Allowed

M/s M.Venkata Rao Infra Projects Private Limited v. M/S. Surendra Constructions Pvt. Ltd.

Telangana HC27 Oct 2014OSA/24/2014

Case brief

AI extract

What is this about?

Original Side Appeal challenging a single Judge's order admitting a winding up petition. The Supreme Court of India held that the petitioner failed to establish that a debt existed between the two companies, making the winding up petition inadmissible.

What did the court decide?

The appeal was allowed; the imugned order admitting the Company Petition was set aside; no order as to costs.

M/s M.Venkata Rao Infra Projects Private Limited Vs… — Company and Corporate | Telangana HC (2014)

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THE HON'BLE SRI JUSTICE K.C. BHANU and THE HON'BLE SMT JUSTICE ANIS

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ORIGINAL SIDE APPEAL NO. 24 OF 2014

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JUDGMENT:

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(Per the Hon’ble Sri Justice K.C.Bhanu)

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Challenging the order dated 17.06.2014 in Company Petition No.69 of 2011 passed by a learned single Judge of this Court, the present Original Side Appeal is preferred.

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2. The appellant herein is the respondent, and the respondent herein is the petitioner, in the Company Petition. For better appreciation of facts, the parties are hereinafter referred to, as they are arrayed in the Company Petition.

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3. The petitioner company filed the aforesaid Company Petition to pass an order for winding up of the respondent company under the provisions of the Companies Act, 1956 and for costs, stating as follows:

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The petitioner company is engaged in business of construction of civil works, etc. The respondent company was incorporated under the Companies Act, 1956 as a private company limited by shares by conversion of the proprietorship firm. As on 24.03.2011, the respondent company is indebted to the petitioner company a sum of Rs.7,52,11,528/- and interest.

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The respondent company entered into three sub-contract agreements viz. dated 29.06.2005 for a contract relating to rehabilitation of roads from Sirsi to Yellapur (Contract M-25); dated 05.12.2005 for a contract relating to rehabilitation of roads from Siris to Mavinagundi (Contract M-26) and dated 07.03.2005 for a contract relating to rehabilitation of roads from Kumbaravada to Sadashivagarh (Contract M-27), in the state of Karnataka with the petitioner. Necessary General Power of Attorney was given to sign all bills, vouchers, measurement books, accounts, claims, variation items, extra items, escalation bill and all other papers, documents and instruments in any way affecting the Contractor Agreement, to Sri B.Surendra Nadha Reddy, the Managing Director of the petitioner company for carrying out the work. Though it is stated that subsequently the said General Power of Attorney was revoked, that may not be relevant for the purpose of

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deciding the issue.

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Though the petitioner company was executing the works in pursuance of the agreements, it was removed from the subcontract by keeping the machinery belonging to it. The respondent company failed to maintain financial discipline of payment, despite the terms and conditions stipulated in the subcontract agreements for smooth execution of the works in time. The petitioner company sent several reminders to respondent company for settlement of dues and submitted a statement of account dated 13.10.2009 showing an amount of Rs.8,60,03,488/including Rs.1,07,91,960/- being interest at 12% up to September, 2009. The respondent company assured to pay the said amount and issued cheque no.944769, dated 21.10.2009 drawn on M/s. ING Vysya Bank Limited, Indranagar, Bangalore, for the said amount. When the said cheque was presented, it was returned with endorsement ‘funds insufficient’ on 28.10.2009. Thereupon, the petitioner company got issued a notice dated 23.11.2009 to the respondent company as contemplated under Section 138 of the Negotiable Instruments Act, 1881. The respondent company got issued a reply dated 29.12.2009 alleging forgery in issuance of the cheque and suggested the petitioner company to settle accounts. As the said cheque was issued by M/s. M.Venkat Rao, a proprietorship firm, which is no more in existence and as the petitioner company was satisfied with the reply of respondent company to settle the account, it did not pursue further under the Negotiable Instruments Act, 1881. Even in the reply, it was admitted by the respondent company that once the final bill is settled by KSHIP, bills of the petitioner company would be settled and that in case KSHIP levies any damages on account of delay in completion of works, the same would be passed on to the petitioner company, and that the claim of reimbursement, security deposit, sales tax, bank guarantee amounts, unpaid mobilization amount and amount paid to procuring machinery, etc. would arise only at the time of finalizing the final bill which, according to the respondent company, is yet to be done, and therefore, the question of payment of balance consideration at that stage would be premature and does not arise. Vide its reply notice, the respondent company admitted the liability and denied the payment of balance on the ground that it was premature.

