This petition is filed seeking winding up of the respondent for non-payment of the alleged debt to the petitioner.
The brief facts leading to the filing of this petition are as under :
The proprietary concern of Mr. M. Venkat Rao, was awarded three contracts described as M-25, M-26 and M-27 by the Karnataka State Highways Improvement Project (for short 'the employer'). The respondent was incorporated by conversion from the sole proprietor of M. Venkat Rao with effect from 4-10-2005. Before the incorporation of the respondent-company, the sole proprietary concern of M/s. M. Venkat Rao has entered into two sub-contracts with the petitioner in respect of contracts M-27 and M-25 on 7-3-2005 and 29-6-2005 respectively. After conversion of the proprietary concern into the respondent-company, another sub-contract was entered on 5-12-2005 by the proprietary concern in respect of contract M-26. On the same dates, General Powers of Attorney were executed in favour of the Managing Director of the petitioner-company by the principal contractor. By 30-4-2008, the petitioner claimed to have completed a major portion of the work and surrendered the site to the respondent by informing the latter that it is unable to execute the balance work. The Managing Director of the petitioner has also sent a statement of account in his capacity as the GPA holder of the respondent-company wherein a sum of Rs.6,52,45,125/- was claimed. The petitioner claimed that the said amount was excluding one bill and that if that amount is included the respondent is liable to pay Rs.7,52,11,528/-.
The petitioner pleaded that the respondent has sent a cheque bearing No.944769 for a sum of Rs.8,60,03,488/-, comprising Rs.7,52,11,528/- as the principal and Rs.1,07,91,960/- as interest. The cheque was dishonoured with the endorsement 'funds insufficient' made on 28-10-2009 by the banker. On 23-11-2009, the petitioner issued a legal notice under Section 138 of the Negotiable Instruments Act, 1881 to the respondent. In reply to the said notice, the respondent has got a legal notice issued on 29-12-2009 wherein it was stated that the final bill is yet to be raised by the respondent in view of non-completion of balance works and that once the final bill is settled by the employer, the bills of the petitioner will be settled. It was further stated that in case the employer levies any damages on account of delay in completion of the works, the same will be passed on to the petitioner. As regards the alleged dishonour of the cheque, the respondent has taken the stand that to their shock, they came to know that cheque book bearing Nos.DBI 944751 to 944800 along with 23 unused cheque leaves vide cheque book No.VNI 209001 to VNI 209050 were found missing from the site office of the respondent and that their enquiries revealed that the Managing Director of the petitioner, with a criminal intention has stolen and misused the cheque by forging the signature of the respondent and filling up the blank cheque No.944769 dated 21-10-2009 with a malafide intention to gain himself and cause loss to the respondent.
By letter dated 22-1-2011, the petitioner has called upon the respondent to pay a sum of Rs.7,52,11,528/- along with interest within 15 days from the date of issue of notice and that failing such payment, the petitioner would initiate legal action. The petitioner has also enclosed a statement of account to the said letter. Having received the said letter, the respondent did not respond to the same. Thereafter, the petitioner issued statutory notice under Section 434 of the Companies Act, 1956 (for short "the Act") to the respondent on 7-2-2011.
The respondent sent a reply notice dated 23-3-2011 wherein while denying any agreement between the petitioner and the respondent, it has set up the plea that the petitioner is executing the work on job work basis for which they have been making payment from time to time and that they are not due any amount. Thereafter, on the same day on which they have received the notice, the petitioner has filed this Company Petition.
