Stanes Tyre and Rubber Products Ltd. vs Tolins Tread and Allied Products

K. Kannan, J.

The core issue:

The tenability of directing the non-payment of interest on the debt as condition for further proceedings for publication in the winding up process

of the company is the issue in appeal before us.

II. Disposition in the court below:

The suppliers, who are sister companies, of certain rubber products to the M/s. Stanes Tyre and Rubber Products Ltd. (hereinafter called ""the

company"") were not paid the contracted sums for the goods delivered and after statutory notices filed the applications for winding up u/s 433(e)

read with Sections 434(1) and 439 of the Companies Act, 1956. During the pendency of the petitions, the company paid the principal amounts

due under the contracts but did not pay the interest component as demanded by the petitioners. The company denied its liability to pay interest but

the learned judge while disposing of the petitions passed orders thus:

Now it is admitted by both the parties that after filing of the above company petition the principal outstanding amount alone was paid by the

respondent-company and the interest accrued on the principal amount is still due and payable by the respondent-company.

The letter dated April 11, 2001, sent by M/s. Tolin Rubber P. Ltd., to the respondent-company and the letter dated April 16, 2001, sent by

the respondent-company will make it very clear that the respondent has to make the payments within 90 days from the date of receipt of the

materials and in such circumstances, though the interest portion is disputed by the respondent-company, I am of the considered view that the

respondent-company is liable to pay the interest also. Further, it is settled law that the company court can also go into the question of payment of

interest.

Therefore, considering the fact that the transactions are purely commercial in nature. I direct the respondent-company in both the company

petitions to pay the interest calculated at 18 per cent. per annum on the outstanding amount, within four weeks from the date of receipt of a copy

of this order.

It is made clear that failing to pay the interest within the time stipulated as above, the company petition would be admitted and steps would be

taken to publish the same in the newspapers and Official Gazette.

III. Contentions by the appellant:

Learned senior counsel Shri Venkatraman argued before us that the invoices for the supplies effected by the petitioners made no reference either

to the payment of interest or stipulate any time within which it was to be paid. To the notices issued by the petitioners prior to the filing of the

petitions in court, the company denied its liability to pay interest in the replies dated April 3, 2002. According to him, the company petition cannot

be used as a tool to apply pressure to recover contracted debts. He refers us to Amalgamated Commercial Traders (P.) Ltd. Vs. A.C.K.

Krishnaswami and Another, , Madhusudan Gordhandas and Co. Vs. Madhu Wollen Industries Pvt. Ltd., and Mediquip Systems Pvt. Ltd. Vs.

Proxima Medical System GMBH, , to bring home the propositions of law that (i) if the debt was bona fide disputed, there cannot be a ""neglect to

pay"" within Section 434(1) (a) of the Companies Act; (ii) mere fact that the company had suffered some trading losses would not lead to

presumption of its inability to pay ; (iii) the defence of the company was a substantial one and not a moonshine, which is likely to succeed on a

point of law; and (iv) the company adduces prima facie proof of the facts on which the defence depends. He also relied upon the decision in

Gujarat Industrial Investment Corporation Ltd. v. Sterling Holiday Resorts (India) Ltd. [2008] 143 Comp Cas 39, where a Division Bench of this

Court held that when there was a dispute as regards a huge component of Rs. 13.50 crores against a principal of Rs. 4.5 crore and a civil suit was

also pending, and a genuine dispute existed for pendente lite interest, there was no justification for winding up of the company. This, the court did

after a finding that the company was in a position to pay its debts.

IV. Contentions by the respondent:

Although the original invoices made no mention of the payment of interest, when the company did not pay the amounts for the supplies effected,

the petitioners had issued notices on April 11, 2001 and April 16, 2001, requiring the company to make the payments within 90 days (emphasis1

supplied) from the date of receipt of materials. He relied on a Division Bench decision of the Calcutta High Court in Rydak Syndicate Ltd. v.

