordinarily, an unpaid creditor may aspire for an order of winding up, the ""ex debito justitiae"" rule is not of inflexible mandate, but is,

as such a matter of discretion of the court.

(12) Section 433 is also indicative of the fact that even if one or more grounds mentioned in Section 433 exist, it is not obligatory for the court to

make an order of winding up. The court has discretionary power. The court must in each case exercise its discretion in deciding whether in the

circumstances of the case, it would be in the interest of justice to wind up the company. It is a well known rule of prudence that even in a case

where indebtedness to the petitioning person is undisputed, the court does not pass an order for winding up where it is satisfied that it would not be

in the larger interest of justice to wind up the company.

(13) It is also well settled that a winding up order shall not be made on a creditor''s petition, if it would not benefit him or the company''s creditors

in general.

(14) The Court is also obliged to consider that it would be in the interest of justice to give the company some time to come out of the momentary

financial crisis or any other temporary difficulty as winding up is a measure of last resort.

(15) Winding up course cannot be adopted as a recourse to recovery of the debt.

(16) The court must bear it in mind one more celebrated principle and consider whether the company has reached a stage where it is obviously and

plainly and commercially insolvent, that is to say, that its assets are such and its existing liabilities are such as to make the court feel clearly satisfied

that current assets would be insufficient to meet the current liabilities, along with other principles.

(17) It is also necessary to consider whether the respondent-company has become defunct or has closed its business, for quite some time, whether

it is commercially insolvent. For the purpose of finding commercial insolvency, a mere look into the financial data is relevant to examine about its

soundness. In all matters relating to winding up, the court may have regard to the wishes of the creditors and contributories and may, if necessary,

ascertain their wishes appropriately. If the company is solvent, the wishes of the contributories would carry more weight as they are persons,

mainly, interested in the assets.

(18) The element of public policy in regard to commercial morality has, likewise, to be taken into account before determining the winding up issue.

The court has also to consider the purpose and policy behind Sections 443 and 557 of the Companies Act.

(19) Winding up is the last thing the court would do and not the first thing to do having regard to its impact and consequences. Winding up of a

company would ensue:

(a) closing down of a company which is engaged in production or manufacture or which provides some services;

(b) it would throw out of employment numerous persons and result in gross hardship to the members of families of the employees;

(c) loss of revenue to the State by way of collection of taxes which otherwise should have been collected, on account of customs, excise duties,

sales tax, Income Tax, etc.;

(d) scarcity of goods and diminishing of employment opportunities.

(20) A winding up petition has to be submitted in the prescribed form highlighting all the facts and emphasising the inability of the company to pay

its debts. The form prescribed under the Companies (Court) Rules, clearly, indicates that the petitioner should, provide all the necessary material

particulars. The petitioner is obliged to show that the financial status or the monetary substratum or the commercial viability of the company has

gone so low and down that winding up is obviously, and evidently, unavoidable.

(21) It is a settled proposition of law that a winding up petition is not a legitimate means of seeking to enforce the payment of a debt which is

disputed by the company, bona fide. A winding up petition ought not to be aimed at pressurising the company to pay the money. Such an attempt

would be nothing but tantamount to blackmailing or stigmatizing the concerned company by abusing the process of the court.

(22) A winding up petition is not an appropriate mode enforcing bona fide disputed debts and it is nothing but misuse and abuse of the process of

the court.

(23) A winding up petition is not an alternative form for resolving the debt dispute. In certain cases disputes are such that they are fit for resolving

through the civil court rather than through the company court.

(24) What is bona fide and what is not is a question of fact. The expression ""bona fide"" would mean genuine, in good faith and when a dispute is

based on substantial grounds or when a defence is probable and with some substance, it is a bona fide dispute. It must be strictly noted that a

winding up petition is not an alternative to a civil suit.

The High Court of Gujarat on the facts of the case, held that there was a serious controversy about the liability which require investigation of facts

and evaluation of document and examination of witnesses and therefore it would be advisable to the parties to go to the civil court for adjudication.

In (2003) 113 Company Cases 383 (Mad) SICAL-CWT Distripark Ltd. v. Besser Concrete Systems Limited, the agreement relied on by the

petitioner was genuine alleging fraud and this Court held that the case is not one for winding up and it can be adjudicated only before a civil forum.