On behalf of the respondent, it has filed a counter-affidavit wherein the fact that the petitioner was entrusted with sub-contracts by M. Venkat Rao has been admitted. The counter-affidavit also admitted the fact that the proprietary concern of M. Venkat Rao was converted into a limited company by its incorporation on 4-10-2005. The counter-affidavit further averred that while the petitioner could not complete the works, the employer gave extension of contracts twice and the petitioner expressed its inability to complete the works and surrendered the balance portion of the contract, as a result of which the agreements between M. Venkat Rao and the petitioner-company stood terminated. The respondent, while stating that it has never admitted its liability in its reply dated 29-12-2009, also denied issuing of cheque. It was however conceded that the dishonoured cheques were issued by M. Venkat Rao. The respondent has also denied that it has given assurance that once the final bill is settled by the employer, the petitioner’s bill will be settled. The respondent has reiterated that it is not admitting its liability. The counter-affidavit refers to various averments which may not be relevant for the present purpose.
At the hearing, Sri S. Vivek Chandrasekhar, learned Counsel for the petitioner, submitted that the debt claimed by the petitioner is an undisputed debt. In support of this submission, the learned Counsel relied on the following circumstances:
(i) Issuance of cheque bearing No.944769 by M. Venkat Rao for Rs.8,60,03,448/- on 21-10-2009.
(ii) Non-denial of statement of account sent by the Managing Director of the petitioner who also happens to be the G.P.A. holder of M. Venkat Rao as on 30-4-2008 wherein the petitioner has claimed a sum of Rs.6,52,45,144/-.
(iii) Categorical admission made by the respondent in the reply notice dated 29-12-2009 to the legal notice dated 23-11-2009 about the debt with an assurance that as soon as the employer settles the final bill, the respondent will settle the petitioner’s bills with the only rider that levy of any damages by the employer for non-completion of works in time will be to the petitioner’s account.
Sri Vikram Pooserla, learned Counsel for the respondent, advanced the following submissions :
(i) that the debt is seriously disputed;
(ii) that the petitioner has already invoked the arbitration clause and got the dispute referred for arbitration, which fact reveals that there is a serious dispute regarding the debt;
(iii) that the respondent is commercially solvent; and that
(iv) the petitioner has taken inconsistent stands relating to the quantum of amount claimed by it.
The law is well settled that the jurisdiction under Section 432 of the Act is a special jurisdiction conferred only on the High Courts. One of the grounds for ordering winding up of a company is its inability to pay its debts as envisaged under Section 433(1)(e) r/w. Section 434(1)(a) of the Act.
Section 433 (A company may be wound up by the Tribunal – (a) if the company has, by special resolution, resolved that the company be wound up by the Tribunal; (b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting; (c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year; (d) if the number of members is reduced, in the case of a public company, below seven, and in the case of a private company, below two; (e) if the company is unable to pay its debts; (f) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up; (g) if the company has made a default in filing with the Registrar its balance sheet and profit and loss account or annual return for any five consecutive financial years; (h) if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality; (i) if the Tribunal is of the opinion that the company should be wound up under the circumstances specified in Section 424G; Provided that the Tribunal shall make an order for winding up of a company under clause (h) on application made by the Central Government or a State Government) of the Act envisages the grounds for winding up of a company. The present Company Petition is concerned with the ground mentioned in clause (e) of Section 433 of the Act. Under this clause, a company may be wound up if it is unable to pay its debts. Section 434(1) (A company shall be deemed to be unable to pay its debts – (a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum or to secure or compound for it to be reasonable satisfaction of the creditor; (b) if execution or other process issued on a decree or order of any Court or Tribunal in favour of a creditor of the company is returned unsatisfied in whole or in part; or (c) if it is proved to the satisfaction of the Tribunal that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the