Companies Act Case Law M/s. Vijay Industries Appellant Vs M/s. NATL Technologies Limited

Companies Act Case Law

M/s. Vijay Industries Appellant Vs M/s. NATL Technologies Limited

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 7352 OF 2008
[Arising out of SLP (Civil) No. 15672 of 2005]
M/s. Vijay Industries …Appellant

Versus

M/s. NATL Technologies Limited …Respondent
JUDGMENT

S.B. SINHA, J :

 

1. Leave granted.

 

2. Whether interest payable on the sum due would be a debt so as to

attract the provisions of Sections 433 and 434 of the Companies Act, 1956

is the question involved herein.
2
3. Before, however, adverting to the said question, we may notice the

fact of the matter.

 

Appellant is a small scale unit registered with the District Industries

Centre. Admittedly, it supplied Castor Oil to the respondent valued at Rs.

89,13,589/-. A sum of Rs. 49,99,000/- had been paid by the respondent.

The invoices of the credit bills attached with each of the supply contained a

clause relating to payment of interest in the following terms:

 

“amount must be paid within seven days or you
are liable to pay 2% interest per month.”

 

4. It is not in dispute that at the foot of each credit bill an officer of the

respondent – company had put its signatures as a token of acceptance.

 

5. Appellant is said to have adjusted the amount first towards interest at

the stipulated rate and balance against the principal amount. As despite

demand the amount due and owed to it was not paid by the respondent, a

legal notice was served upon it claiming interest on the said sum. It was

stated that the appellant had appropriated account of payments made by it

against the interest and balance, if any, against the principal amount. On the
3
basis thereof, a demand for a sum of Rs. 64,58,457/- together with future

interest at the rate of 2% per month was raised. The said legal notice was

replied by the respondents, stating:

 

“We have received a legal notice from Sri Rao
Raghunandan, Advocate dt. 06.01.2003. You are
aware that after making payment of Rs. 10.00
lakhs towards Castor Oil Supplies to our plant, we
have received a notice under Section 226 (3) of the
Income Tax, 1961 from the Income Tax
Department. As per the notice, we are directed to
pay the amounts due to you on account of Castor
Oil supplied directly to the department in view of
your dues to the department to an extent of Rs.
25,43,737/-.
Subsequently, we have paid by way of
cheques to Income Tax Officer Ward-8(3) on
account of supply of castor oil as detailed below:-
Cheque No. Bank Dated Amount
(Rs.)
074013 Allahabad Bank 09.08.02 2,00,000/-
100313 S.B.H. 09.09.02 3,34,868/-
5,34,868/-

After adjusting the above amounts and our
earlier payment of Rs.10.00 lakhs, the balance
amount due to your company on account of oil
supplies is only Rs. 27,40,882/-.
In view of the notice served by the Income
Tax Department, we could not arrange any
payment directly to your company. This matter
was brought to your notice and also advised you to
obtain a direction from the Income Tax
Department to pay the dues directly to your
company. In the circumstances, we have not
intentionally defaulted in making arrangements for
4
the payment of your dues on account of Castor Oil
Supplies from time to time.
We request you kindly to obtain the
clearance, so as to enable us to arrange payment of
the outstanding amount due to you amounting to
Rs. 27, 40,882/-. In the circumstances, we request
you to kindly advice your advocate to withdraw
the legal notice served on us forthwith.”

 

6. Without disputing its liability, however, in view of the

correspondence that exchanged between the parties, the respondent offered

to pay a sum of Rs. 2,00,000/- per week to the appellant beginning from

April, 2003. It is on that assurance the appellant is said to have agreed to

restore supply of Castor Oil provided it deposited 50% of the outstanding

dues and remaining 50% at the rate of Rs. 2,00,000/- per week.

 

7. In its letter dated 8.09.2003, the respondent stated:

 

“…We have accounted your payments against the
interest and balances against Castor Oil Supplies
approximately. On such account being taken the
balance of Rs. 64, 58,457/- upto November, 2002.
Accordingly, the balance upto 31st March, 2003
stands Rs. 69, 75,134/-. This amount carries
interest @ 2 % per month.”
5
8. A sum of Rs. 8 lakhs was paid in between the period 19.04.2003 to

11.07.2003. As evidently, the appellant refused to make further supplies, a

meeting took place, the minutes whereof reads, thus:

 

“As per the discussion regarding the old
outstanding and for the continuity of the Business
at present, Vijaya Industries is rotataing, One
Tanker load for the payment arrangement towards
old outstanding. The Representatives of NATL
Technologies Ltd. have agreed to arrange payment
for the values of 2 truck loads of Castor Oil in the
month of December. Against the above payment,
the Company representative Sri Jagadish Prasad
agreed for supply of Three Tanker loads including
the existing One Tanker load which is already
supplying.
Basing on the convenience and as per the
discussions from time to time NATL have agreed
to square up the old outstandings and bring in to
the system for the rotation. Also in principle
agreed to compensate Vijaya Industries for the
delay in payment on account of earlier supplies
after clearing the entire old dues.”

