Dismissed

Asim Pharmachem Industries v. Nilsin Ultrachem Limited

Gujarat HC6 Aug 2012COMP/14/2006

Case brief

AI extract

What is this about?

The Court dismissed two winding up petitions filed to recover disputed debts. Holding that the debt was bona fide disputed with a substantial defense, the Court ruled that the winding up machinery cannot be utilized to realize such debts and treated the petitions as an abuse of process, quoting the Supreme Court.

What did the court decide?

Both Company Petitions No.14 and 15 of 2006 were dismissed as the debt was disputed and a bona fide dispute existed.

Asim Pharmachem Industries Vs Nilsin Ultrachem Limited — Company and Corporate | Gujarat HC (2012)

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COMP/14/2006

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JUDGMENT

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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

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COMPANY PETITION No.14 of 2006
With
COMPANY PETITION No.15 of 2006

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For Approval and Signature:

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HONOURABLE MR.JUSTICE R.M.CHHAYASd/-

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1^{Whether Reporters of Local Papers may be} NO allowed to see the judgment ?

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2 To be referred to the Reporter or not ? NO 3^{Whether their Lordships wish to see the} NO fair copy of the judgment ? Whether this case involves a substantial question of law as to the interpretation

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4 NO of the constitution of India, 1950 or any order made thereunder ?

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5^{Whether it is to be circulated to the} NO civil judge ?

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ASIM PHARMACHEM INDUSTRIES - Petitioner(s)

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Versus

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NILSIN ULTRACHEM LIMITED - Respondent(s)

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Appearance :

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MS NIYATI K SHAH for Petitioner(s) : 1,MR.D K.PUJ for
Petitioner(s) : 1,

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MS AVANI S MEHTA for Respondent(s) : 1,

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CORAM : HONOURABLE MR.JUSTICE R.M.CHHAYA

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Date : 06/08/2012

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ORAL (COMMON) JUDGMENT

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(1)Both these petitions are against the same
company and as identical issues arise in these
petitions, the same are disposed of by this
common judgment.

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(2) Both these petitions have been filed by the petitioners for an appropriate order of winding

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COMP/14/2006

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JUDGMENT

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up of the respondent-Company, Nilsin Ultrachem
Limited, under the provisions of the Companies
Act, 1956 (the Act).

¶31

(3)It is the case of the petitioner in Company
Petition No.14 of 2006 that because of some
business relation the petitioner advanced a sum
of Rs.2,00,000/- at the relevant point of time @
18% p.a. on 28.09.2002. It is the contention on
behalf of the petitioner that the said amount
was to be repaid by the respondent-Company on
02.12.2002. It is contended by the petitioner-
Company that the respondent-Company did not pay
an amount of Rs.6,411/- towards interest. It is
also the case of the petitioner-Company that
thereafter the petitioner advanced a sum of
Rs.5,00,000/- on 23.10.2002 carrying interest @
18% p.a. It is the case of the petitioner that
the respondent Company repaid the amount of
Rs.1,00,000/- on 02.12.2002. On the basis of the
said factual premises, it is the case of the
petitioner that the respondent is liable to pay
interest for 40 days on Rs.5,00,000/-, which
comes to Rs.9,863/- and Rs.1,19,704/- for 911
days of Rs.4,00,000/-. It is also the case of
the petitioner that the petitioner-Company
further advanced a sum of Rs.3,00,000/- on
29.03.2003 and the respondent-Company is liable
to pay an amount of Rs.1,17,468/- towards the
interest for 794 days. It is further the case of
the petitioner that the petitioner is entitled

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COMP/14/2006

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JUDGMENT

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to recover an amount of Rs.7,00,000/- towards
properties of Rs.3,13,446/- towards interest
total aggregating to Rs.10,13,446/-. The
petitioner, in order to prove the aforesaid
facts, has relied upon the extract of account of
the petitioner-Company.