tl shall take into account the contingent and prospective liabilities of the company. (2) The demand referred to in clause (a) of sub-section (1) shall be deemed to have been duly given under the hand of the creditor if it is signed by an agent or legal adviser duly authorised on his behalf, or in the case of a firm, if it is signed by any such agent or legal adviser or by any member of the firm.) of the Act explained as to what constitutes the inability of a company to pay its debts. The main ingredients to be satisfied for ordering winding up of a company for its inability to pay its debts are, (i) if it is shown that the company is indebted in a sum exceeding Rs.500/- (though the amount is enhanced to Rs.1 lakh by Companies (Second Amendment) Act, 2002, the same is not notified) and despite service of notice on it by a creditor by assignment or otherwise, it has neglected to pay the same for more than three weeks after such service or to secure or to compound for it to the reasonable satisfaction of the creditor, and (ii) if the execution or other process issued on a decree or order of any Court or Tribunal in favour of a creditor of the company is returned unsatisfied in whole or in part. The scope of these provisions is well explained in a catena of Judgments of the Apex Court. In M/s. Madhusudan Gordhandas & Co. Vs. Madhu Woollen Industries Pvt. Ltd. (1971) 3 SCC 632 the Supreme Court held that in the matter of winding up of a company for non-payment of its debts, two rules are well settled for refusing an order of winding up – first, if the debt is bona fide disputed and the defence is a substantial one; secondly, where the defence is likely to succeed in point of law and that the company adduces prima facie proof of facts on which the defence depends. It was further held that while considering the winding up of a company for its inability to pay its debt, the Court will consider the wishes of its creditors and may decline to make the winding up order by attaching greater weight to their views. The Supreme Court also held that winding up order will not be made on a creditor’s petition if it would not benefit him or the company’s creditors generally. Referring to the Judgment in Tweeds Garages Ltd., Re (1962) Ch. 406 : 1962 Comp. Cases 795 (Ch.D), the Court held that where there is no dispute 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 quantify the debt precisely.
From the Judgments in Amalgamated Commercial Traders (P) Ltd. Vs. A.C.K. Krishnaswami and another 1965(35) Comp. Cases 456 (SC), Pradeshiya Industrial & Investment Corporation of U.P. Vs. North India Petrochemicals Ltd., (1994) 3 SCC 348, M/s.Madhusudan Gordhandas & Co. (3-supra), Tweeds Garages Ltd., Re (4-supra), Mediquip Systems (P) Ltd. Vs. Proxima Medical System GmbH (2005) 7 SCC 42, Vijaya Industries Vs. NATL Technologies Ltd. (2009) 3 SCC 527 and IBA Health (India) Pvt. Ltd. Vs. Info-Drive Systems SDN.BHD (2010) 10 SCC 533 this Court, in M/s. Indiabulls Housing Finance Ltd. Vs. M/s. South Asian Agro Industries Ltd. C.P.No.264 of 2013, dt. 17-6-2014 deduced the following legal principles :
1. If the debt is bona fide disputed and the defence is a substantial one, the Court will not wind up the company. Conversely, if the plea of denial of debt is a moonshine or a cloak, spurious, speculative, illusory or misconceived, the Court can exercise the discretion to order the company to be wound up.
2. A petition presented ostensibly for winding up order, but in reality to exert pressure to pay the bona fide disputed debt is liable to be dismissed.
3. Solvency is not a stand alone ground. It is relevant to test whether denial of debt is bonafide.
4. Where the debt is undisputed and the company does not choose to pay the particular debt, its defence that it has the ability to pay the debt will not be acted upon by the Court.
5. Where there is no dispute regarding the liability, but the dispute is confined only to the exact amount of the debt, the Court will make the winding up order.
6. An order to wind up a company is discretionary. Even in a case where the company’s inability to pay the debt was proved, order to wind up the company is not automatic. The Court will consider the wishes of shareholders and creditors and it may attach greater weight to the views of the creditors.
7. A winding up order will not be made on a creditor’s petition if it would not benefit him or the company’s creditors generally and the grounds furnished by the creditors opposing winding up will have an impact on the reasonableness of the case.
Keeping in view the settled legal position, it needs to be examined whether the petitioner has made out a case for admission of the Company Petition.