 

9. As the said agreement between the parties arrived at in the said

meeting was not adhered to, on 23.12.2003 a legal notice under Section 434

of the Companies Act, 1956 was served on the respondent, stating:

 

“…My client states that as per the invoices
raised by it, you are laible to pay interest at 2% per
6
month if payment is not paid after availing the
credit period…”

 

It was further stated:

 

“In view of the above, my client calls upon
you to pay an amount of Rs. 65,15,947/- with
further interest thereon at 2% per month within
three weeks from the date of receipt of this
notice…”

 

10. In its reply to the said legal notice, the respondent did not deny or

dispute demand of interest. According to it, the total sum due was Rs.

16,80,468/ (sic for Rs. 15, 80,460/-), stating:

 

“In the circumstances, we advice you kindly
withdraw the legal notice dated 23rd December,
2003 so as to enable us to arrange payment for full
and final settlement of your dues amounting to of
Rs. 16,80,468/- within two months from the date
of this letter.”

 

Even that amount was not paid.

 

11. Appellant filed a winding up petition under Section 433(e) and 433(f)

read with Section 439 of the Companies Act on 23.01.2004.
7
12. Respondent in its counter-affidavit before the learned Company

Judge denied its liability to pay its interest for the first time, stating that it

was not liable to pay any interest nor it entered into any agreement in

connection therewith.

 

13. Appellant in its rejoinder contended that the credit bills mentioned

that the respondent was liable to pay interest at the rate of 2% per month on

delayed payment.

 

14. An interim order was passed on 17.02.2004 directing:

 

“Both the learned counsel agree that the
matter can be settled out of Court having regard to
the commercial relations between petitioner and
respondent for long duration. Sri V.S. Raju,
learned counsel for respondent has given a
Demand Draft bearing No. 097852, dt. 14.06.2004
for an amount of Rs. 2,00,000/- (Rupees two lakhs
only) drawn on Punjab National Bank, Bank
Street, Hyderabad, and six post-dated cheques-
five cheques bearing Nos. 216948, 216949,
216950, 216951, 216952 dt.25.07.2004,
25.08.2004, 25.09.2004, 25.10.2004 and
25.11.2004 respectively, each for an amount of Rs.
2,30,000/- (Rupees two lakhs thirty thousand
only), and another cheque bearing No. 216953
dt.25.12.2004 for an amount of Rs. 2,30,468/-
8
(Rupees two lakhs thirty thousand four hundred
and sixty eight only), drawn on State Bank of
India, Commercial Branch, Secunderabad, in
favour of the petitioner company in Court today.
Learned counsel for petitioner has received the
Demand Drafts, without prejudice to the claim of
the petitioner for interest and seeks time for
getting instructions from his client regarding
cheques.
Post on 09.07.2004.”

 

15. The learned Single Judge, in view of the stand taken by the parties,

while admitting the company petition by an order dated 10.11.2004 held

that a prima facie case has been made out therefor having regard to the

correspondences passed between the parties, the credit bills and also the

minutes of the meeting.

 

16. Aggrieved by and dissatisfied therewith, the respondent preferred an

appeal. By reason of the impugned judgment, the Division Bench has

allowed the said appeal.

 

17. Mr. Gourab Banerji, learned senior counsel appearing on behalf of

the appellant, would at the outset bring to our notice that there is a

difference of opinion on the issue amongst the different High Courts; one

taking a liberal view and another a strict view.
9
We have noticed hereinbefore that the defence of the respondent was:

 

(i) there has been no agreement between the parties to pay interest;

(ii) it had not been informed about the adjustment of payments made

by it towards interest.

 

Mr. Banerji would submit that the High Court committed a serious

error in accepting the aforementioned contentions of the respondent as each

of the credit bill was signed by the representative of the respondent –

company.

 

18. The Punjab and Haryana High Court in Stephen Chemical Limited v.

Innosearch Limited [(1986) 60 CC 702], the Madras High Court in Rashid

Leathers P) Ltd. v. Super Fine Skin Traders [(1990) 68 CC 684] and the

Delhi High Court in Devendra Kumar Jain v. Polar Forgings and Tools Ltd.

[(1995) 84 CC 766] took a liberal view of the matter opining that even if

interest is not payable by way of an agreement, usage or custom, the

Company Court will have the requisite jurisdiction to go into such a
10
question and admit a company petition for non-payment of interest on the

admitted dues.

 

19. In Devendra Kumar Jain (supra), a Division Bench of the Delhi High

Court, opined:

 

“My conclusion is that in a case where the liability
to pay the principal amount is not disputed by the
company the creditor need not be forced to initiate
separate litigation for recovery of the interest
amount and the interest amount can be determined
by the Company Judge in the winding up
proceedings and on failure of the company to pay
that amount the Company can be ordered to be
wound up on the ground that it is unable to pay its
debts. Interest at the rate of 12% per annum
was granted in stead and place of stipulated rate of
interest.”