Roshanlal Agarwal [2007] 139 Comp Cas 814, where the company court had admitted a winding up petition and directed the payment of

principal with interest from the date of service of statutory notice. According to him, the non-payment of interest was unjustified and the company

court had jurisdiction to award such interest also as a condition to ward off further proceedings for winding up.

V. The court''s power to award interest:

The power of the court to award interest, while determining the existence of a debt cannot be doubted. The debt may include the interest

component also. Where the contract specifies payment of interest, there is no difficulty in immediately arriving at the answer. However, only in

cases, where the written contract itself does not contain a stipulation of interest, the answer could be secured by reference to the provisions of the

Interest Act, 1978. The relevant section is Section 3, which reads as under:

Power of court to allow interest.-(1) In any proceedings for the recovery of any debt or damages or in any proceedings in which a claim for

interest in respect of any debt or damages already paid is made, the court may, if it thinks fit, allow interest to the person entitled to the debt or

damages or to the person making such claim, as the case may be, at a rate not exceeding the current rate of interest, for the whole or part of the

following period, that is to say,-

(a) if the proceedings relate to a debt payable by virtue of a written instrument at a certain time, then, from the date when the debt is payable to the

date of institution of the proceedings ;

(b) if the proceedings do not relate to any such debt, then, from the date mentioned in this regard in a written notice given by the person entitled or

the person making the claim to the person liable that interest will be claimed to the date of institution of the proceedings:

Provided that where the amount of the debt or damages has been repaid before the institution of the proceedings, interest shall not be allowed

under this section for the period after such repayment.

(2) Where, in any such proceedings as are mentioned, in Sub-section (1),-

(a) judgment, order or award is given for a sum which, apart from interest on damages, exceeds four thousand rupees, and

(b) the sum represents or includes damages in respect of personal injuries to the plaintiff or any other person or in respect of a person''s death,

then the power conferred by that sub-section shall be exercised so as to include in that sum interest on those damages or on such part of them as

the court considers appropriate for the whole or part of the period from the date mentioned in the notice to the date of institution of the

proceedings, unless the court is satisfied that there are special reason why no interest should be given in respect of those damages.

(3) Nothing in this section,-

(a) shall apply in relation to:

(i) any debt or damages upon which interest is payable as of right, by virtue of any agreement; or

(ii) any debt or damages upon which payment of interest is barred, by virtue of an express agreement;

(b) shall affect:

(i) the compensation recoverable for the dishonour of a bill of exchange, promissory note or cheque, as defined in Negotiable Instruments Act,

1881 ; or

(ii) the provisions of Rule 2 of Order II of the First Schedule to the Code of Civil Procedure, 1908 ;

(c) shall empower the court to award interest upon interest.

Although the interest could well be a part of liability and hence included in the debt, the Act makes a dichotomy between a ""debt"" and so called

interest"" for the purpose of the Act. The reading of the section (particularly, Section 3(3)) makes it clear that the section is not attracted in relation

to a debt where interest is payable as of right or in cases where there is an express bar under a particular agreement to pay interest. This is so

because, in such a case, it is the express provision of the agreement between the parties that governs the issue of interest. If the circumstances in

Section 3(3) are not attracted, the next question is to examine, as laid down u/s 3(1): (i) if there has been a demand for interest for the debt or

damages in the proceedings, or (ii) if in respect of the debt or damages already paid, a claim for interest is made. The court may, if it thinks fit,

allow interest to the person entitled to the debt or to the person making such claim (where the debt is paid already) from the period as stipulated in

Section 3(1) (a) : from the date when the debt is payable by virtue of a written instrument at a certain time (that is, when the time is specified in the

written instrument) to the date of institution of proceedings or as stipulated in Section 3(1)(b): from the date mentioned in a written notice to the

date of institution of proceedings.

