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Anand Steel v. Bharath Earth Movers Limited
Court Opinion Summary: Anand Steels v. Bharat Earth Movers Ltd. (Company Petition under Section 433(e))
Factual and Procedural Background
This is a company petition under Section 433(e) of the Companies Act, 1956, filed by Anand Steels (a proprietory concern) seeking the winding up of the respondent, Bharat Earth Movers Ltd., Bangalore, for non-payment of monies due for supplies of steel.
Petitioner alleged supplies made on various dates from 9/16-10-1985 to 14-12-1985, with a total claimed amount of Rs. 13,67,697/-. After allowing for goods said to have been rejected (about Rs. 45,405/-), the petitioner sought Rs. 13,22,292/- plus interest at 18% per annum from 1-7-1986 to the date of the petition.
The respondent filed a detailed statement of objections denying liability and asserting that certain employees in its Stores Department had colluded with suppliers to manipulate records, that it had sufficient assets and was a profit-making company, that employees had been suspended and enquiries launched, and that a police complaint had been lodged.
The Court, before advertising the petition, directed evidence to be adduced. The petitioner’s primary witness (P.W.1) was examined and concluded on 4-12-1986. The respondent examined two witnesses. On 28-5-1987 the respondent filed a memo admitting liability of Rs. 10,33,620.30, disputed the claim to interest and the value of three consignments alleged to be undelivered, and paid a cheque for the admitted liability to the petitioner's counsel. The Court reserved the question of the disputed amount and whether a winding up order should be made.
Legal Issues Presented
- Whether a creditor is entitled to a winding up order under Section 433(e) of the Companies Act to enforce payment of a debt where the company disputes part of the claimed debt on the ground of alleged collusive fraud.
- Whether a disputed debt — particularly one alleged to have arisen from collusion or fraud — may be determined and enforced by the Company Court in summary winding-up proceedings, or whether such disputes must be litigated in a civil (or criminal) forum before a winding-up order can be made for the balance.
- Whether the Court should relegate the petitioner to pursue the disputed portion of the claim in a civil suit despite admission and payment of a portion of the claimed debt by the respondent.
Arguments of the Parties
Petitioner's Arguments
- The petitioner argued that a winding up petition under Section 433(e) is a proper remedy to enforce payment of a debt and that the Court must pass a winding up order when a debt is established.
- The petitioner contended that there was no tenable defence disclosed either in the respondent’s evidence or pleadings to the extent that would prevent the Court from ordering winding up in respect of the disputed amounts.
Respondent's Arguments
- The respondent denied liability in full and pleaded that certain employees in its Stores Department had indulged in serious irregularities and colluded with suppliers to manipulate entries so that payments were made for consignments not received.
- The respondent asserted it had sufficient assets and was profit-making, had suspended the implicated employees, ordered enquiries and lodged a police complaint regarding the alleged fraud.
- By way of compromise or admission of part liability, the respondent admitted Rs. 10,33,620.30 but disputed interest and the value of three consignments alleged to be undelivered.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| H.S. Mills Co. v. Court Receiver, AIR 1966 SC 1707 | That a winding up petition is a proper remedy for enforcing payment of a just debt; the Court gives winding up as a mode of execution against a company unable to pay its debts. | The Court acknowledged the proposition but held it only applies where the debt is a just (established) debt; it cannot be applied where the debt is disputed or alleged to arise from fraud. |
| In the matter of Advent Corporation (P) Ltd., 1969 (2) CLJ 71 | Reiterates that a petition for winding up is a remedy to enforce payment of a debt (presupposing existence of the debt). | Used to support the proposition that the existence of the debt must be clear; if existence is in doubt, winding up is not the appropriate remedial vehicle to enforce a disputed debt. |
| In the matter of Seksaria Cotton Mills Ltd., 1969 (2) CLJ 155 | Also reiterates that winding up petitions are a remedy for enforcing debts, subject to the presumption that the debt exists. | Cited to underline that where debt existence is doubtful the winding up petition is not the suitable remedy. |
| M. Gordhandas & Co. v. Madhu Woollen Industries Pvt. Ltd. (references in the opinion: AIR 1979 SC 2600; 1971 3 SCC 632) | Describes principles applicable where debt is disputed: the Court must be satisfied that the company's defence is in good faith, is one of substance, likely to succeed in law, and that the company adduces prima facie proof of the facts on which the defence depends. | The Court applied these criteria and concluded that where the respondent pleads collusive fraud and adduces prima facie material (suspension, inquiry, police complaint), the summary company jurisdiction is not the forum to try delivery/non-delivery disputes; such matters should be litigated in a civil (or criminal) forum first. |
| Re. A Company, 94 SJ 369 (quoted in Gordhandas) | Supports the proposition that where the debt is undisputed the Court will not act on a defence that the company can pay but chooses not to pay that particular debt. | Cited within the Gordhandas reasoning; used by the Court to distinguish cases of undisputed debt from those where genuine disputes exist. |
| Re. Tweeds Garages Ltd., 1962 Ch. 406 (quoted in Gordhandas) | Where exact amount is disputed but there is no doubt company owes a debt entitling winding up, the Court may make a winding up order without requiring precise quantification. | Referenced to show that different treatment applies where only the quantum is disputed but the debt's existence is clear; the Court used this to clarify boundaries of its power. |
| Tulshidas v. Bharat Khand Cotton Mills (referenced in S.C. Sen's book) | Quoted in a secondary source for the proposition that the Court must inquire into the genuineness of disputes alleged by a company to see if they are bona fide or a cloak to hide inability to pay. | The Court observed that such observations are relevant mainly where a company uses a defence as a screen for inability to pay; it found that such a rationale was not compelling against a Government Company with large turnover in the present context. |
Court's Reasoning and Analysis
The Court proceeded step-by-step as follows, relying only on the material presented in the opinion:
- The Court accepted the general legal proposition (as in H.S. Mills and other authorities) that a winding up petition under Section 433(e) is a proper remedy to enforce payment of a just (established) debt.