 

20. We may notice the two decisions of the Andhra Pradesh High Court

in Multimetals Ltd. v. Suryatronics Pvt. Ltd. [(1997) 89 CC 259] and

Bombay Glass Blowing Industries v. Bio Vaccines Pvt. Ltd. [(1999) 98 CC

174] wherein after the company petition was admitted, the parties adduced

evidences. A finding of fact was arrived at that there was no written

agreement except the printed clause for payment of interest in the invoices.

The court did not rely upon the evidence adduced on behalf of the appellant.
11
It was in the aforementioned situation, the said Court in Bombay Glass

Blowing Industries (supra) held that the provisions contained in Section 3 of

the Interest Act, 1978 or Section 62(1)(a) of the Sale of Goods Act, 1930

would not be attracted, stating:
“From a reading of Section 61 (2)(a) of the Sale of
Goods Act, it is revealed that it is the discretion of
the Court to award interest at such rate as it thinks
fit on the amount of price to the seller from date of
tender of goods or from the date on which the
price was payable and under Section 3 of the
Interest Act, at a rate not exceeding the current
rate of interest. If the proceedings relate to a debt
payable by virtue of a written “instrument at a
certain time from the date when the debt is payable
lo the dale of institution of the proceedings and if
the proceedings do not relate to any such debt,
then, from the date mentioned in this regard in the
written notice given by the person entitled to the
dale of institution of the proceedings. These
provisions refer to the sole discretion of the Civil
Court to award interest in a suit for recovery of
money. Therefore, the concerned creditor is not at
all entitled to interest until the Court so orders. In
other words, it cannot be said that the creditor is
entitled to interest as a matter of right before the
institution of the proceedings in the Court. Before
that, the alleged amount of interest or damages is
unascertained. The creditor cannot claim interest
at any particular rate, in the absence of any
agreement to pay the same, prior to the institution
of the proceedings. He cannot claim that from the
person liable to pay the price of goods he is
entitled to, in addition to the unpaid price of
goods, the interest claimed and calculated
according to his-unilateral act and, therefore, the
concerned person cannot be said to be indebted to
12
a certain extent so far as the claim of interest is
concerned. This being the position, how can it be
said that at the time of issuance of the statutory
notice, the respondent-company was indebted to
the petitioner-company to pay the interest at any
rate, much less at the rate of 21 per cent per annum
? and, therefore, on account of default in making
payment of interest as claimed by the petitioner-
company, it is liable to be declared as
commercially insolvent The same position
continues even during the pendency of the
proceedings.”

[Emphasis supplied]

 

21. The Division Bench of the High Court, in its impugned judgment, not

only relied upon the aforementioned two binding precedents but also a

judgment of the Allahabad High Court in Ultimate Advertising and

Marketing v. G.B. Laboratories Ltd. [(1989) 66 CC 232].

 

22. We may at the outset notice that Ultimate Advertising and Marketing

(supra) has also been noticed in Devendra Kumar Jain (supra) to hold that

the Company Judge is the appropriate forum for determining as to whether

the creditor is entitled to interest, where the company admits its liability.

 

23. It may, however be placed on record that the aforementioned decision

of the learned Single Judge of the Allahabad High Court in Ultimate
13
Advertising and Marketing (supra) came up for consideration before a

Division Bench thereof in M/s. Ultimate Advertising and Marketing New

Delhi v. G.B. Laboratories Ltd., Kanpur [AIR 1998 Allahabad 320] wherein

inter alia it was held:

 

“From the cases referred to above by various High
Courts, it seems that the company Judge has a
power to direct the respondent-company to pay the
amount of interest but in each case, the facts are to
be examined as to whether there is bona fide
dispute regarding the claim of the interest and if
the Court finds that there is bona fide dispute, the
petitioner-company cannot make a grievance that
the company Judge failed to allow the company
petition for winding up the company for payment
of the Interest…”

 

However, on the facts of that case, there was nothing to show that

prior to the issuance of the statutory notice by the appellant, any claim was

made in respect of the payment of interest and furthermore the respondent

had filed a counter affidavit to the said petition denying and disputing the

said assertion of the appellant that an order of winding up of the company

was not passed only for payment of the interest which had been disputed

bonefide.
14
24. We may furthermore notice that even in Kitply Industries Ltd. v. Hari

Narain and Sons Pvt. Ltd. [(1998) 91 CC 715] a similar view was taken by

the Rajasthan High Court. The learned Judge upon holding that the

principles enumerated in various decisions referred to therein must be

applied in each and every case having regard to the facts thereof, rejected

the claim for payment of interest, stating:

 

“…In my opinion, in the absence of any agreement
between the parties, the dispute which the
respondent has raised regarding its liability to pay
interest cannot be treated as a fictitious or
frivolous dispute. There is sufficient justification
in the claim of the respondent that the dispute is a
bona fide dispute. It is also to be noted that the
petitioner has not even said that the parties had
agreed for payment within a particular time
period…”

 

The said decision was rendered after trial.