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The respondent company is due a sum of Rs.7,52,11,528/-

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to the petitioner company by 13.11.2008. But, the respondent company had not paid any amount, but only issued a T.D.S. certificate dated 08.08.2008 for an amount of Rs.12,35,854/- and the said amount was properly adjusted by the petitioner company in his claim. The petitioner company sent a communication to the respondent company showing the outstanding amount payable by the respondent company as on 22.01.2011 for which was there was no reply. After receipt of the said notice, the respondent company has neither replied to it nor made payment to the petitioner. The petitioner company, after several reminders to pay admitted unpaid amount, got issued a notice dated 07.02.2011 to the respondent company under Section 434 of the Companies Act, 1956 for repayment of the unpaid amounts. Inspite of receipt of the notice, the respondent company has neither chosen to pay the admitted amount due to the petitioner company nor replied to it. The unpaid amount for the works carried out by the petitioner company has not been disputed by the respondent at any point of time. Therefore, the respondent is bound and liable to pay Rs.7,52,11,528/-.

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The action of non-payment of dues by the respondent company constitutes intentional failure, neglect and inability to pay its dues to the petitioner company. The respondent company is commercially insolvent as it is unable to pay its debts in terms of Sections 433 and 434 of the Companies Act, 1956. Hence, the Company Petition.

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4. The respondent company filed its counter affidavit denying the averments in the company petition and stating as follows:

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The Company Petition is not maintainable as the respondent company has not entered into a sub-contract agreement with the petitioner company and that it is not admitting that it owes the sum of Rs.7,52,11,528/- or interest to petitioner company. The petitioner company initiated parallel proceedings by filing application under Section 11 of the Arbitration and Conciliation Act, 1996. The Company Petition is filed by the petitioner company basing on its self-serving documents on a non-existing debt and so, it is not maintainable. The allegation that the respondent company admitted its liability vide its reply notice dated 29.12.2009 is denied.

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The respondent company is commercially solvent and it is

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able to meet its financial commitments as and when it arises. Its turn over for financial year 2009-2010 is Rs.323.16 crores and as on 31.03.2010, net worth of the respondent company is Rs.50.85 crores. It enjoys excellent credit limits from its various bankers. Statutory auditors of the company also certified its net worth and net cash accruals for the financial year 2005-2006 and 2009-2010. The allegation that the respondent company admitted its liability vide its reply notice dated 29.12.2009 is denied.

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The respondent company never gave any General Power of Attorney to B.Surendra Nadha Reddy, who is Managing Director of petitioner company, and that M.Venkat Rao gave General Power of Attorney in favour of said B.Surendra Natha Reddy for carrying out the said works. As the petitioner company is unable to complete the works in pursuance of a sub-contract, the petitioner company voluntarily surrendered works back to Sri M.Venkat Rao. The statement of account dated 13.10.2009 is specifically denied stating that there was no agreement between the petitioner company and the respondent company. It never issued any cheques to petitioner company. Hence, it is prayed to dismiss the Company Petition.

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5. After hearing both sides, learned single Judge of this Court, vide the impugned order, came to the conclusion that the reply notice contains clear and categorical admission of liability and the intention of the respondent company to settle the bills of the petitioner company, and that mere pendency of the arbitration proceedings does not constitute a ground for rejection of winding up petition and accordingly admitted the Company Petition, and permitted the petitioner company to issue advertisement in English and Telugu daily news papers. Challenging the same, the present appeal has been preferred.