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(4)It is contended by the petitioner that as the
said amount was not paid by the respondent
Company the petitioner issued a notice dated
18.07.2005 under Section 433(e) read with
Section 434 of the Act and raised a demand of
Rs.10,13,446/- along with interest @ 18% p.a.
from the due date of payment till 31.05.2005.
the petitioner-Company in the said statutory
notice, raised a requisition that if the payment
is not made within a period of three weeks, the
petitioner would file a winding up petition
before this Court under Section 433 (e) of the
Act. It is the case of the petitioner that a
very vague reply was given to the aforesaid
statutory notice by the respondent-Company. It
is the case of the petitioner that on causing
search for the Office of the Registrar of
Companies it has reveled that the respondent-
Company has not filed annual return for the
years ending on 31.03.2004 and 31.03.2005. It is
the case of the petitioner that the respondent-
Company has heavily indebted and the financial
substratum of the respondent-Company has gone
down and the respondent-Company has become

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COMP/14/2006

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JUDGMENT

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commercially insolvent and, therefore, by way of
this petition the petitioner-Company has prayed
for winding up of the respondent-Company.

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(5)Upon notice being issued by this Court the
respondent-Company, through its authorized
signatory, has filed affidavit-in-reply and has
denied the contentions raised by the petitioner-
Company wherein it is contended that no such
amount has been received by the respondent-
Company towards loan. It is further submitted
that as stated in the petition and has relied
upon the audited balance sheet it was contended
that no loans are outstanding as on 31.03.2003.
It is also contended by the respondent-Company
that the present petition is filed only with a
view to harass the respondent-Company. It is
further contended that the petitioner-Company
was engaged in trading of various items of Soda
Ash and others, there were transactions of
purchase and sales between the parties. It is
the case of the respondent-Company that there
are three companies of the petitioner-Company
and four companies of the respondent-Company
wherein such transactions took place. However,
it is contended by the respondent-Company that
it had never sought any amount from the
petitioner-Company towards the money lender i.e.
towards the dues. It was further contended by
the respondent-Company that the amount raised in
the invoices from June 2000 to May 2001 are

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COMP/14/2006

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JUDGMENT

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disputed and in fact the respondent also has
raised a debit note to the tune of Rs.9,38,525/-
as the invoices which were raised by the
petitioner-Company, were much higher than the
price prevailing in the market. It is therefore
contended by the respondent-Company that merely
by raising higher amount in the invoices does
not entitle the petitioner to receive the
payment as per the invoices raised. The
respondent-Company has therefore contended that
no dues are outstanding and the petitioner-
Company is not entitled to recover amount of
Rs.10,13,446/-. It is also contended that the
averments made in the petition are untrue. It is
the case of the respondent-Company that the
financial substratum of the respondent-Company
has not gone down and has denied the fact that
it has become commercially insolvent.

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(6)In response to the aforesaid affidavit-in-reply
of the respondent-Company, rejoinder was also
filed by the petitioner-Company denying the
contentions raised by the respondent-Company in
the affidavit-in-reply and has contended that
the averments made in the affidavit-in-reply are
not true. It is also contended that the
petitioner-Company has never received any such
debit note and such debit note is not even
produced by the respondent-Company and has
reiterated the contentions raised in the
petition. It is also contended that the

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COMP/14/2006

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JUDGMENT

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respondent-Company has received the accounts and
has never disputed the contents thereof and has
therefore prayed that the respondent-Company be
ordered to be wound up as prayed for in the
present petition.