 

25. We may notice an elaborate judgment of a learned Single Judge of the

Karnataka High Court in Jyothi Limited v. Boving Fouress Limited [(2001)

3 Comp LJ 413 (Karn)] wherein the learned Judge from paragraphs 5 to 8 of

the judgment considered Stephen Chemical Limited (supra), Rashid

Leathers P) Ltd. (supra) and Devendra Kumar Jain (supra), on the one hand
15
and from paragraphs 10 to 16 considered Southern Industrial Polymers (P)

Ltd. v. Amar Formulators and Electronics (P) Ltd. [(1984) 56 CC 77

(Karn)], Anand Steel v. Bharat Earth Movers Ltd. [(1987) 3 Comp LJ 175

(Karn)], Multimetals Ltd. (supra), Unisystems (P) Ltd. v. Stepan Chemical

Ltd. [(1985) CC 875 (P&H)], Gangadhar Narsinghdas Agrawal v. Timble

(P) Ltd. [(1996) 5 Comp LJ 342 (Bom)], Ultimate Advertising and

Marketing v. G.B. Laboratories Ltd. [(1989) 66 CC 232] and Kitply

Industries Ltd. (supra).

 

26. We have noticed hereinbefore that the decision of the Allahabad High

Court in Ultimate Advertising and Marketing v. G.B. Laboratories Ltd.

[(1989) 66 CC 232] was reversed by the Division Bench. The said fact was

not brought to the notice of the learned Single Judge. It was furthermore

not brought to the notice of the High Court that Unisystems (P) Ltd. (supra)

has also been overruled in Unisystems P. Ltd. v. Stepan Chemical Ltd.

[(1986) 60 CC 753].

 

The learned Judge opined that the word “debt” refers to an

ascertained and definite amount due to the creditor and not a disputed

amount. However, it was furthermore held:
16
“(a) The term `debt’ refers to an ascertained and
definite amount `due’ and does not refer to a claim
for compensation/ damages or a claim which
requires assessment by a court before it becomes
due and payable.
(b) The term `debt’ may refer not only to
`principal’ (value of goods or amount advanced),
but also to interest due thereon, where there is a
contract to pay interest. Where the contract
specifically provides for payment of interest, or
where there is an admission or promise to pay
interest by the company or where in proceedings
for recovery of money, a competent court or
arbitrator has determined the liability to pay
interest, then non-payment of interest (whether
with principal or interest alone) may amount to
inability to pay debts.
(c) Interest cannot be awarded merely on the
basis of a term in a bill or invoice, unless the
creditor proves that such provision is based on a
contract or agreement on the part of the purchaser
to pay interest. This is because a credit bill or an
invoice is a unilateral demand by the supplier and
is neither a bilateral agreement nor a promise by
the purchaser to pay interest. Interest can be
awarded on the basis of a provision in a bill/
invoice, if it is supported by an agreement or
promise to pay interest by the purchaser. Such
agreement may be established with reference to
correspondence, or by countersigning of the bill
by the purchaser, or by acceptance by the
purchaser of the term in the bill relating to interest.
Where in the absence of an agreement or contract
for payment of interest on the value of goods
supplied, a notice of demand is sent by the
supplier requiring payment of the value of goods
supplied with interest thereon and a reply is sent
by the purchaser in general terms seeking time to
17
pay the bill amount, such reply cannot be
construed as an admission to pay interest. Either
an agreement to pay interest or a specific
admission or promise to pay interest or an order or
decree granting interest by a court or tribunal
empowered to award interest, is a condition
precedent to hold that interest is a debt due, for the
purpose of a winding up petition. In the absence
of a contractual or legal liability, nor act as an
estoppel in regard to a subsequent denial by the
company in legal proceedings.

(d) Where there is a bona fide dispute in regard
to interest, the court considering a petition under
section 433(e) should not decide the issue, merely
to avoid multiplicity proceedings. The purpose of
winding up proceedings being completely
different from the purpose of proceedings for
recovery of a debt, winding up proceedings are not
a substitute for a civil suit, and, therefore,
relegating parties to a civil suit cannot be
considered as resulting in multiplicity of
proceedings.”

 

27. We may also notice that a Division Bench of the Calcutta High Court

in Universal Bearing Agency v. Wpil Limited [2006 (2) CHN 530] followed

the decision of the Punjab and Haryana High Court in Stephen Chemical

Limited (supra).
18
28. Keeping in view the aforementioned divergence in the opinions of the

different High Courts, let us consider relevant provisions of the Companies

Act.

 

Circumstances in which a company may be wound up by the court are

contained in Section 433 of the Companies Act. If a company is unable to

pay its debts as contained in Clause (e) thereof, it would be one of the

grounds therefor.

