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Ultimate Advertising And Marketing, New Delhi v. G.B Laboratories Ltd., Kanpur .
Structured Summary of the Opinion (Special Appeal)
Factual and Procedural Background
Concise narrative of events and procedural history, drawn solely from the provided opinion.
The appellant filed a company petition for winding up the respondent company under Section 433(e) of the Companies Act 1956, asserting that the respondent owed Rs. 2,22,289-23p for advertising and publicity services rendered in connection with the respondent's proposed public issue of shares. The appellant alleged the respondent had paid only Rs. 75,000 as an advance and failed to pay the balance despite letters and a statutory notice under Section 434, which claimed the principal plus interest at 18% from 1 June 1984. The respondent filed a counter affidavit denying liability; the appellant filed a rejoinder.
When the matter was listed, counsel for the respondent requested time to examine vouchers and sought permission to make payment to demonstrate bona fides. On 20 October 1986 the principal amount claimed in the petition was paid by two bank drafts (one for Rs. 1,00,000 and another for Rs. 1,22,289-23p). The only remaining dispute was whether the appellant was entitled to interest on the principal. The learned single Judge dismissed the winding up petition on the finding that there was a bona fide dispute regarding the interest claim. The appellant challenged that dismissal by filing this Special Appeal.
Legal Issues Presented
- Whether, having paid the principal amount claimed in the company petition, the respondent is nonetheless liable to pay interest on that amount to the appellant.
- Whether the Company Judge is entitled to award interest on the principal sum under provisions such as Section 34 of the Code of Civil Procedure and Section 3(b) of the Interest Act, 1978, when a winding up petition is founded on the claim.
- Whether a bona fide dispute regarding the claim of interest bars a winding up order and whether the Company Court should exercise discretion to refuse winding up proceedings when interest alone is in dispute.
Arguments of the Parties
Appellant's Arguments
- Once the respondent accepted and paid the principal amount claimed, the appellant remained entitled to interest at 18% on that amount even in absence of an agreement specifically providing for interest.
- The appellant relied on Section 34 of the Code of Civil Procedure (power to award interest in a decree, including, in commercial transactions, interest exceeding six percent) and on Section 3(b) of the Interest Act 1978 as statutory bases for an award of interest by the Court/Tribunal.
- Because the principal debt was admitted (and paid), the company forum is an appropriate forum for determining entitlement to interest to avoid multiplicity of litigation (reliance placed on Stephen Chemical Ltd. v. Innosearch Ltd.).
Respondent's Arguments (as recorded in the opinion)
- The respondent, in its counter affidavit, denied the claim of the appellant and asserted that the respondent had appointed the State Bank of India as Merchant Banking Bureau/managers for the public issue and that the appellant could not claim amounts directly against the respondent company.
- The respondent disputed the claim generally on the ground of absence of proof.
- The opinion records that the appellant had not produced any agreement between the parties providing for payment of interest, and the original bills/letters before the statutory notice did not include any claim for interest; these factual points formed part of the respondent's position that there was a bona fide dispute over interest.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Bengal Luxmi Cotton Mills Ltd. v. Maha Luxmi Cotton Mills Ltd., AIR 1955 Cal 273 | Where the ground on which liability is disputed is substantial, the court will ordinarily not decide the dispute in winding-up proceedings and may dismiss the petition or keep it pending until the creditor establishes the claim in a regular action. | Used to support the proposition that winding-up proceedings should not be used as an alternative to ordinary debt-recovery when there is a substantial bona fide dispute. |
| Amalgamated Commercial Traders (P) Ltd. v. A.C.K. Krishnaswami, (1965) 35 Com Cas 456 | A winding up petition is not a legitimate means to enforce payment of a debt which is bona fide disputed by the company; such petitions may be dismissed as an abuse if used to exert pressure. | Relied upon to affirm that where a company bona fide disputes a claim, the petition should be dismissed rather than used to enforce a disputed debt. |
| Madhusudan Gordhandas & Co. v. Madhu Woollen Industries Ltd., (1971) 3 SCC 632 : AIR 1971 SC 2600 | Two well-settled rules: (1) if debt is bona fide disputed and defence is substantial, court will not wind up the company; (2) court should not decide controversies regarding liabilities in winding-up proceedings where a substantial dispute exists. | Invoked to caution company courts against deciding disputed liability issues in winding-up proceedings and to support dismissal where dispute is substantial. |