As noted hereinbefore, the first and the foremost plea raised by the learned Counsel for the respondent is that the debt is seriously disputed and that therefore the Company Petition is not maintainable. The fact that the erstwhile proprietary concern M/s. M. Venkat Rao has entrusted three works to the petitioner under sub-contracts is admitted. Further, the fact that the petitioner has executed substantial works is also not in dispute. That while giving up the balance works, the Managing Director of the petitioner has sent a statement of account, albeit, as an agent of M/s. M. Venkat Rao, is also not in dispute. The learned Counsel for the respondent has candidly admitted that no reply to the said statement of account was sent either by M. Venkat Rao or on behalf of the respondent disputing the correctness of the said statement of account.
It is the specific case of the petitioner that cheque bearing No.944769 was issued in the name of M. Venkat Rao for Rs.8,60,03,488/- towards the bills payable to the petitioner and that the same was dishonoured. When the petitioner has caused legal notice issued to M. Venkat Rao on 23-11-2009 in this regard, a reply notice was issued both on behalf of M. Venkat Rao and also the respondent. This reply notice is significant for it contains a clear and categorical admission of liability and the intention of the respondent to settle the bills of the petitioner. For proper appreciation, it is necessary to reproduce this part of the reply notice :
' … The work in M-27 package is completed in all respects and remaining works are completed substantially. Though KSHIP issued completion certificates, the same are subject to completion of snag list works. The final bill is yet to be raised in as much as there are balance works to be completed apart from delay in execution of project works.
That once the final bill is settled by KSHIP, your client bills would be settled and if in case KSHIP levy any damages on account of delay in completion of works the same would be passed on to your client. So far as the claim of reimbursement, security deposit, sales tax, bank guarantee amounts, unpaid mobilization amount and amount paid to procuring machinery etc., are concerned, the same would arise only at the time of finalizing the final bill which according to my client is yet to be done. Therefore question of payment of balance consideration at this stage would be premature and does not arise and that there is no occasion for issuance of cheque….' (Emphasis supplied)
With regard to the cheque, it was stated in the reply notice as under:
'… My clients further state that they have never given any assurances and promises to your client that the alleged Cheque Bearing No.944769 dated 21-10-2009 drawn M/s. ING Vysya Bank Ltd. would be honoured. It is pertinent to mention here that after going through your legal notice my clients were shocked and on verification of the records they came to know that the Cheque Book No.BDI 944751 to 944800 along with 23 unused cheque leafs in vide Cheque Book No.VNI 209001 to VNI 209050 are missing from my clients site office situated at Bangalore. In fact your client office is also situated very close to my client’s office. On further enquiry it is revealed that the Managing Director of your client with a criminal intention has stolen and misused the cheque by forging the signature of my client and filing up the blank Cheque Bearing No.944769, dated 21-10-2009 with a malafide intention to gain himself and sustain loss to my clients. There is no liability at all cost upon our clients to issue any cheque to your client and in particular the cheque referred to above.
That my clients have come to know about the incident of stealing, misusing, forgery and extraction of money only after receiving your legal notice and therefore my clients are advice to take necessary legal steps to file appropriate criminal proceedings against your client and Managing Director for the above illegal acts. Therefore my clients reserve their right to initiate such criminal proceedings.'
The respondent, having categorically admitted its liability to settle the petitioner’s bills took a complete volte- face in the counter affidavit wherein it went to the extent of denying the admission of its liability made in the reply notice dated 29-12-2009. In para-11 of para-wise reply given in the counter-affidavit, the respondent inter-alia stated as under :
'… It is also false and denied that this respondent company assured the petitioner that once the final bill is settled by KSHIP, the bill of the petitioner company would be settled. The petitioner is put to strict proof of the same. The respondent herein is not admitting any liability….'