 

Section 433 (f) of the Companies Act reads as under:

 

“A company may be wound up by the Tribunal, —
(a) *** ***
(b) *** ***
(c) *** ***
(d) *** ***
(e) *** ***
(f) if the Tribunal is of the opinion that it is just
and equitable that the company should be wound
up;”

 

Section 434 raises a legal fiction as to when the company would be

deemed to be unable to pay its debts; Clause (a) of Sub-section (1) whereof

reads as under:
19
“( 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
one lakh rupees then due, has served on the
company, by causing it to be delivered at its
registered office, by registered post or otherwise, a
demand under his hand requiring the company to
pay the sum so due and the company has for three
weeks thereafter neglected to pay the sum, or to
secure or compound for it to the reasonable
satisfaction of the creditor;”
29. On a plain reading of the aforementioned provisions, it is evident that

what is necessary for invoking the said provision is that despite service of

notice, the company which was indebted in a sum exceeding one lakh

rupees then due failed and/ or neglected to pay the same within three weeks

thereafter or to secure or compound for it to the reasonable satisfaction of

the creditor.

 

30. The fact that despite receipt of a legal notice dated 23.12.2003, no

payment has been made to liquidate the debt on the part of the company is

not in dispute. Admittedly, appellant had been supplying Castor Oil to the

respondent. The fact that the respondent did not pay the price of the said

supplies, on presentation of the invoices, is also not in dispute. It also
20
stands admitted that the parties negotiated as regards the manner in which

the payments could be made. In a meeting held on 25.11.2003, promises

were made to square up the old outstanding dues and bring it into the

system for the purpose of rotation. The agreement spoke of payment of

compensation to the appellant for the delay in payment on account of earlier

supplies after clearing the entire old dues. There cannot be any doubt

whatsoever that when, in principle, the respondent had agreed to

compensate the appellant for the delay in payment, the same must be by way

of interest payable on the principal amount or otherwise.

 

31. Respondent never denied the demand of interest as such, but in its

reply dated 30.12.2003 merely stated that a sum of Rs. 16,80,468 (sic for

Rs. 15,18,460) was due.

 

Construction of the aforementioned provision came up for

consideration before this Court in Amalgamated Commercial Traders (P.)

Ltd. v. A.C.K. Krishnaswami and Another [(1965) 35 CC 456], wherein it

was held:

 

“It is well-settled that “a winding up petition is not
a legitimate means of seeking to enforce payment
21
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.””
32. Yet again in M/s. Madhusudan Gordhandas & Co. v. Madhu Woollen

Industries Pvt. Ltd. [(1971) 3 SCC 632], this Court upon considering

Amalgamated Commercial Traders (P.) Ltd. (supra) and various other

English cases opined as under:
“20. 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) Again, a petition
for winding up by a creditor who claimed payment
of an agreed sum for work done for the company
22
when the company contended that the work had
not been properly was not allowed. (See Re.
Brighton Club and Horfold Hotel Co. Ltd.)”

 

The court furthermore opined:

 

(i) Where the debt is undisputed, the court will not act upon a defence

that the company has the ability to pay the debt but did not choose

to pay that particular debt.

(ii) Where, however, there is no dispute that the company passed the

creditor a debt entitled 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.

(iii) The principles 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 adduced prima facie proof of the facts on which the

defence depends.

 

33. Section 433 of the Companies Act does not state that the debt must be

precisely a definite sum. It has not been disputed before us that failure to
23
pay agreed interest or the statutory interest would come within the purview

of the word `debt. It is one thing to say that the amount of debt is not

definite or ascertainable because of the bona fide dispute raised thereabout

or there exists a dispute as regards quantity or quality of supply or such

other defences which are available to the purchaser; but it is another thing to

say that although the due as regards the principal amount resulting from the

quantity or quality of supply of the goods stands admitted but a question is

raised as to whether any agreement had been entered into for payment of

interest or whether the rate of interest would be applicable or not. In the

latter case, in our opinion, the application for winding up cannot be

dismissed.

 

34. In M/s. Madhusudan Gordhandas & Co. (supra), this Court referred to

the decisions of the Chancery Division in Re. Tweeds Garages Ltd. [1962

Ch 406], holding:

 

“From those sections it appears that the only
qualification which is required of the petitioners in
this case is that they are creditors and about that,
as I have said, there is really no dispute.
Moreover, it seems to me that it would, in many
cases, be quite unjust to refuse a winding-up order
to a petitioner who is admittedly owed moneys
which have not been paid merely because there is
24
a dispute as to the precise amount owing. If I may
refer to an example which I suggested in the
course of argument, suppose that a creditor obtains
judgment against a company for 10,000 and after
the date of the judgment something is paid off.
There is a genuine bona fide dispute whether the
sum paid off is 10 or 20. The creditor then
presents a petition to have the company wound up.
Is the company to be entitled to say: “It is not
disputed that you are a creditor but “the amount of
your debt is disputed and you are not, therefore,
“entitled to an order”? I think not. In my
judgment, where there is no doubt (and there is
none here) that the petitioner is a creditor for a
sum which would otherwise entitle him to a
winding-up order, a dispute as to the precise sum
which is owed to him is not of itself a sufficient
answer to his petition.”
Re. Tweeds Garages Ltd. (supra), apart from M/s. Madhusudan