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6. Learned senior counsel Sri S.Ravi appearing for the appellant herein/respondent vehemently contended that one of the conditions to invoke the jurisdiction under Section 433 of the Companies Act, 1956 is that the company is unable to pay its debts, and then only Company Court shall make an order for winding up of a company; that in this case, except filing the selfserving statement of account dated 30.04.2008, there is no other supporting document to show that the company is unable to pay its debts; that there is no material to show that the petitioner company

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submitted bills for the works it carried out or the statement of account like ledger, day-book, etc.; that as seen from the search report, the petitioner company has not submitted statement from 2005-2006 till 2010-2011 showing its debts and liabilities, and that basing upon the issuance of the cheques and conduct of the party, the Company Petition was admitted; that there was no pleading in the Company Petition that the said M.Venkat Rao was given authority by the respondent company to execute any agreement in favour of the petitioner company; that even according to the pleadings, the whole case rests upon one document viz. statement of account; that the General Power of Attorney said to have been given by said M.Venkat Rao was for execution of the works but not for any other purpose; that the petitioner company has not filed any supporting documents till an objection was raised at the time of hearing of arguments; that in the absence of any material on record to show that some amount was due by the respondent company to the petitioner company and the respondent company was unable to pay that amount, admission of the Company Petition does not arise. Hence, he prays to set aside the impugned order.

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7. On the other hand, learned senior counsel Sri S.R. Ashok appearing for the respondent herein/petitioner contended that inconsistent stands have been taken by the respondent company in the reply notice got issued to the notice under Section 138 of the Negotiable Instruments Act, 1881 by the petitioner company; that the notice dated 07.02.2011 was issued demanding the respondent company to pay the amount due to the petitioner company; that in pursuance of the statement of account, the respondent company issued a cheque for Rs.8.00 crores and odd, and that there is no other reason for the said M.Venkat Rao to issue a cheque for the said amount if the amount has not been settled between the petitioner company and the respondent company; therefore, even though the respondent company filed counter stating that there was no nexus between the petitioner company and the respondent company with regard to execution of work, the conduct of the respondent company would clearly go to show that there are no bona fides; that the respondent company has taken conflicting stands only to wriggle out of the consequences; that to claim damages and interest, the petitioner company filed petition under Section 11 of the Arbitration and Conciliation Act, 1996, and that does not mean that the Company

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Petition is not maintainable; that no stand is taken by the said M.Venkat Rao as to under what circumstances the cheque for Rs.8.00 crores and odd was issued; that once it is proved that the amount not less than Rs.500/- is due to the petitioner company and if the respondent company is unable to pay its debts, the burden shifts to the respondent to show bona fides; that the learned single Judge has rightly taken into consideration these aspects and rightly admitted the Company Petition, and there are no grounds to interfere with the impugned order.

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8. Under Section 433 of the Companies Act, 1956, one of the grounds in which a company may be would up is that the company is unable to pay its debts. Therefore, the primary requirement that has to be established by a person who approaches a Company Court is that there was a debt existing between him and the respondent and that the respondent was unable to pay the said debt. ‘Debt’ really means an amount which is due and can be claimed by creditor; so that if the demand, when made, is not met by the company, it can certainly be said to be unable to pay its debts within the meaning of Section 433 (e) of the Act. In other words, it is an amount payable or due from one person to another in return of any obligation.

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9. The respondent company was given three contract works in the State of Karnataka. In the process of execution of the works, the petitioner company had taken sub-contract in the year 2005 from the respondent. As seen from those sub-contract agreements, it is clear that the same were executed between Mr. M.Venkat Rao and the petitioner company. Those sub-contract works were allegedly not executed by the petitioner company. A legal notice dated 29.12.2009 was issued on behalf of both Mr. M.Venkat Rao and the respondent company to the petitioner company. But, as seen from the documents filed along with the Company Petition, it is clear that the sub-contract agreements were said to have been executed in between Mr. M.Venkat Rao and the petitioner company. Respondent company is not a party to those agreements. It is an admitted fact that the cheque for Rs.8.00 crores and odd was issued by said Mr. M.Venkat Rao but not by the respondent company or its authorized officer. There is no material on record to show that the cheque was given to the petitioner company for and on behalf of the respondent company. Prima facie, there is no privity of contract between the petitioner

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company and respondent company.