VI. Juxtaposing facts to law:

The principal amount for the goods supplied by the petitioner in C. P. No. 263 of 2002 is Rs. 35,10,544.60 and the principal amount due to the

petitioner in C. P. No. 264 of 2002 is Rs. 14,07,827. The invoices themselves do not contain references to interest or payment terms within any

particular dates. The subsequent notices commencing from April 11, 2001, particularise the stipulation both as regards time and payment of

interest. The statutory notices had been first issued on March 14, 2002, for the payment of the amounts by April 7, 2002, warning the company of

legal action for the recovery of the amount with costs and interest (emphasis1 supplied). The company did not dispute the debt as such but replied

by its notices dated April 3, 2002, that there was no justification to assume commercial insolvency, that their own customers did not pay for the

goods supplied by the company due to the poor quality of rubber supplied by the petitioners, the difficulty in recoveries was directly attributable to

the petitioners'' poor quality of supplies and that further it did not accept the claim for interest. The replies end with a supplication to ""bear with us

for some time when we shall approach you with an acceptable schedule of payment apart from resolving the quality claims.

The liability of the debt itself is not in serious doubt and the company has made the payments of the principal sum alone in six instalments

between February 28, 2003 and December 3, 2004, that is, during the pendency of the proceedings. The interest component alone is denied. In a

case, where the company court comes to the conclusion on appreciation of all relevant facts, there exists a debt due by the company and that it is

unable to repay the same, by the application of the relevant tests laid down in the decisions referred to above, it would be justified in ordering

winding up. The question is whether there exist circumstances that legally justify the order for winding up.

Here, the invoices do not refer to any date before which the amount shall be paid or whether the interest will be collected. Therefore, it is the

second contingency that arises of a situation when the liability is cast by a demand, which is not expressly barred by the agreement. Admittedly, the

notice had been issued, referring to the time for payment for the goods supplied to arise within 60 days and more importantly demanding interest at

18 per cent. per annum. The fact that the original invoice does not stipulate interest is irrelevant. If it does, there is no question of invoking the

provisions of the Interest Act, 1978. Again, there is no question of the fact that the invoice does not stipulate when the payment is to be made. All

that is necessary to solidify the liability is a demand for the same stipulating a period. The demand could be not merely of the debt but also of the

interest. Again the proceeding could be not merely of the debt (that is the principal already paid) but also of the interest. As we have already

pointed out, there is such a demand for payment of interest both in the statutory notices and in the petitions. The problem here is that the petition

itself is not a proceeding for recovery of debt nor is this process to be resorted to as an arm-twisting tactics to recover interest. It is one thing to

find that in a given case, there is a liability for interest but quite another to direct further proceedings towards winding up only for its non-payment,

under legal advice or under bona fide perception that it is not payable. The rate of interest payable is also a contentious issue. At any rate, it could

not be said that the defence regarding interest is a moonshine.

VII. Relevant conditions for winding up shall still be satisfied:

The court below, while it recorded the finding that the interest at 18 per cent. per annum is payable by the company, although denied by the

company, it could not have directed the non-payment of interest within four weeks from the date of receipt of the order to result in further

proceedings for winding up, without entering a definite conclusion that in its opinion, there exists an inability to pay the debt, de hors the company''s

perception (that could be also on account of the advice received by it) that the interest need not be paid. It is that decisive finding that the company

is unable to pay the debt that would conclude the issue. All the decisions of the Supreme Court referred to above, we have carefully borne in our

mind and to this case, they are relevant to the extent that there is a bona fide dispute with regard to the debt which includes a compound of interest

and there is no reason to conclude that there is a commercial insolvency of the company to pay the debt. The Division Bench ruling of the Calcutta

High Court has no relevance because, the decision refers to an instance where interest has been treated as included in the debt and hence

awarded, but it does not advert to the issue of the court''s power to make its non-payment on a bona fide dispute or on legal advice not to pay the

sum a pre-condition to direct further proceedings in winding up process.

VIII. Conclusion:

We therefore, set aside the order of the company court and allow the appeals. It shall be open to the respondents to take independent action

for recovery of interest by separate proceedings, if they are so advised by properly instituted civil suits or other proceedings and it might be open

to plead for exclusion of the time spent in the company court to save the bar of limitation. The O. S. As are allowed on the above terms. No costs.