- The Court emphasized the limitation to that proposition: where the debt is disputed or alleged to have been created by fraud, it is not equivalent to a just debt that may be enforced by routine winding-up proceedings.
- The Court applied the criteria articulated by the Supreme Court in Gordhandas: before acting on a disputed debt the Court must be satisfied that the company's defence is in good faith, is of substance, is likely to succeed in law, and that the company has adduced prima facie evidence in support of the facts on which its defence depends.
- On the evidence, the respondent had placed before the Court a specific contention of collusive fraud involving an employee in the Stores Department, suspension of that employee, initiation of domestic enquiry and a police complaint. The Court found these were prima facie materials supporting the respondent's contention that some of the claimed deliveries might not have been made.
- The Court reasoned that detailed factual determination of delivery or nondelivery, or proof of collusive fraud, could not properly be undertaken in the Company Court's summary jurisdiction on collateral pleadings; such matters required a properly framed civil suit (or criminal proceedings) with full opportunity for pleadings and evidence on the specific issues.
- The respondent had paid a substantial admitted amount (Rs. 10,33,620.30). Given the admitted payment and the outstanding disputed portion relating to alleged undelivered consignments and interest, the Court concluded that it should not in the summary winding-up proceeding determine those factual issues.
- Consequently, the Court decided to relegate the petitioner to the Civil Court to pursue the disputed balance in an appropriate suit. The Court indicated that if the petitioner thereafter obtains a decree in such suit, the petitioner may renew a company petition for winding up on the basis of that established debt.
Holding and Implications
REJECTED
Holding (core ruling): The Company Petition under Section 433(e) filed by Anand Steels was rejected. The Court relegated the petitioner to pursue the disputed portion of its claim (the balance relating to alleged undelivered consignments and disputed interest) by filing a properly framed suit in the appropriate Civil Court. The Court expressly left open the possibility that, if the petitioner obtains a decree in such suit, it may then press for a winding up order based on that decree.
Implications: The direct consequence for the parties is that the petitioner received the admitted amount already paid by the respondent but must litigate the disputed balance in a Civil Court; the Company Court will not determine the disputed factual issues of delivery or alleged collusion in its summary winding-up jurisdiction. The opinion does not purport to establish a new legal precedent beyond applying and following the principles in earlier authorities; it applies established tests (as described in Gordhandas and other authorities) to the facts before it.
This summary is based exclusively on the content of the provided opinion and does not add information beyond that text.
CASES REFERRED:
1. AIR 1966 SC 1707 -
H.S Mills Co. v. Court Receiver
(Dist)
2. 1969 (2) CLJ 71 -
In the matter of Advent Corporation (P) Ltd.
(do)
3. 1969 (2) CLJ 155 -
In the matter of Seksaria Cotton Mills Ltd.
(do)
4. AIR 1979 SC 2600 -
Gordhandas v. Madhu Wollen
(Foll)BOOKS REFERRED
:
1. Palmer-Company Precedents, Part II, 1960 Edition, page 25
2. S.C Sen—New Frontiers of Company Law, 1971 Edition, Bonafide Disputed Debt — Page 249.
Mr. Udaya Holla for Petitioner
Mr. S.G Sundaraswamy for Respondent.
Chandrakantaraj Urs, J.:—
This Company petition under Section 433(e) of the Companies Act, 1956, is by Anand Steels, Bangalore. It is a proprietory concern, that has moved this Court for a winding up order seeking the winding up of the respondent-Bharat Earth Movers Ltd., Bangalore.
2. The substance of the allegations in the petition is that on various dates commencing from 9/16-10-1985 to 14-12-1985 certain supplies of steel were effected in respect of which a sum of Rs. 13,67,697/- was due and liable to be paid by the respondent-Company. The same was not paid despite more than one notice issued, Petitioner was informed that goods worth about Rs. 45,405/- was rejected by the respondent Company. Therefore, the petitioner is seeking payment of Rs. 13,22,292/- together with interest at 18% per annum from 1-7-1986, up to the date of petition. It is in that circumstance, for non-payment of the cost of materials supplied the petition is filed, inter alia, contending that the respondent-Company is unable to pay its debts and therefore it should be wound up.