In 2004(120) Company Cases 784 (DB) Neg.Micon Limited v. NEPC India), in respect of the petition for winding up, defence was raised by

stating that the letter acknowledging the liability has been fabricated, which came to be produced only at a later stage, it has been held in the said

decision that the defence raised by the respondent merits acceptance and it require deeper investigation and consequently, the petition for winding

up was dismissed. According to the learned Counsel appearing for the respondent, the facts of the said case and the ratio laid down in the said

decision squarely applicable to the facts of this case.

In AIR 2005 SC 4175 (Mediquip Systems (P) Ltd. v. Promima Medical Systems), the Hon''ble Supreme Court held that in order to pass an

order of winding up, there should be a debt and it should be determined or denied and it should not be allowed to be utilised as a means to

realising the debts and the power u/s 433 is discretionary. It has been further held that if there is any bona fide dispute, it is to be resolved by

approaching the civil court.

This Court in the decision reported in (2008) 6 MLJ 633(DB) (Narsey Brothers v. Nithyalakshmi Textiles Mills (P) Ltd., on the facts of the

case found that in spite of factual positions, there were earlier notices and replies have been sent and that the amount as well as the quantum is in

dispute and hence the winding up petition cannot be made as a device, to pressurise the respondent to make payment as per the demand raised.

The Court has carefully considered the submissions made by the learned senior counsel appearing for the appellant and the learned Counsel

appearing for the respondent and also perused the materials available on record in the form of typed set of documents and also taken into

consideration, the principles laid down in the decisions cited by the respective counsels.

A perusal of the agreement dated 12.12.1997 would reveal that a sum of Rs. 60,00,000/- was paid to the appellant herein and an undertaking

was given to ensure payment of the balance amount due to the appellant within a period of 60 days from the date of the agreement. Though the

total liability is Rs. 1,00,14,850/-, the appellant on receipt of Rs. 60,00,000/- had transferred all the share certificates which were pledged with

them by way of security to the new management of the respondent. That apart, a perusal of statement of accounts would reveal the said document

was signed by Thiru. K.A. Narayanan in his capacity as the Managing Director while the respondent company was with the old management. The

amount of Rs. 49,70,714/- was stated to be due as on 31.3.1997 as per the said statement of accounts and it was also signed by the same person.

In so far as the increase of interest from 20% to 24% it was undertaken in the letter dated 3.3.1997 signed by the same person viz., Thiru. K.A.

Narayanan.

The learned Counsel appearing for the respondent invited the attention of this Court to the resolution passed in the Board of Directors meeting

held on 6.5.1995, wherein it has been stated that all commercial transactions and contracts excepting Rs. 500/- had to be ratified/approved by two

whole time Directors apart from Mr. K.A. Narayanan and hence according to the learned Counsel appearing for the respondent, it is not open to

Mr. K.A. Narayanan to unilaterally increase the payment of interest to 24% from 20% per annum and that he is not competent to acknowledge the

liability to the extent of 1,00,14,850/-. The above said acts of Mr. K.A. Narayanan who was part of the old management according to the learned

Counsel appearing for the respondent is in collusion with the appellant thereby the statement of accounts and other documents came to be

fabricated in favour of the appellant. That apart, it is submitted by the learned Counsel appearing for the respondent that two partners of the

appellant firm were Directors of the old management of the respondent company and utilising their services, the documents came to be fabricated

based on which, the appellant made untenable claim which resulted in the filing of the company petition.

The Court has also taken into consideration the suit filed by the appellant in O.S. No. 15 of 2000, wherein it was filed for permanent injunction

restraining the respondent from encumbering the shares and also for mandatory injunction to return the share certificates held by him. The suit is not

laid for recovery of money and no leave under Order 2 Rule 3 of C.P.C. was obtained while instituting the suit.

The respondent after perusal of accounts, had sent a letter dated 7.2.1998 stating among other things that there was strike in the factory from

8.9.1997 to 26.12.1997 and hence it was paying a sum of Rs. 60,00,000/- without due verification of the accounts and that the accounts were

also not ready on the date. It is to be pointed out at this juncture that a counter claim for a sum of Rs. 22,00,000/- was also made by the

respondent against the appellant and in response to the said letter, there is no reply from the appellant. The respondent also sent one letter dated

27.7.1999 claiming a sum of Rs. 31.86 lakhs as the amount due and payable by the appellant and therefore, the legal notice dated 20.7.1999 was

sent on behalf of the appellant calling upon them to settle the liability. A perusal of the legal notice would reveal that no admission for the

outstanding amount has been made even though according to the appellant, Mr. K.A. Narayanan on behalf of the old management had

acknowledged the liability of Rs. 1,00,14,850/-. In response to the legal notice, the respondent sent a reply on 6.8.1999 disputing the liability.