| Stephen Chemical Ltd. v. Innosearch Ltd., (1986) 60 Com Cas 702 : 1985 Tax LR 2141 (Punjab & Haryana) | Where the liability to pay the principal debt is not disputed and the debt is paid to avoid winding up, the company judge is the appropriate forum to decide entitlement to interest; avoids multiplicity of litigation. | Distinguished on facts by this Court: relied on by appellant to argue the forum should decide interest where principal was paid, but the opinion notes factual differences and that the court did not hold an automatic rule in favor of interest in every such case. |
| Stephen Chemicals Ltd. v. Delhi Cloth & General Mills Co. Ltd., (1987) 61 Com Cas 355 (Punjab & Har) | Where invoices expressly stipulated interest (19.5%) and the debtor raised no objection, there is no bona fide dispute regarding interest and the court may award it. | Cited as an example where claim for interest was not bona fide disputed because of an unchallenged contractual clause; used to contrast facts where interest was disputed here. |
| Southern Industrial Polymers (P) Ltd. v. Amar Pharmalators & Electronics (P) Ltd., (1984) 56 Com Cas 77 : 1983 Tax LR NOC 94 (Karnataka) | Where the principal was paid but the rate of interest was disputed, the scope of inquiry under Section 433 should not be extended to enforcement of contractual terms entered into during pendency; the court declined to exercise winding up jurisdiction merely because the rate of interest was disputed. | Relied upon by this Court to show that a company cannot be held negligent to pay if it is solvent and that extending winding-up jurisdiction to disputed contractual terms (interest) may be unjust. |
| Rashid Leathers (P) Ltd. v. Superfine Skin Traders (Mad), (1990) 68 Com Cas 684 (Madras) | Where there was no dispute that goods were supplied and principal was due, and where notice demanding principal and interest was not replied to, the court awarded interest having regard to the Sale of Goods Act, Interest Act and CPC. | Referred to as a contrasting case where interest was awarded on facts showing no bona fide dispute and no reply to demand; illustrates factual dependency of outcomes. |
| London and Paris Banking Corporation, (1874) 19 Eq. 444; Re Brighton Club and Norfolk Hotel Co. Ltd., (1865) 35 Beav 204 | Historic authorities cited within Madhusudan Gordhandas demonstrating that courts have not allowed winding up petitions founded on disputed debts where the dispute is substantial. | Used within the Madhusudan Gordhandas exposition to support the general principle that substantial disputes should be litigated in regular actions rather than in winding-up petitions. |
Court's Reasoning and Analysis
The Court structured its analysis around statutory requirements for a winding up petition under Section 433(e) read with Section 434 of the Companies Act 1956: the court must find (1) that there is a debt against the company, and (2) that the company is unable to pay that debt after receipt of a statutory notice (Section 434(a)). The cause of action under sub-section (1) of Section 433(e) arises only when the company is unable to pay its debts.
The Court explained the well-established approach in company-law jurisprudence: where a debt is admitted or liability is not denied, a winding up order can follow if payment is not made; but where the claim is disputed, the Company Judge must determine whether the dispute is bona fide or a pretext to avoid liability. If the dispute is bona fide and substantial, winding-up proceedings are an inappropriate substitute for ordinary litigation and will not normally be used to decide the dispute.
The opinion surveyed authority (including Bengal Luxmi, Amalgamated Commercial Traders and Madhusudan Gordhandas) to articulate that principle and then reviewed decisions where courts addressed interest claims in the context of winding-up petitions (notably the Stephen decisions, Southern Industrial Polymers and Rashid Leathers). Those authorities demonstrate two strands: (a) where principal liability is admitted and paid only to avoid winding up, a company forum may decide entitlement to interest to avoid multiplicity of litigation; (b) where interest itself is bona fide disputed, a winding-up order should not be used merely to enforce a contested interest claim.
Applying these legal principles to the present facts, the Court noted several key factual findings drawn from the petition and supporting documents: the appellant had not filed any copy of an agreement providing for interest; the correspondence (letters dated 17 April 1984 and 25 June 1984) and submitted bills did not claim interest prior to the statutory notice; the statutory notice itself was dated 14-5-1985. The respondent, in its counter affidavit, denied the claim and asserted that the appellant could not claim directly against it and challenged the proof of the claim. These facts, the Court concluded, established a bona fide dispute over the claim for interest.
The Company Judge had further found that the respondent company was solvent and had not neglected payment of the principal amount. Given the bona fide dispute over interest and the respondent's solvency, the Company Judge exercised his discretion not to wind up the company solely to enforce a disputed interest claim. The appellate Court found that the exercise of discretion was based on sound reasons and that there was no error in dismissing the petition.