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(7)Similarly in Company Petition No.15 of 2006
similar contentions are raised and identical
prayers are prayed for. It is the case of the
petitioner that a sum of Rs.14,53,115/- is due
and payable by the respondent-Company, as per
invoiceNo.37dated22.07.2002for
Rs.1,15,710/-, invoice No.45 dated 29.08.2002
for Rs.2,72,800/-, invoice No.51 dated
30.09.2002 for Rs.2,86,000/- and invoice No.52
dated 30.09.2002 for Rs.3,01,500/-. It is the
case of the petitioner-Company that as no amount
was received from the respondent-Company, the
petitioner-Company issued a statutory notice
dated 29.06.2005 under Section 433(e) read with
Section 434 of the Act calling upon the
respondent-Companytomakepaymentof

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Rs.14,53,115/- along with interest @ 18 p.a.
from the due date of payment till 31.05.2005.
However, in spite of the statutory period being
over instead of vague reply of the statutory
notice no payment was made by the respondent-
Company and hence, it is contended that the
financial substratum of the respondent-Company
is lost and, therefore, the respondent-Company
is liable to be wound up. It is also contended

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COMP/14/2006

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JUDGMENT

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by the petitioner-Company that the respondent-
Company has become commercially insolvent and
has not even filed its annual return.

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(8)The respondent-Company has filed an affidavit-
in-reply in response to the aforesaid petition
and has also contended that the petition suffers
from delay and latches and the claim raised in
the petition pertaining to the year 2002 wherein
invoices were raised in the year 2002 and,
therefore, the petition is filed in the month of
October, 2005 i.e. beyond the period of three
years. It is contended that there is dispute
with regard to the invoices for the purchase of
raw material. The respondent-Company has also
contended that in the reply to the notice given
by the respondent-Company it is specifically
pointed out that on the contrary the respondent-
Company is entitled to refund of the amount. It
is contended that the debit note of
Rs.9,38,525/- was raised and as such no dues are
outstanding. It is also contended that the
petitioner-Company have not waived his right for
filing civil suit for recovery and has
approached this Court after a long period of
three years only with a view to pressurize the
respondent-Company to pay the amount in spite of
the fact that such amount is not due and
payable.

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(9) In response to the aforesaid affidavit-in-reply

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COMP/14/2006

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JUDGMENT

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of the respondent-Company, affidavit-in-
rejoinder was filed by the petitioner-Company
denying the contentions raised by the
respondent-Company in the affidavit-in-reply and
has specifically contended that no disputes were
raised when the invoices were raised. It is
contended that only in order to create a facade
of a bona fide dispute in the present petition
dispute of price variation is brought forward by
the respondent-Company. The petitioner-Company
has denied the contentions raised by the
respondent-Company in the affidavit-in-reply and
has reiterated what has been stated in the
petition.

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(10) This court (Coram: M.R.Shah, J) vide order dated 13.12.2006 admitted both these petitions, passed an order of advertisement and fixed the matters for final hearing. It is a matter of record that the respondent-Company filed O.J. Appeal Nos.4/2007 and 5/2007 against the said order of admission and advertisement. However, the said appeals came to be withdrawn vide order dated 17.01.2007 passed by Division Bench of this Court with a liberty to raise all the contentions raised in the appeals as well as other contentions available to the petitioner before the learned Company Judge at the time of final hearing of the Company Petitions.

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(11) Heard Ms.Niyati K. Shah, learned advocate for

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COMP/14/2006

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JUDGMENT

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the petitioner and Mr.K.G.Vakharia, learned
Senior Counsel with Ms.Avni Mehta, learned
advocate for the respondent in both petitions.

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(12)Ms.Niyati K. Shah, learned advocate for the
petitioner, has submitted written submissions
and has mainly raised a contention that even
though a notice was issued under Section 433(e)
read with Section 434 of the Act the respondent-
Company has neglected to make the payment. It is
further averred that the respondent-Company had
never raised objections as regards quality of
the goods and the respondent-Company has
produced fabricated note before this Court. It
was also further averred that in spite of the
fact that the documentary evidence proves that
there was subsisting debt payable by the
respondent-Company to the petitioner and even
though the respondent-Company was also aware
about the non-payment of the dues the
respondent-Company has not paid the debt. It is
also averred that the respondent-Company is now
dormant and it can hardly be contended that the
company is solvent and there are any chance of
resurrection. It was further averred that the
company is kept alive only for the name.
Reliance was placed upon the decisions of - (i)
Aluminum Extrusions and Industrial Components
Pvt. Ltd. Vs. Central Paints Ltd., 1990 Company
Cases 477 (M.P.); AND (ii) Joti Prasad Bala
Prasad Vs. A.C.T. Developers (P.) Ltd., 1990

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COMP/14/2006

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JUDGMENT

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Company Cases 601 (Delhi).