It is indeed consternating to notice the audacity of the respondent in denying the assurance given by it in its own reply notice, the authenticity of which is not disputed by it. Perhaps, there can be no better instance of denying the admitted debt. In fact, in the reply notice dated 29-12-2009 issued to the statutory notice, the stand of the respondent is wholly evasive. While denying entering into any sub-contracts with the respondent, it has pleaded that the petitioner was entrusted with contracts on job work basis and that they do not owe any money, much less Rs.7,52,11,528/- and with interest thereon. In my prima facie opinion, having made a categorical admission that the respondent will settle the petitioner’s bill once the employer settles its own bills, subject to recovery of damages from the petitioner’s bills if the same is levied by the employer, it lies ill in the mouth of the respondent to make a total denial of its liability to pay the debt to the petitioner.
With regard to the cheque, the stand of the respondent is brazenly inconsistent. Having claimed that the cheque leaves were stolen by the Managing Director of the petitioner in reply its notice dated 29-12-2009, in its counter-affidavit the respondent has abandoned the said stand and admitted that the cheques were issued to the petitioner by M. Venkat Rao, the erstwhile proprietary concern. In the face of this admission that the cheque was issued by M. Venkat Rao and the same was dishonoured, the burden heavily lies on the respondent to explain the circumstances under which the cheque was issued. The statement of account dated 30-4-2008 which was not controverted by the respondent by any contemporaneous correspondence coupled with the fact that M. Venkat Rao, the erstwhile proprietary concern, has issued the cheque which was admittedly dishonoured, would prima facie prove the debt of the petitioner owed by the respondent.
Clause (1) of the Memorandum of Association of the respondent-company, which relates to the main objects to be pursued on its incorporation, to the extent the same is relevant, reads as under:
'To undertake and to continue, to carry on, as a going concern, the business of M/s. M. Venkat Rao …….. with all the Assets i.e., all Movables, Immovable, Tangible and Intangible Assets including all the rights, titles, privileges, licenses, permits, sanctions, awards, grants, all other work orders on hand and work in progress, experience status such as special contractors, pre-qualifications given by the principals to M. Venkata Rao and with all the liabilities, obligations and payables of every nature and description including secured,
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unsecured loans, funded and non-funded facilities/sanctions by bankers, financial Institutions besides overdrafts, cash credits, Term Loans, Bank Guarantees, Letters of Credit etc., availed by Proprietary concern of M. Venkat Rao.' (Emphasis supplied) Though the cheque in question was issued by M. Venkat Rao instead of by the respondent-company, it is not in dispute that even after incorporation of the respondent-company, M. Venkat Rao is closely associated with the respondent-company as one of its Directors. A perusal of the reply notice dated 29-12-2009 would show that the same was issued on behalf of both the respondent as well as M. Venkat Rao. The respondent cannot thus disown the actions of one of its Directors taken in connection with the obligations under clause (1) of its Memorandum of Association. No further material needs to be discussed in order to show that the respondent owes debt to the petitioner and that its denial of debt completely lacks bonafides apart from the same being a cloak to avoid payment of the debt. With regard to the submission of the learned Counsel for the respondent that the very fact that arbitration proceedings have been initiated would show that there is a dispute with regard to quantum of debt and that unless the same is ascertained, the petition for winding up of the respondent for its inability to pay the debt is not maintainable, I am afraid, I cannot accept this submission. The liability to pay a debt is different from the liability to pay an ascertained debt. If the petitioner is able to show that the respondent is liable to pay the debt in excess of Rs.500/- as prescribed under Section 434(1)(a) of the Act and this Court is satisfied that the denial of debt is not bonafide and that there is no substantial defence to justify non-payment of the debt, the Court will order winding up irrespective of whether the debt is quantified or not. In the light of the legal position discussed and the finding that the respondent has admitted its liability to pay the bills to the petitioner rendered above, the mere pendency of arbitration proceedings does not constitute a ground to reject the petition for winding up. The Company Petition is therefore admitted. The petitioner is permitted to issue advertisement in 'The Hindu' and 'Saakshi', the English and Telugu Daily Newspapers, respectively, of Hyderabad edition. Post on 21-7-2014 for filing proof of publication.