Dismissed

M/s Integreat Pmc India Private Limited, v. M/s Omega Shelters Private Limited

Telangana HC11 Sept 2012CP/153/2011

Case brief

AI extract

What is this about?

In this company petition, the petitioner sought winding up of the respondent company for alleged inability to pay a disputed debt of Rs. 6,18,971.50 arising from a project management consultancy contract. The respondent disputed the payment on grounds of poor work quality and non-compliance. The Court held that since the debt was bona fide disputed on substantial grounds, it could not be adjudicat

What did the court decide?

The Company Petition seeking winding up of the respondent company is dismissed.

M/s Integreat Pmc India Private Limited, Vs M/s… — Service and Employment | Telangana HC (2012)

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THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN COMPANY PETITION NO.153 OF 2011

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ORDER:

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This petition is filed under Section 434 and Section 433(F) of the Companies Act, and Rule 11(A), (15) and 95 of the Companies (Court) Rules, seeking winding up of the respondent company.

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The petitioner is a private limited company carrying on the business of providing project management consultancy services. The respondent is also a private limited company registered under the Companies Act. The respondent awarded a contract to the petitioner for providing project management consultancy services for the project called “Neighbourhood” at Gundalapochampally and “Casa Estibana” at Dulapally, Medchal Road, Secunderabad for a period of six months from November, 2009 to April, 2010. The contract was executed by the respondent on 15.11.2009. Annexure-A thereof details the scope of the services to be provided by the petitioner. It is the petitioner’s case that, on completion of six months (the period of contract), they had asked the respondent whether they desired to continue the contract, to which the respondent had informed, by e-mail dated 31.03.2010, that they were allowing the contract to expire by the end of April, 2010, and the petitioner should plan the transition accordingly. It is the petitioner’s case that the respondent did not dispute the quality of the work either at the time sending the said e-mail, or at any time thereafter, and it is only after the petitioner had sent a notice under Section 434(1)(a) of the Companies Act on 27.12.2010, calling upon the respondent to make the outstanding payment of Rs.6,18,971.50, with 18% interest thereon, within twenty one days that the respondent

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had, by its reply notice, stated that the work executed was of very poor quality; and they did not renew the contract in view of the deficient service rendered by the petitioner, and as they had not fulfilled the terms and conditions of the contract in the proper perspective. Hence this Company Petition.

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In their counter-affidavit, the respondent would submit that the debt claimed by the petitioner is disputed bonafide; the company petition was filed only to harass the respondent; there is no amount due and payable, and the demand made by the petitioner is illegal; the petitioner had failed to establish, even prima facie, that they were entitled for the relief under Sections 433 and 434 of the Companies Act; the petitioner had grossly neglected to perform their part of the contract as stipulated in Annexure-A thereof; the petitioner had failed to properly coordinate between the consultants/vendors and the contractor resulting in the respondent suffering additional cost and losses; the petitioner was, therefore, not entitled to claim any further fees; the petitioner had failed to ensure the quality of the works being executed resulting in the respondent suffering damages of more than Rs.2 crores; the plastering of the villas, where two coats were required to be put, was not done till date; the petitioner was responsible for the same, as they had recommended payment after the first coat itself; roads were again broken for laying hume pipes, at the recommendation of the petitioner; the hume pipe work was also not completed as per the drawing; the road remains broken till date; while laying the hume pipe, the reclying water pipeline was badly damaged, and the damage was beyond repairs; the recycling pipeline has not been re-laid till date; payments were made to the contractor at the recommendation of the petitioner; water proofing in the villas, during

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the petitioner’s period of contract, was not done properly resulting in seepage during the rainy season; the petitioner, in collusion with the contractor, had approved bills for Rs.20 crores and above, though the work was not completed as per specifications; the petitioner did not engage sufficient staff as per the agreed contractual terms, more particularly as referred to in Annexure-B of the contract; under clause No.3.0 of Annexure-D, it was specifically stated that the petitioner’s representative Mr. Srinath or Mr. Prasannakumar would be visiting the site once a week, but they did not visit the site for several months resulting in improper supervision, and false certification of the bills; this, in turn, resulted in a huge financial loss to the respondent; Rs.3.00 lakhs was to be paid as performance incentive only on completion of the infrastructure work; the infrastructure work has not been completed till date; and it is the respondent which has to receive substantial amounts from the petitioner for the deficient service rendered, and the loss suffered by them of Rs.20.00 crores. C.A. No.67 of 2012 is filed by the respondent requesting this Court to receive certain documents, which includes photographs showing the poor quality of the work executed under the supervision of the petitioner. C.A. No.67 of 2012 is ordered and the documents are taken on record. A perusal of the photographs filed does show the poor quality of the work executed by the contractor.