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10. Learned senior counsel appearing for the respondent herein (petitioner in Company Petition) placed strong reliance on the statement of account dated 30.04.2008 of the respondent company to show its liability. As seen from this document, apart from other details, it is stated that balance payable is Rs.6,52,45,125/-. It reads further as : ‘Signed and delivered for and on behalf of M/s. Venkata Rao Infra Projects Pvt Ltd (Formerly known as M/s M.Venkata Rao)’. There is signature beneath these lines and name of ‘SURENDREA REDDY – GPA Holder’ is written within brackets. A bare perusal of this document would clearly indicate that it was not given by the respondent company so as to admit its liability to pay the amount in pursuance of the three subcontracts. M.Surendranath Reddy claimed that M.Venkata Rao executed a General Power of Attorney in his favour and therefore it can be looked into. But, we are unable to accept the said contention because the said General Power of Attorney does not authorize him to admit liability of the company or payments that have to be paid by the respondent company. It is only a selfserving document issued by B.Surendranath Reddy, the General Power of Attorney holder of M.Venkata Rao. Further more, it cannot be taken as evidence so as to arrive at a conclusion that the amount as stated therein was due to the petitioner company. None of the authorized representatives of the company has issued the statement of account showing the balance amount payable to the petitioner company. Even as seen from the pleadings, it is clear that Mr. M.Venkata Rao executed sub-contract work in favour of the petitioner company. Therefore, there is no privity of contract between the petitioner company and the respondent company.

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11. No doubt, in the notice dated 29.12.2009 got issued for and on behalf of Mr. M.Venkata Rao and also M/s. Venkat Rao Infra Projects Private Limited, it is stated ‘That once final bill is settled by KSHIP, your client bills would be settled and if in case KSHIP levy any damages on account of delay in completion of works the same would be passed on to your client along. So far as the claim of reimbursement, security deposit, sales tax, bank guarantee amounts, unpaid mobilization amount and amount paid to procuring machinery, etc. are concerned, the same would arise only at the time of finalizing the final bill which according to my client is yet to

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be done.” Basing on the said averment in the notice got issued on behalf of the company as well as the individual, the learned senior counsel appearing for respondent herein/petitioner vehemently contended that they are admitting that there are some amounts due to the petitioner company. We are unable to accept the said contention because there was no such admission made to show that certain amount was due to the petitioner company. It is simply stated that Mr.Venkata Rao and M/s. Venkata Rao Infra Projects Private Limited would settle the bills submitted by the petitioner company. But no such settlement has been arrived at, because there is no allegation in the petition that they submitted the bills to Mr. M.Venkat Rao or to the respondent company for settlement of the account. Nowhere in the affidavit filed in support of the application or in the Company Petition it is stated that the petitioner company submitted bills to the respondent company or to M.Venkat Rao for settlement of accounts. In such a case, one cannot presume that some amount was due to the petitioner company by the respondent company. The whole case of the petitioner company revolves around the statement of account. Once the statement of account said to have been given by said B.Surendranath Reddy as General Power of Attorney, falls to the ground, there is no basis to claim any amount from the respondent company by the petitioner company.

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12. The learned senior counsel appearing for the respondent herein/petitioner also placed heavy reliance on the cheque said to have been issued by said M.Venkat Rao. Even according to the petitioner, the cheque was given as a collateral security but not otherwise. No doubt, there must be some pleading as to under what circumstances M.Venkat Rao issued the cheque and whether the amount covered under the cheque is the amount due to the petitioner company. In the absence of any supporting evidence, this Court cannot infer that the cheque said to have been given by M.Venkat Rao is towards discharge of a legally enforceable debt or liability of respondent company. Even after receipt of the notice from the respondent company, the petitioner company has not raised any bills so as to claim the amounts due under the work carried out by him. It is also not in dispute that the petitioner company abandoned the contract work by its letter dated 20.09.2008, which reads as follows:

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“This is with reference to our earlier discussions in

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connection with the above subject, we hereby inform you that we are handing over all the works w.r.f. KSHIP as we are unable to complete the works in time.

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We therefore decided not to continue these works. Hence, we are hereby handing over all the sites as & there conditions.

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We further state that you are in no way connected with any dues by any form to any persons OR agencies in connection with the above said works executed by us till date in M25, M26 & M27 packages.

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We therefore request you to kindly take over the packages in order to complete the works. We further assure you either of my employees or our supplies who had supplied materials will not create any type of disturbance either to you or to your employees in any manner.”