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(13)Mr.Vakharia, learned Senior Counsel for the
respondent-Company, contended that the petitions
are filed for winding up of the respondent-
Company on the ground of inability to pay the
debts and specifically under Section 433 (e) of
the Act. He further relied upon the ratio of
decision of the Apex Court in the case of IBA
Health (India) (P) Ltd. Vs. Info-Drive Systems
SDN. Bhd., reported in (2010) 10 SCC 553, more
particularly Paragraph Nos.29-35 thereof:

¶75

29. On a detailed analysis of the various terms and
conditions incorporated in the deed of settlement
as well as the compromise deed and the averments
made by the parties, we are of the considered view
that there is a bona fide dispute with regard to
the amount of claim made by the respondent company
in the company petition which is substantial in
nature. The Company Court while exercising its
powers under Sections 433 and 434 of the Companies
Act, 1956 would not be in a position to decide who
was at fault in not complying with the terms and
conditions of the deed of settlement and the
compromise deed which calls for detailed
investigation of facts and examination of evidence
and calls for interpretation of the various terms
and conditions of the deed of settlement and the
compromise entered into between the parties.

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30. A company petition cannot be pursued in respect
of contingent debt unless the contingency has
happened and it has become actually due. In the
absence of any evidence, it is not possible to
conclude that M/s. Solutions Protocol Sdn. Bhd. had
in fact paid any amount to the appellant company
towards commission charges due to the respondent
company before the cut off date. A legal notice
prior to the institution of the company petition
could be served on the company only in respect of a
debt (then due) and a company could be wound up
only if it was unable to pay its debts. In this
case, there is a bona fide dispute as to whether
the amount claimed is presently due and if, at all,

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COMP/14/2006

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JUDGMENT

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it is due, whether the appellant company is liable
to pay the sum unless they have received the same
from M/s. Solutions Protocol Sdn. Bhd.

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31. Where the company has a bona fide dispute, the
petitioner cannot be regarded as a creditor of the
company for the purposes of winding up. "Bona fide
dispute" implies the existence of a substantial
ground for the dispute raised. Where the Company
Court is satisfied that a debt upon which a
petition is founded is a hotly contested debt and
also doubtful, the Company Court should not
entertain such a petition. The Company Court is
expected to go into the causes of refusal by the
company, to pay before coming to that conclusion.
The Company Court is expected to ascertain that the
company's refusal is supported by a reasonable
cause or a bona fide dispute in which the dispute
can only be adjudicated by a trial in a civil
court.

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32. In the instant case, the Company Court was very
casual in its approach and did not make any
endeavour to ascertain as to whether the company
sought to be wound up for nonpayment of debt has a
defence which is substantial in nature and if not
adjudicated in a proper forum, would cause serious
prejudice to the company.

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MALICIOUS PROCEEDINGS FOR WINDING UP

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33. We may notice, so far as this case is
concerned, there has been an attempt by the
respondent company to force the payment of a debt
which the respondent company knows to be in
substantial dispute. A party to the dispute should
not be allowed to use the threat of winding up
petition as a means of enforcing the company to pay
a bona fide disputed debt. A Company Court cannot
be reduced as a debt collecting agency or as a
means of bringing improper pressure on the company
to pay a bona fide disputed debt. Of late, we have
seen several instances, where the jurisdiction of
the Company Court is being abused by filing winding
up petitions to pressurize the companies to pay the
debts which are substantially disputed and the
Courts are very casual in issuing notices and
ordering publication in the newspapers which may
attract adverse publicity. Remember, an action may
lie in appropriate Court in respect of the injury

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COMP/14/2006

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JUDGMENT

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to reputation caused by maliciously and
unreasonably commencing liquidation proceedings
against a company and later dismissed when a proper
defence is made out on substantial grounds. A
creditor's winding up petition implies insolvency
and is likely to damage the company's
creditworthiness or its financial standing with its
creditors or customers and even among the public.