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In reply to the allegations made in the counter-affidavit, the petitioner would submit that they only rendered project management consultancy services, and their responsibility was only to take care of the quality of the works which were being carried out for the respondent; hume pipes were laid prior to commencement of the base work for the bitumen road; any changes, after handing over the same

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by the petitioner, could not be attributed to them; water proofing was done by the respondent engaging ill qualified agencies; the respondent was trying to fix false liability on the petitioner; the respondent was always short of funds, and was unable to pay the man power; it is the respondent who is responsible for the incomplete infrastructure works in the “neighbour project”, as it had constraints with regards funds to engage sufficient man power; the exorbitant amount of damages, arrived at by the respondent, is inexplicable; the invoice for Rs.6,18,971/- was raised towards the works done by the petitioner; the respondent could not deny the rightful entitlement of the petitioner; and the company petition is required to be allowed.

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Enclosed to the contract is Annexure-A which requires the petitioner, at serial Nos. 8 and 9, to monitor execution as per approved drawings/specifications/design and suggesting modifications, during construction, due to site conditions. The assertions in the counteraffidavit, and the photographs enclosed along with C.A. No.67 of 2012, would show that the quality of the work executed by the contractor is poor. Whether it is the petitioner who failed to supervise the work properly, or the respondent which did not engage sufficient man power to have the work properly executed, resulting in claims made by both of them against each other are disputes which cannot be examined in summary proceedings under Sections 433 and 434 of the Companies Act. Suffice to hold that the debt, claimed by the petitioner as due to them of Rs.6,18,971.50, is bonafide disputed by the respondent, and their defence is not a mere moonshine.

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If the debt is bona fide disputed, there cannot be "neglect to pay" within the meaning of Section 434(l)(a) of the Companies Act, 1956. If there is no neglect, the deeming provision does not come into

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play and the winding up on the ground that the company is unable to pay its debts is not substantiated and non-payment of the amount of such a bona fide disputed debt cannot be termed as "neglect to pay" so as to incur liability under Section 433(e) read with Section 434(1)(a) of the Companies Act, 1956. (Iba Health (India) Private Limited v. Info-Drive Systems Sdn. Bhd^[1] ) . A dispute would be substantial and genuine if it is bona fide and not spurious, speculative, illusory or misconceived. The Company Court, at that stage, is not expected to hold a full trial of the matter. It must decide whether the grounds appear to be substantial. The grounds of dispute, of course, must not consist of some ingenious mask invented to deprive a creditor of a just and honest entitlement, and must not be a mere wrangle. If the creditor's debt is bona fide disputed on substantial grounds, the court should dismiss the petition and leave the creditor first to establish his claim in an action, lest there is danger of abuse of the winding up procedure. The Company Court always retains the discretion, but a party to a dispute should not be allowed to use the threat of a winding up petition as a means of forcing the company to pay a bona fide disputed debt. (Iba Health (India) Private Limited¹ ).

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If the defence is a substantial one, the court will not wind up the company. (Bhalchandra Dharmajee Makaji, v. Alcock, Ashdown and Co. Ltd^[2] ) . An order of winding up will not be made where the court is satisfied with the company's defence. A winding up petition is not a legitimate means of seeking to enforce payment of a 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 stigmatised as a scandalous abuse of the process of the court. (B. Viswanathan v.

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Seshasayee Paper and Boards Ltd^[3] ; Amalgamated Commercial Traders (P.) Ltd. v. A. C. K. Krishnaswam i^[4] ; Madhusudan Gordhandas and Co. v. Madhu Woollen Industries Pvt. Ltd .^[5] ) .