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This letter is not denied or disputed by the petitioner company that Mr. B.Surendranath Reddy, Managing Director has not executed any such letter. What he states in the affidavit is that this letter has been misinterpreted by the respondent company. A plain reading of the letter would clearly indicate that the company was unable to complete the works in time and therefore the company has decided to discontinue these works. So, petitioner itself voluntarily issued a letter by showing that as they could not complete the works as agreed within the time frame fixed, they were withdrawing to proceed further in doing contract works. In such circumstances, a prudent contractor would definitely submit all the bills to the person from whom a subcontract work has been taken in pursuance of the sub-contract agreement so as to settle the accounts. No material is filed by the petitioner company to show that the company submitted all the bills for the works carried out till that date to the respondent company or at least, at any rate, to Mr. M.Venkat Rao, from whom the sub-contract works were taken as per the agreement and also as per the indent of letters exchanged between both the parties. The petitioner company failed to establish that certain amount was due from the respondent company and the respondent company was unable to pay it with a bad intention or lack of bona fides. Unless this burden is discharged by the petitioner company, the

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burden will not shift on the respondent company to show that there was bona fide dispute with regard to payment of certain amount and that because of the bona fide acts, they would not pay that amount. That aspect of the case may not arise in this case because the petitioner company failed to establish those aspects.

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13. Further more, relevant portion of the search report filed by the respondent company reads as follows:

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“The company is in default in filing with the Registrar its balance sheet and profit and loss account or annual return for five consecutive financial years i.e. from the financial year 2006-07 onwards till financial year 2012-13.”

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So, from this search report, it is clear that the petitioner company has not been submitting annual returns which are required by the Statute or as per the provisions contemplated under the Companies Act, 1956. Therefore, the petitioner company miserably failed to establish that certain amount was due to it by the respondent company and that it was unable to pay that amount. These aspects have not been considered by the learned single Judge. In the absence of any material documents, the impugned order is liable to be set aside and is accordingly set aside.

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14. Learned counsel for the respondent company relied on a decision in Iba Health (India) Private Limited v. Info-Drive Systems^[1] (paras 20 & 24).

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“The question that arises for consideration is that when there is a substantial dispute as to liability, can a creditor prefer an application for winding up for discharge of that liability? In such a situation, is there not a duty on the Company Court to examine whether the company has a genuine dispute to the claimed debt? 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. It is settled

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law that 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 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 winding up petition as a means of forcing the company to pay a bona fide disputed debt.

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Appellant company raised a contention that it is commercially solvent and, in such a situation, the question may arise that the factum of commercial solvency, as such, would be sufficient to reject the petition for winding up, unless substantial grounds for its rejection are made out. A determination of examination of the company's insolvency may be a useful aid in deciding whether the refusal to pay is a result of the bona fide dispute as to liability or whether it reflects an inability to pay, in such a situation, solvency is relevant not as a separate ground. If there is no dispute as to the company's liability, the solvency of the company might not constitute a stand alone ground for setting aside a notice under Section 434 (l)(a), meaning thereby, if a debt is undisputedly owing, then it has to be paid. If the company refuses to pay on no genuine and substantial grounds, it should not be able to avoid the statutory demand. The law should be allowed to proceed and if demand is not met and an application for liquidation is filed under Section 439 in reliance of the presumption under Section 434(1)(a) that the company is unable to pay its debts, the law should take its own course and the company of course will have an opportunity on the liquidation application to rebut that presumption.”

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That issue may not arise in this case as the petitioner company failed to establish that the respondent company owe the amount over and above Rs.500/-. Whether there is substantial dispute of the liability or not, comes later after the petitioner discharged its initial burden. In view of the fact that the petitioner failed to establish the initial burden standing on it, the question of deciding whether it is a bona fide dispute as to the liability, may not be relevant factor to decide in this case. Therefore, the

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aforesaid decision has no application to the facts of the present case.

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15. The O.S.A. is, accordingly, allowed. There shall be no order as to costs. Miscellaneous Petitions, if any, pending in this appeal shall stand closed.

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_______________ K.C.BHANU, J

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__________ ANIS,J.

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27.10.2014 DRK

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THE HON'BLE SRI JUSTICE K.C. BHANU and

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THE HON'BLE SMT JUSTICE ANIS

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ORIGINAL SIDE APPEAL NO. 24 OF 2014