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PUBLIC POLICY CONSIDERATIONS

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34. A creditor's winding up petition, in certain
situations, implies insolvency or financial
positionwithothercreditors,banking
institutions, customers and so on. Publication in
the Newspaper of the filing of winding up petition
may damage the creditworthiness or financial
standing of the company and which may also have
othereconomicandsocialramifications.
Competitors will be all the more happy and the sale
of its products may go down in the market and it
may also trigger a series of cross-defaults, and
may further push the company into a state of acute
insolvency much more than what it was when the
petition was filed. The Company Court, at times,
has not only to look into the interest of the
creditors, but also the interests of public at
large.

¶91

35. We have referred to the above aspects at some
length to impress upon the Company Courts to be
more vigilant so that its medium would not be
misused. A Company Court, therefore, should act
with circumspection, care and caution and examine
as to whether an attempt is made to pressurize the
company to pay a debt which is substantially
disputed. A Company Court, therefore, should be
guarded from such vexatious abuse of the process
and cannot function as a Debt Collecting Agency and
should not permit a party to unreasonably set the
law in motion, especially when the aggrieved party
has a remedy elsewhere.”

¶92

Similarly, in the case of Mediqquip Systems (P)
Ltd. Vs. Proxima Medical System GMBH, reported
in (2005) 7 SC, 42 more particularly Paragraph

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COMP/14/2006

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JUDGMENT

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Nos.18 and 24-25 thereof:

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“18. This Court in catena of decisions 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 dues' 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 utilized merely
as a means for realising debts due from a company.

¶98

24. The Madras High Court in Tube Investments of India
Ltd. v. Rim and Accessories (P) Ltd. (1990) 3 Comp LJ
322 (326) (Mad) has evolved the following principles
relating to bona fide disputes :

¶99

(i) If there is a dispute as regards the payment of the
sum towards principal however small that sum may be, a
petition for winding up is not maintainable and the
necessary forum for determination of such a dispute
existing between parties is a Civil Court;

¶100

(ii) 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 a Civil
Court and in such an eventuality, the Company Court
itself is competent to decide such a dispute in the
winding up proceedings; and

¶101

(iii) 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 a
civil suit as well as filing a petition for winding up
of the company.

¶102

25. The Rules as regards the disposal of winding up
petition based on disputed claims are thus stated by
this Court in Madhusudun Gordhandas and Co. v. Madhu
Woollen Industries Pvt. Ltd. (1972) 42 Com Cases 125 :
AIR 1971 SC 2600. This Court has held that if the debt
is bona fide disputed and the defence is a substantial
one, the Court will not wind up the company. The
principles on which the Court acts are :

¶103

(i) that the defence of the company is in good faith and
one of substance;

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(ii) the defence is likely to succeed in point of law;
and

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(iii) the company adduces, prima facie proof of the

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COMP/14/2006

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JUDGMENT

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facts on which the defence depends.”

¶110

(14) As can be seen from the petitions and as pointed out by the learned Counsel though it has been averred by the petitioner that the debt is not a disputed debt and that no objections were ever raised by the respondent-Company, as regards the quality of the goods supplied, in the affidavitin-reply, however, the stand taken by the respondent-Company clearly borne out the fact that the debt is a disputed debt.

¶111

(15) In view of the aforesaid factual background and considering the contentions of the petitioner and the defence raised by the respondent-Company it cannot be said that the amount due and payable as per the statutory notice is a bona fide debt.