Gordhandas & Co. (supra), has inter alia been followed by the Bombay

High Court in Pfizer Ltd. v. Usan Laboratories P. Ltd. [(1985) 57 CC 236]

holding that only because there is a dispute in regard to the rate of interest,

the winding up petition cannot be thrown out on that ground alone. Pfizer

Ltd. (supra) has been followed by the Bombay High Court in Ispat

Industries Ltd., in RE [(2005) 2 Comp LJ 235]. Pfizer Ltd. (supra) was a

case of principal plus interest.
25
35. Our attention, however, has also been drawn to a recent decision of

this Court in Mediquip Systems (P) Ltd. v. Proxima Medical System GMBH

[(2005) 7 SCC 42] wherein the questions of law which fell for consideration

before this Court inter alia were:
“(i) Whether the Division Bench of the High Court
at Calcutta was justified in dismissing the
appellant’s appeal summarily holding, inter alia,
that the appellant was not entitled to stay of
operation of the order passed by the Company
Judge under appeal or, in other words, whether
dismissal of connecting stay petition could be
justified reason alone for dismissing appeal
summarily which was based on cogent grounds?
(ii) Whether the appellant Company can be said to
be indebted to the respondent petitioning creditor
in respect of US $ 11,000 equivalent to INR
4,69,480 when the said sum was not remitted by
the said petitioning creditor, namely, Proxima
Medical System GmbH?
(iii) Whether the winding-up proceedings under
the relevant provisions of the Companies Act are
maintainable against the Company by the said
respondent petitioning creditor when it is evident
from the document issued by Deutsche Bank
(remitter’s banker) and foreign inland remittance
certificate (issued by the Company’s banker) that
US $ 11,000 was remitted by another company,
namely, Pameda Medizinische Systems GmbH and
not by the petitioning creditor?
(iv) Whether the Division Bench as well as the
Company Judge, in exercise of their jurisdiction
under the Companies Act, erred in directing the
Company to deposit Rs 4,69,480 to secure the
26
alleged claim of the petitioning creditor when the
petitioning creditor was not the remitter of the said
amount and such was seriously disputed before the
Company Judge and the Company Judge did not
adjudicate the disputes at controversy and directed
the petitioning creditor to file suit in respect
thereof?
(v) Whether the Division Bench in passing the
order under appeal was justified to direct the
Company to deposit the balance amount when an
earlier Division Bench by an interim order reduced
the quantum of deposit from Rs. 4,69,480 as
directed by the Company Judge to Rs 2
lakhs in compliance whereof the Company had
duly deposited Rs. 2 lakhs on 11-11-2002 and the
petitioning creditor failed to present any suit
within three months thereof as per direction of the
Company Judge?
(vi) Whether the Division Bench was justified in
passing the order under appeal by dismissing the
stay application, on extraneous considerations,
when an earlier Division Bench by an interim
order granted stay of advertisement subject to the
appellant’s depositing Rs. 2 lakhs which was duly
deposited by the Company to the satisfaction of
the Court?”
In that case, on the premise that no clear cut finding had been arrived

at by the Company Judge that the debt was prima facie due and payable by

the company to the creditor and the impugned order had been passed in

purported exercise of jurisdiction not vested in the Company Court for an

application for winding up of the Company, it had no jurisdiction to direct
27
the company to deposit the amount payable to a third party or to a party

other than the petitioning creditor. Thus, what was in question was whether

the Company Judge could issue a direction to the company to make payment

to a third party. Holding that such a jurisdiction is not vested in the

company court, it was held:
“18. This Court in a catena of decisions has held
that an order under Section 433(e) of the
Companies Act is discretionary. There must be a
debt due and the company must be unable to pay
the same. A debt under this section must be a
determined or a definite sum of money payable
immediately or at a future date and that the
inability referred to in the expression “unable to
pay its debts” in Section 433(e) of the Companies
Act should be taken in the commercial sense and
that the machinery for winding up will not be
allowed to be utilised merely as a means for
realising debts due from a company.

*** *** ***
21. The debt under Section 433 of the Companies
Act must be a determined or a definite sum of
money payable immediately or at a future date…”

 

36. It is, however, of some interest to note that the Division Bench

referred to a decision of the Madras High Court in Tube Investments of
28
India Ltd. v. Rim and Accessories (P) Ltd. [(1990) 3 Comp LJ 322] where

the following principles relating to bona fide dispute had been evolved:

 

“(1) If there is a dispute as regards the payment
of the sum towards principal, however small that
sum may be, a petition of winding up is not
maintainable and the necessary forum for
determination of such a dispute existing between
the parties is the Civil Court;
(2) The existence of a dispute with regard to
payment of interest cannot at all be construed as
existence of a bona fide dispute relegating the
parties to decide such a dispute before the Civil
Court and in such an eventuality, the Company
Court itself is competent to decide such a dispute
in the winding-up proceedings; and
(3) If there is no bona fide dispute with regard
to the sum payable towards the principal, it is open
to the creditor to resort to both the remedies of
filing of a civil suit as well as filing of a petition
for winding-up of the company.”
In that case also a bona fide dispute was raised by the company.