Holding and Implications
HOLDING: The Special Appeal is dismissed; the order of the learned single Judge dismissing the winding up petition is upheld.
Implications:
- The direct effect is that the winding up petition was dismissed and the parties were directed to bear their own costs.
- The decision rests on the factual finding that there was a bona fide dispute regarding the claim for interest and that the respondent company was solvent; accordingly, the Company Court properly exercised its discretion not to wind up the company to enforce a disputed claim for interest.
- The opinion does not purport to lay down a new or general precedent beyond applying established principles: whether interest can be awarded in winding-up proceedings depends on the specific facts (for example, whether the principal liability is admitted and whether the interest claim is bona fide disputed). The opinion emphasizes the factual and discretionary nature of such determinations.
End of summary.
Sudhir Narain, J.:— The core question in this Special Appeal is as to whether the respondent having paid the principal amount as claimed by the appellant in the Company petition for winding up the respondent company, is entitled to the interest on such amount. The facts in brief are that the appellant filed Company petition for winding up the respondent company under Section 433(e) of the Companies Act 1956 (hereinafter referred to as ‘the Act’).
2. The allegation of the appellant was that the respondent company was incorporated as a private limited company in the year 1977. It became a public limited company on 5-10-1982. Its object was to manufacture allopathic medicines, dry syrups, tablets, capsules, ointments and oil syrups etc. In April-May 1984, the company was in the process of making public issue of its shares. It appointed the State Bank of India as the merchant bankers for the purpose of carrying out the public issue. It thereafter entered into an agreement with the appellant and certain other agencies for handling various works in co-ordination with the State Bank of India in connection with above public issue. The appellant was engaged to render certain advertising and publicity service in connection with the public issue of the shares of the company. It incurred the expenses in making advertisement of the public issue. The company had paid only sum of Rs. 75,000/- as an advance before the public issue was advertised. It was liable to pay balance amount of Rs. 2,22,289-23 p. The letters were sent for payment of the balance amount but that remained unpaid. A notice under Section 434 of the Act was given to the respondent for payment of Rs. 2,22,289-23 p. with interest at 18% with effect from 1st June 1984. The respondent sent a reply requesting to settle the accounts. A reply was sent by the appellant to the respondent on 7-7-1985. As the payment was not made, the appellant filed the Company petition No. 11 of 1985 on 29-8-1985.
3. In the company petition the respondent filed a counter affidavit denying its liability. The appellant filed a rejoinder affidavit.
4. When the matter came up for consideration as to whether the company petition be advertised, the learned counsel appearing for respondent company asked time to examine the vouchers and other papers and in the meantime he may be permitted to pay sum of Rs. 1,00,000/- through bank draft within a month to prove the bona fide of the respondent company. On 20th October 1986 a draft in the sum of Rs. 1,00,000/- payable in the Punjab National Bank, Parliament, Street, New Delhi, was handed over to the learned counsel for the appellant. Another sum of Rs. 1,22,289-23 p. was paid by another bank draft. The principal amount as claimed in the petition was fully paid. The only question remained as to whether the appellant was entitled to claim interest in the winding up petition. The learned single Judge on the finding that there was a bona fide dispute regarding the claim of interest, dismissed the winding up petition. The appellant aggrieved against this order has filed the Special Appeal.
5. Learned counsel for the appellant submitted that the liability to pay principal amount having been accepted by making payment as claimed by the appellant from the respondent-company, it was further entitled to receive interest at the rate of 18% on such amount, even though there may not be any agreement relating to payment of interest on the principal amount, still the appellant is entitled to interest on the principle laid down under Section 34 of the Code of Civil Procedure which provides that where and in so far as a decree is for the payment of money, the Court may in the decree, order interest at such rate as the Court deems reasonable to be paid on the principal sum adjudged from the date of suit to the date of the decree not exceeding six percent per annum as the Court deems reasonable on such principal sum and in case the liability in relation to the sum so adjudged had arisen out of a commercial transaction the rate of such interest may exceed six percent. A reference was also made to Section 3(b) of the Interest Act 1978 where the Court/Tribunal is entitled to award interest on the conditions being satisfied under the aforesaid provision.