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In order to sustain a case for winding up of an incorporated company on the ground that it is unable to pay its debts, the debt which is the substratum of the action either under section 433(e) on its own, or under section 433(e) read with section 434(1)(a) of the Act, is not a disputed debt or a debt which could be found after an investigation and adjudication on the claims made inter-se between the so-called creditor and the debtor company. Any such investigation, which would involve the determination of the quantum and quality of the liability, would certainly raise a reasonable presumption that it is a disputed debt. Once such a lingering doubt arises in the mind of the Company Court that the debt is not a sure debt, but a debt which can only be ascertained and determined after an investigation into the facts and circumstances of the case, then, unless there is demonstrative malafides on the part of the company concerned, the Company Court cannot undertake an examination as to the quantum of the liability or the nature of the indebtedness of the company in question to the claimant in a petition under section 433(e) of the Act. (G. Loganayaki

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v. Moolangudi Chit Funds (P.) Ltd .^[6] ; B. Viswanathan³ ).

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Sri L. Ravichander, Learned Senior Counsel appearing on behalf of the petitioner, would submit that the very fact that the respondent, either in their e-mail addressed to the petitioner or at any time thereafter before a statutory notice was issued under Section 434, had failed to inform the petitioner in writing of the deficiency in their

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services is proof that their contentions in this regard were only an afterthought to avoid admission of the company petition, and an advertisement being issued consequent thereto. A perusal of the photographs enclosed along with C.A. No.67 of 2012, which is supported by the pleadings in the counter-affidavit, shows the poor quality of the work executed by the contractor. The petitioner, as the project management consultancy was required to supervise the work. Whether the poor quality of the work was during the petitioner’s supervision or otherwise is again a matter of dispute which cannot be examined in summary proceedings under Section 433 of the Companies Act.

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The jurisdiction of the Court, under Section 433 of the Companies Act, 1956, is not that of a court which is essentially meant for settling money disputes between parties, but is to subserve the object of winding up of companies which have not paid their debts or which are unable to pay their debts. Therefore the first pre-requisite must be to establish, prima facie, a debt against the respondent. But when a claim or debt is disputed, the proper forum for that is a Civil Court. Where therefore, admittedly, there is a genuine dispute as to the liability of the respondent-company to pay the debt claimed, it would not be proper to decide the case in summary proceedings under section 433. (Kamadenu Enterprises v. Vivek Textile Mills P. Ltd .^[7] ;

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B. Viswanathan³ ). When the company produces prima facie proof of the facts on which the defence depends, and which is probable and is likely to succeed in point of law, it cannot be said that the company has neglected to pay within the meaning of section 434 (1)(a) of the Companies Act. Bonafide dispute implies the existence of a substantial ground for the dispute raised. (Smt. Vijayalakshmi v. Hari

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Hara Ginning & Pressing^[8] ) .

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The question whether a dispute regarding a debt is bona fide or not depends upon the circumstances of each case. The test is whether the dispute is raised only to avoid payment of the debt, and is not based on a substantial ground. Bonafide dispute means that the dispute is based on a substantial ground and, if such a dispute is raised, the court should refuse to make an order of winding-up. (Rajasthan Spinning and Weaving Mills Ltd. v. Texkool Company Ltd .^[9] Newfinds (India) v. Vorion Chemicals and Distilleries Ltd^[10] ) . A bonafide dispute need not extend to the whole debt. It is sufficient if a substantial part of the claim is bona fide disputed. (In re

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Steel Equipment and Construction Co. (P.) Ltd .^[11] ; Newfinds (India)¹⁰ ). If the defence raised by the company is a substantial one, and not a mere moonshine, it has to be finally adjudicated upon on merits before the appropriate forum. (Mediquip Systems (P) Ltd. v. Proxima Medical Systems (GMBH )^[12] ; Vijay Industries v. NATL Technologies Ltd .^[13] ) .

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As the debt, claimed to be due to them by the petitioner, is bonafide disputed by the respondent, and as the remedy available to the petitioner to seek recovery, of any amount due, is by way of a Civil Suit before the Civil Court of competent jurisdiction, I see no reason to entertain the Company Petition. The Company Petition is, accordingly, dismissed.

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Date: 11.09.2012 ____________________________ RAMESH RANGANATHAN, J MRKR

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