On behalf of the appellant, one more legal notice was issued on 18.9.1999, wherein a reference was made to the confirmation of balance letter

dated 27.11.1997. The said legal notice was a statutory notice prior to the filing of the company petition for winding up and the respondent has

sent its reply dated 4.10.1999 disputing the contents of the legal notice and the liability and also made a counter claim. A perusal of the company

petition in C.P. No. 137 of 2000 would show that there was no reference made to the reply dated 4.10.1999 sent by the respondent in response

to the statutory notice.

The submissions made by the learned senior counsel appearing for the appellant that once the respondent has made a sum of Rs. 60,00,000/-,

it is not open to him to doubt the genuineness of the balance claim cannot merit acceptance for the reason that the respondent has raised a plea of

fabrication of documents and also made a counter claim for more than one occasion. The respondent also denied the cash receipts. It is pertinent

to point out at this juncture that the letter dated 27.11.1997 regarding confirmation of balance is seriously disputed by the respondent which is a

primary reason for filing the company petition. Once the said document is disputed, it is not open to the appellant to contend that the debt has been

crystallised in the form of ascertainable liquidated sum so as to enable them to get relief of winding up of the company.

As regards the contention made on behalf of the appellant that the dispute with regard to the sale of Woodbraiar Estate Ltd., is an independent

transaction with another company and it no way connected with the respondent company, and that the amounts due from Tamil Nadu Tea Brokers

Limited was received by the appellant and letter on paid to the respondent, in our considered opinion, are relatable to factual aspects which are

under dispute. Hence, it require detailed adjudication before a competent forum.

The statement made by the learned senior counsel appearing for the appellant with the respondent company became commercially insolvent, is

seriously disputed by the learned Counsel appearing for the appellant. According to the learned Counsel appearing for the respondent, the

respondent is a profit making concern having huge assets employing 800 persons and it is also the second largest manufacturer of tea. It is further

submitted by the learned Counsel appearing for the respondent that the loss incurred by the old management of the respondent company is being

wiped out and provisions have also been made. In this connection, the learned Counsel appearing for the appellant has invited the attention of this

Court to the revised statement of accounts as on 10.5.2005 in support of his submissions.

We have also gone through the judgment cited by the learned senior counsel appearing for the appellant and we find in most of the cases,

liability claimed was not disputed and in one case it was found the defence raised by the respondent therein was found to be frivolous.

In Madhusudanan v. Madhu Ullan Private Ltd. 1971(3) SCC page 632 : AIR 1971 SC page 2006, in our considered opinion is squarely

applicable to the facts of the case. It is trite law that the rule of winding up a company on a petition by creditor is that if there is a bona fide dispute

about the debt and the defence is substantial one, the defence of the company is in good faith and of substance and is likely to be succeed on a

point of law and the company adduced prima facie proof of the fact on which the defence defends, no order of winding up would be made by the

Court. We have carefully analysed the factual aspects of this case keeping in mind the principles laid down in the decisions cited by the learned

senior counsel appearing for the appellant and the learned Counsel appearing for the respondent and found that the respondent has established by

materials that there is a bona fide dispute about the debt and its defence is substantial in nature. The respondent company placed the material on

record in support of its contention that there is genuine, bona fide dispute between the parties. As the respondent company according to the

appellant is a commercially insolvent company, we perused the revised statement of accounts dated 10.5.2005 and also the submission of the

learned Counsel appearing for the respondent that it is a running company employing about 800 persons. The said fact has also weighed in our

mind. If the company petition is entertained, it would create unnecessary hardship and other wise causes stigma on the respondent company.

The learned Judge also has carefully analysed the entire materials placed before the Court and found that the company petition need not be

entertained.

We have also independently considered the materials placed before us and find no reason to interfere with the order passed by the learned

single Judge. Accordingly, this appeal is dismissed confirming the order and decree dated 25.7.2002 made in C.P. No. 137 of 2000. In the

circumstances, there will be no order as to costs. Consequently, C.M.P. Nos. 19268, 19269, 10678 and 10679 are closed.

The findings given above are only for the disposal of this appeal and it is open to the appellant to put-forth its case on all points before the

appropriate forum.