6. The appellant had filed a company petition for winding up the company under Section 433(e) read with Section 434(a) of the Act. Section 433 of the Net enumerates the circumstances under which the Court may pass an order for winding up the company. Clause (e) provides that if a company is unable to pay its debts the company may be wound up by the Court. Section 434 enumerates the circumstances when the company shall be deemed to be unable to pay its debts. The Court has to record a finding that there was a debt against the company and secondly, it was unable to pay the debt after receipt of a statutory notice given to it under Section 434(a) of the Act. The cause of action in winding up proceedings under sub-section (1) of Section 433(e) arises only when the Company is unable to pay its debts.
7. In case the debt is admitted or liability to pay is not denied, there is no difficulty and the company Judge can pass suitable order for winding up of the respondent company if such company fails to pay the amount. The difficulty arises when the claim is disputed by the respondent company. The company Judge in that situation has to examine whether the dispute is bona fide or it is only a pretext to deny its liability. If the learned Judge finds that there is a bona fide dispute, it will not relegate itself to a Court adjudicating the rights of the parties as in a regular suit.
8. In Bengal Luxmi Cotton Mills Ltd. v. Maha Luxmi Cotton Mills Ltd., AIR 1955 Cal 273, the Court held that if the ground on which the liability is disputed is substantial, it will ordinarily not proceed further and decide the dispute itself and determine whether or not a debt exists and has become payable. The Court made the following observations (Para 7):—
“In such a case, the Court will either dismiss the petition for winding-up or keep it pending till the creditor has established his claim in a regular action. The principle on which the Court will forbear from deciding the dispute and making a winding-up order in case it decides it against the company, is that winding-up proceedings are not intended to be exploited as a normal alternative to the ordinary mode of debt-realisation and that it is more convenient that claims should be investigated and decided in a regular action”.
9. In Amalgamated Commercial Traders (P) Ltd. v. A.C.K Krishanaswami, (1965) 35 Com Cas 456, the Supreme Court on facts having termed that the debt in respect of which notice was given under Section 434 was bona fide disputed by the Company, dismissed the winding up petition on the following principle of law laid down by it.
“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 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 then 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.”
10. In Madhusudan Gordhandas and Company v. Madhu Woollen Industries Ltd., (1971) 3 SCC 632 : AIR 1971 SC 2600, the Apex Court again cautioned the company Courts not to decide the controversy regarding the liabilities and observed as follows (Para 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, (1874) 19 Eq. 444). Again, a petition for winding up by a 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 Re. Brighton Club and Norfolk Hotel Co. Ltd., (1865) 35 Beav 204).”
11. Learned counsel for the appellant contended that once the liability to pay the principal amount is accepted there cannot be a dispute in regard to the payment of the interest particularly in commercial transactions. Reliance has been placed upon the decision Stephen Chemical Ltd. v. Innosearch Ltd. (1986) 60 Com Cas 702 : 1985 Tax LR 2141 (Punjab and Haryana), wherein the winding up petition was filed on the allegation that the petitioner-company supplied goods worth Rs. 48,302/- to the respondent company under an order but the amount was not paid, the Court on the admission of the respondent company of its liability to pay the price of the goods, further directed to pay 12% interest on the principal amount. The Court observed as under:—
“In our opinion, where the company Judge was seized of the matter and when the liability to pay the principal debt had not been disputed by the company sought to be wound up and, in fact, paid up the debt in order to avoid winding up, the forum of the company Judge is the appropriate foum for determining as to whether the creditor was entitled to interest on the amount in question or not. The basic policy of law is to avoid multiplicity of litigation.”
12. It was further observed that where a winding up initially is sought by a party on the ground that certain amount by way of interest was due from the other party which the other party had failed to pay up despite demand notice and the other party raises a bona fide dispute as a right against the creditor to claim interest in the absence of any agreement regarding payment of interest or any other plausible ground, the position would be entirely different but where the amount alleged to be due from the company sought to be wound up included the principle amount of debt and the liability to the principal amount has been accepted before the Company Judge it would not be appropriate that the creditor be relegated to the civil remedy for getting the interest on the said principal amount. The case of the Apex Court in Amalgamated Commercial Traders (P) Ltd. v. A.C.K Krishnaswami, (1965) 35 Com Cas 456 (SC) was distinguished on facts wherein the Supreme Court has observed that winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the company. In Stephen's case (1985 Tax LR 2141) (supra) the petitioner-company had supplied the goods on the orders issued by the respondent company. There was nothing to show as to what was the contention raised on behalf of the respondent regarding the claim of interest. The Court did not hold that in every case whenever the claim of interest along with principal amount is made against the respondent company the Court must in all cases pass an order for finding up the company.