 

It was furthermore found that there was no general allegation or

averment that the company was unable to pay its dues and other obligations

in the sense of its innumerable creditors. It was in the aforementioned
29
situation that Section 433(f) of the Companies Act was found to be not

applicable.

 

37. In this case, on the date of filing of the application, dues in respect of

at least a part of the debt which was more than the amount specified in

Section 433 of the Companies Act was not denied. It is not a requirement of

the law that the entire debt must be definite and certain. The Division

Bench of the High Court proceeded on the basis that the entire sum covering

both the principal and the interest must be undisputed, holding:

 

“Except making a bald allegation in the company
petition that the petitioner had come to know that
the respondent company owes large sums of
money to its creditors and it is not in a position to
meet its debt obligations and as, therefore, become
commercially insolvent, the petitioner has not
taken necessary care to prima facie establish the
same. The only piece of evidence available on the
side of the petitioner is that the respondent is
indebted to the petitioner a sum which is claimed
towards interest on the delayed payment.
Assuming for a moment that the respondent
company is liable to pay interest on the delayed
payments and it has not paid the said amount to
the petitioner, could it be said that the respondent
neglected to pay the debt particularly when the
respondent is disputing the liability of payment of
interest on the delayed payments and when there is
no such written agreement in between the parties
for such payment of interest.”
30
38. The Division Bench upon noticing the fact of the matter formulated

the question “as to whether the respondent is liable to pay interest at 2% per

month on delayed payments and what that is being disputed would it

constitute prima facie a valid ground for admission of the company

petition?” It was held:

 

“…The petitioner seeks to rely upon the invoices
which according to him contain at the foot a clause
for payment of interest on delayed payments. Such
a clause, even assuming is there, since it has not
been placed by means of any cogent evidence in
this case, in view of the judgment of the Rajasthan
High Court in Kitply Industries case (supra),
cannot constitute an agreement between the parties
for payment of interest. The legal position, thus,
seems to be obvious. Before seeking a company to
be wound up on the ground that it is unable to pay
its debts, it must be shown before the Court that
the debt claimed against the company is
ascertained and definite and that the company
failed to pay the same. Mere failure to pay the
amount would not constitute the requisite ‘neglect
to pay’ as envisaged under Clause (a) of Sub-
section (1) of Section 434 of the Act when the
company bona fide disputes the very liability and
hence the defence taken up by it is of substance.”

 

It was furthermore held:
31
“Having regard to the facts and circumstances of
the instant case, we are of the considered view that
the claim of the petitioner towards interest on
delayed payments since not covered by any
specific agreement between the parties inter se is a
contentious issue and the dispute as regards the
payment of interest is bona fide and it cannot,
therefore, legitimately be concluded that the
respondent has neglected to pay. The petitioner,
who pleaded inter alia in his petition that as per
the trade practice payments made shall be adjusted
towards interest first and balance, if any, shall be
adjusted towards principal later, failed to establish
the same by any prima facie evidence. In the
absence of any such trade practice, appropriating
the amounts towards interest first and the balance,
if any towards principal next becomes
inappropriate, in which event the claim of the
petitioner that the respondent is liable to pay Rs.
65,15,947/- basing upon such calculations cannot
be accurate. The total amount claimed by the
petitioner as due in that view of the matter
becomes doubtful and not definite. It is still got to
be ascertained if the claim of the respondent were
to be considered that there has been no agreement
for payment of interest on delayed payments. For
the above reasons, it cannot be presumed prima
facie that the respondent is unable to pay its
debts.”

 

39. The findings of the High Court, with respect, are not correct for more

than one reason; firstly, because the Division Bench did not hold that the

invoices were not proved by cogent evidence; secondly, question of leading

evidence would arise only after the company petition is admitted and,
32
thirdly, issuance of invoices and signature of the respondent thereon is not

disputed.

 

40. The judgment of the Division Bench also contains a legal flaw insofar

as it failed to take into consideration that the appellant had in fact issued

three notices being dated 6.01.2003, 8.09.2003 and legal notice dated

23.12.2003 specifically mentioning that the payments had been adjusted

towards interest first and balance, if any, shall be adjusted towards the

principal. Thus, a prima face case was made out.

 

41. This brings us to the question as to why an interest is payable. An

interest is inter alia payable by way of restitution.

 

In Clariant International Ltd. and Another v. Securities & Exchange

Board of India [(2004) 8 SCC 524], this Court held:

 

“25. A direction in terms of Regulation 44 which
was in the interest of securities market
indisputably would have caused civil or evil
consequences on the defaulters. Clause (i) of
Regulation 44, however, does not provide for any
penal consequence. It provides for only civil
consequences. By reason of the said provision, the
power of the Board to issue directions is sought to
be restricted to pay the amount of consideration
33
together with interest at a rate not less than the
interest payable by banks on fixed deposits. Both
the Board and the Tribunal have proceeded on the
basis that the interest is to be paid with a view to
recompense the shareholders and not by way of
penalty or damages. Such a direction, therefore,
was for the purpose of protecting the interest of
investors and not “in the interest of the securities
market”. The transactions in the market are not
thereby affected one way or the other. The Board,
as noticed hereinbefore, has a discretion in the
matter and, thus, it may or may not issue such a
direction. The shareholders do not have any say in
the matter. As a necessary concomitant, they have
no legal right.”