¶112

(16) Hon'ble Supreme Court in case of Madhusudan Gordhandas and Co.[1972] 42 Comp. Cases 125, has held as under ;

¶113

“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, In re [1875] LR 19 Eq.444). Again, a petition for winding up by a

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JUDGMENT

¶117

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 Brighton Club and Norfolk Hotel Co.Ltd., In re [1865] 35 Beav. 204).

¶118

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 chhoses not to pay that particular debt. (See A Company, In re [1894] 94 SJ 369; [1894] 2 Ch 349 (Ch D)). 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 quantify the debt precisely. (See Tweeds Garages Ltd., In re [1962] Ch 406; [1962] 32 Comp Gas 795 (Ch D)). 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.

¶119

Another rule which the court follows is that if there is opposition to the making of the winding-up order by the creditors the court will consider their wishes and may decline to make the winding-up order. Under section 557 of the Companies Act, 1956, in all matters relating to the winding-up of the company the court may ascertain the wishes of the creditors. The wishes of the shareholders are also considered, though, perhaps, the court may attach greater weight to the views of the creditors. The law on this point is stated in Palmer's Company Law, 21^st edition, page 742, as follows :

¶120

“This right to a winding-up order is, however, qualified by another rule, viz., that the court will regard the wishes of the majority in value of the creditors, and if, for some goods reason, they object to a winding-up

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JUDGMENT

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order, the court in its discretion may refuse the order.'

¶125

The wishes of the creditors will, however, be tested by the court on the grounds as to whether the case of the persons opposing the winding-up is reasonable; secondly, whether there are matters which should be inquired into and investigated if a winding -up order is made. It is also well-settled that a windingup order will not be made on a creditor's petition if it would not benefit him or the company's creditors generally. The grounds furnished by the creditors opposing the winding up will have an important bearing on the reasonableness of the case. (See P & J. Macrae Ltd. In re [1961] 1 All ER 302; [1961] 31 Comp Cas 424 (CA).”

¶126

It is beyond dispute that the machinery for winding up will not be allowed to be utilized merely as a means for realising its debts due from a company. In Amalgamated Commercial Traders (P.) Ltd. vs. Krishnaswami (A.C.K.)[1965] 35 Comp Cas 456, 463 (SC) this court quoted with approval the following passage from Buckley on the Companies Acts, 13^th edition, page 451 :

¶127

“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 stigmated as a scandalous abuse of the process of the court.”

¶128

(17)As observed above, the statutory notice as well
as the prayers prayed for in both petitions
indicate that these are the petitions filed for
the purpose of recovery of dues as envisaged
under Section 433(e) of the Act. Considering the
ratio laid down by the Apex Court in the case of

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17/17

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JUDGMENT

¶132

Madhusudan Gordhandas and Co. (supra) an order
under Section 433(e) of the Act is
discretionary. There must be a debt due and the
company must be unable to pay it. It is further
observed that, A debt under this section must
be a determined or definite sum of money payable
immediately. It is also held that if the debt
is disputed and the defence is a substantial
one, the court will not pass an order of winding
up the company.

¶133

(18)It is therefore necessary that there must be
debt due and the company must be unable to pay
it. If the debt is a disputed debt and the
defence is substantial one order of winding up
should not be passed. It is also note worthy
that after the petitions were admitted no other
persons have raised any claim and, therefore,
this Court finds that the debt being disputed
and there exists a bona fide dispute. The
present petitions cannot be used as tool for
recovery and, therefore, considering the
aforesaid facts and circumstances of the case,
when the debt itself is disputed the petitions
deserve to be dismissed. Hence, the petitions
are hereby dismissed.

¶134

(19) Registry to place a copy of this order in connected matters.

¶135

***

¶136

Bhavesh*

Asim Pharmachem Industries v. Nilsin Ultrachem Limited

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Asim Pharmachem Industries v. Nilsin Ultrachem Limited

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