13. In Stephen Chemicals Ltd. v. Delhi Cloth and General Mills Company Ltd. (1987) 61 Com Cas 355 (Punj and Har) the Court examined as to whether there was a bona fide dispute regarding the claim of payment of interest by the respondent-company. The Court found that the invoices mentioned that if the amount is not paid before a particular date, the respondent company would be liable to pay the interest at the rate of 19.5 percent. The goods were accepted by the respondent and no objection was raised regarding the said clauses. The Court in those circumstances held that there was no bona fide dispute regarding the claim of interest.
14. In Southern Industrial Polymers (P) Ltd. v. Amar Pharmalators and Electronics (P) Ltd. (1984) 56 Com Cas 77 : (1983 Tax LR NOC 94), wherein the agreed amount towards the principal amount was paid but the dispute was raised with regard to payment of the interest, the Karnataka High Court dismissed the winding up petition in respect of the payment of interest of the principal sum on the ground that there was a dispute about the claim of interest. This decision was considered in Rashid Leathers (P) Ltd. v. Superfine Skin Traders (Mad) (1990) 68 Com Cas 684 (Mad), wherein there was no dispute that the petitioner company had supplied skins of sheep and goats to the respondent company on payment of the principal amount, the Court awarded the interest on the principal amount keeping in view the provisions of the Sale of Goods Act 1930, the Interest Act 1978 and the Code of Civil Procedure 1908. In that case the petitioner had given the notice against the respondent company to pay not only a principal amount but also the amount of interest at the rate of 18 per cent per annum. There was no reply to the notice by the respondent. Considering the facts and circumstances of the case, the Court directed to pay the amount of the interest as well.
15. The Karnataka High Court in Southern Industrial Polymers (P) Ltd. (1983 Tax LR NOC 94) (supra) rejected the claim of petitioner company for payment of the interest after the principal amount was paid to the respondent company. The Court made the following observation:—
“But all outstanding claims except the amount arising out of the difference in the rate of interest calculated is outstanding. In my view, the scope of an inquiry under Section 433 cannot be extended to an enforcement of the memorandum of an agreement entered into during the pendency of the proceedings. The payment made by the respondent-company is clearly indicative that the respondent-company is commercially solvent. Therefore, an exercise of the jurisdiction under Section 433 of the Act, admitting the petition merely because the rate of interest agreed to between the parties in regard to the transactions is disputed, would be unjust.”
16. 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. Secondly, as the Karnataka High Court in Southern Industrial Polymers (P) Ltd. (1983 Tax LR NOC 94) (supra) has held that a company cannot be held negligent to pay the amount if it is found that it is a solvent and is able to pay the amount.
17. In the present case, the appellant was claiming the amount against the respondent as it incurred expenses in advertising and publicity in connection with the public issue of the shares of the respondent company. In paragraph 7 of the company petition it has been stated that the company entered into an agreement with the appellant and certain other agencies for handling various works in co-ordination with the State Bank of India in connection with the publication. The appellant has not filed any copy of the agreement entered into between the parties in relation to the payment of amount of interest on the principal amount. The letter dated 17th April 1984 sent by appellant to the Managing Director of respondent-company asked for certain amount and it was indicated that the rest bills will be settled within 15-20 days after the submission of final bill. The bill sent did not include the amount of interest. Another letter dated 25th June 1984 also does not make claim from payment of any interest. There is nothing to show that prior to the issue of statutory notice by the appellant to the respondent on 14-5-1985 any claim was made in respect of the payment of interest. The respondent had filed the counter affidavit to the said company petition. In the counter affidavit the claim of the appellant was denied, inter alia, that respondent company had appointed State Bank of India Merchant Banking Bureau as Managers to the public issue of shares and the appellant could not claim any amount directly against it. Secondly, the claim of the appellant was also denied in absence of proof. In such a situation there was a bona fide dispute regarding the claim of interest of the appellant. The appellant was to further establish that in such nature of the transaction the provisions of the Sale of Goods Act 1930 and the Interest Act 1978 are applicable.
18. The Company Judge further has come to the conclusion that the respondent company is solvent and has not neglected to pay the amount. Considering the entire circumstances the learned Company Judge did not think it appropriate to pass an order for winding up of the company only for payment of the interest which was bona fide disputed. It was the discretion of the Court. The exercise of discretion is based on sound reasons.
19. There is no merit in this Special Appeal. It is accordingly dismissed. The parties shall, however, bear their own costs.
20. Appeal dismissed.
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