 

Yet again, this Court in Alok Shanker Pandey v. Union of India and

Others [(2007) 3 SCC 545] has held that interest is payable by way of

accretion on capital.
The question came up for consideration in Meka Venkatadri Appa

Rao Bahadur Zamindar Garu and others v. Raja Parthasarathy Appa Rao

Bahadur Zamindar Garu [AIR 1922 PC 233] wherein it was held:

 

“…There is a debt due that carries interest. There
are moneys that are received without a definite
appropriation on the one side or on the other, and
the rule which is well established in ordinary cases
is that in those circumstances the money is first
applied in payment of interest and then when that
34
is satisfied in payment of the capital. That rule is
referred to by Rigby, L.J., in Parr’s Banking Co. v.
Yates in these words:
“The defendant’s counsel relied on the old rule
that does, no doubt, apply to many cases, namely,
that, where both principal and interest are due, the
sums paid on account must be applied first to
interest. That rule, where it is applicable, is only
common justice. To apply the sums paid to
principal where interest has accrued upon the debt,
and is not paid, would be depriving the creditor of
the benefit to which he is entitled under his
contract.”

 

The said decision has been followed by this Court in Meghraj and

Others v. Mst. Bayabai and others [(1969) 2 SCC 274, para 5] and a

Constitution Bench of this Court in Gurpreet Singh v. Union of India

[(2006) 8 SCC 457, para 19].

 

In Alok Shanker Pandey v. Union of India and Others [(2007) 3 SCC

545], this Court held:

 

“8. We are of the opinion that there is no hard-
and-fast rule about how much interest should be
granted and it all depends on the facts and
circumstances of each case. We are of the opinion
that the grant of interest of 12% per annum is
appropriate in the facts of this particular case.
However, we are also of the opinion that since
interest was not granted to the appellant along
35
with the principal amount, the respondent should
then in addition to the interest at the rate of 12%
per annum also pay to the appellant interest at the
same rate on the aforesaid interest from the date of
payment of instalments by the appellant to the
respondent till the date of refund of this amount,
and the entire amount mentioned above must be
paid to the appellant within two months from the
date of this judgment.”
42. Interest is also payable in terms of the provisions of Section 62(1)(a)

of the Sale of Goods Act. Interest may be held to be payable in terms of

Section 3 of the Interest Act, 1978 as also in terms of Sections 5 and 6 of

the Interest on Delayed Payments to Small Scale and Ancillary Industrial

Undertakings Act, 1993.

 

In Krishna Chemicals v. Orient Paper and Industries Ltd. [(2005) 128

CC 72], the Orissa High Court held:
“The interest amounts as claimed by the
petitioners in the two cases against the Company
however may not be in accordance with the
provisions of Sections 4 and 5 of the Act, 1993.
The fact that the exact amount of interest claimed
by the petitioners against the Company is disputed
can be no ground to dismiss the petition for
winding up for non-payment of the interest so long
as the liability to pay interest of the Company to
36
the petitioners exists under Sections 4 and 5 of the
Act, 1993 and admittedly such liability has not
been discharged by the Company. As has been
held by the Supreme Court in Madhusudan
Gordhandas and Co. v. Madhu Woollen Industries
Pvt. Ltd. (supra) in the portion of the judgment
quoted above, where 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 quantify the
debt precisely.”

 

The provisions of the Interest on Delayed Payments to Small Scale

and Ancillary Industrial Undertakings Act, 1993 were applied in Assam

Small Scale Industries Development Corpn. Ltd. and Others v. J.D.

Pharmaceuticals and Another [(2005) 13 SCC 19]

 

43. For the reasons aforementioned, we have no other option but to set

aside the judgment of the High Court. The question, however, which arises

for consideration is whether at this stage we shall remit the matter back to

the learned Single Judge to admit the company petition or dispose of the

matter ourselves. We choose to adopt the latter course. We are of the

opinion that interest of justice would be subserved if we in exercise of our

jurisdiction under Article 142 of the Constitution of India direct that the

respondent to pay simple interest on the admitted sum at the rate of 12%
37
per annum on the balance amount instead of 24% per annum within eight

weeks from the date of amount became due till it is paid failing which the

consequences provided in law shall ensue.

 

44. We have passed this order with a view to avoid multiplicity of

proceedings and for the purpose of avoiding unnecessary delay in the

interest of parties.

 

45. The appeal is allowed. No costs.
………………………….J.
[S.B. Sinha]
…………………………..J.
[Cyriac Joseph]
New Delhi;
December 17, 2008

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