3. Petition is rejected by the respondent - Company. Detailed statement of objections has been filed. It is unnecessary to refer to the objections in detail. In paragraph-5, it is pointed out that the Chairman of the respondent-Company received a complaint from 108 employees alleging that certain employees were indulging in serious irregularities in the Stores Department. One employee of the Stores Department is specifically named to be in collusion with the suppliers in manipulating entries in the records of the Stores and Receiving Departments. It is pleaded that certain consignments which were actually paid for were not received at all. Payments were made on the basis of the forged records. In that circumstance, in para 21 of the statement of objections, the Company has asserted as follows:—
“It has sufficient assets to carry on its business. It is a profit making Company as could be seen from its Balance sheet. Respondent has not paid the amounts claimed by petitioner in the circumstances stated above and in view of the fraud committed by petitioner.”
That assertion relates to and is based on the circumstances narrated in the objection statement that certain employees have been suspended and enquiry ordered against them. Respondent Company asserts that it has lodged a police complaint in regard to the complicity of its employees in falsifying the entries in the records.
4. It is on such pleadings, this Court even before directing advertisement in the paper, called upon the parties to adduce evidence.
5. On 31-10-1986 this Court passed an order as follows:—
“For enquiry regarding the alleged liability of the respondent company and to determine whether it is a fit case for winding-up the company, call on 20-11-1986.”
Thereafter, P.W 1 for the petitioner was examined and his evidence was concluded on 4-12-1986, subject to rebuttal evidence, if any. The evidence of respondent Company was concluded by examination of two witnesses when question of permitting the petitioner to lead rebuttal evidence on the basis of certain documents came up for consideration. At that point of time, the Court suggested to the respondent-Company to State categorically when their investigation into the alleged complicity of its employees in committing fraud in collusion with the petitioner would be completed so that the Court may proceed with the case thereafter. On 13th March 1987 the matter had been adjourned to 16th April 1987 the last working day before the Summer Vacation. On that day, the Company Judge did not sit, therefore, the matter was called on 28-5-1987. As recorded in the order sheet on 28-5-1987 a memo was filed by the respondent-company admitting the liability of Rs. 10,33,620.30, but disputing the liability to pay interest and value of three consignments, which it was contended had not been delivered. A cheque for the admitted liability was also paid to the Counsel for the petitioner. The Court wanted to close the matter reserving liberty to the petitioner to collect the disputed amount by action in the Civil Court.
6. The Counsel for the petitioner contended that it would not be the correct position in law. The petitioner was entitled to a winding up order even in respect of the amount disputed as there was no tenable defence disclosed either in the evidence adduced by the respondent or in the pleadings. Therefore, the matter was heard at length to-day on the above questions.
7. Firstly, reliance was placed on the decision of the Supreme Court in H.S Mills Company v. Court Receiver, High Court of Bombay . AIR 1966 SC 1707. in which while observing whether it could not be said that the petition filed by the Receiver for winding up of the Company is not a mode of realisation of the debt due to the joint family from the Company, the Court relied upon a passage in Palmer's Company Precedents, Part II, 1960 Edition at page 25, to the following effect:
“A winding up Petition is a perfectly proper remedy for enforcing payment of a just debt. It is the mode of execution which the Court gives to a creditor against a company unable to pay its debts.”
Therefore, it was contended on the strength of the observation of the Supreme Court that the Court must necessarily pass a winding up order when a debt is established and a petition under Section 433(e) of the Companies Act is a proper remedy to enforce payment of that debt. One cannot dispute that as a proposition of law. What the Learned Counsel for the petitioner has missed is the Court must be satisfied that it is a just debt. A disputed debt or a debt created by the commission of fraud (though not yet established) cannot be equated with the just debt due repayment of which the Court would enforce as a matter of course. Therefore, the decisions relied upon cannot be said to assist the petitioner on the facts of this case.
8. Similarly, attention was drawn to the decisions reported in 1969 (2), Company Law Journal, pages 712 and 1553 in which a Learned Judge of the Bombay High Court has more or less reiterated that a petition for winding up is a remedy available to enforce payment of a debt. Again, it presupposes that the debt exists; if the existence of the debt is in doubt, then it necessarily follows that the winding up petition is not a remedy to enforce a debt which is in doubt. The Learned Counsel for the respondent, therefore, contended that in the case of a disputed debt the Court must be satisfied in regard to the genuineness and bonafide nature of the dispute as held by the Supreme Court in M. Gordh andas & Co. v. Madhu Woolen Industries Privat Ltd. . 1971 3 SCC 632.
9. In the said decision, the Supreme Court after noticing its certain earlier decisions in paragraph-21, which is reproduced below, has explained the position clearly:
“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 chooses not to pay that particular debt (See Re. A Company 94 SJ 369). 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 Re. Tweeds Garages Ltd., 1962 Ch. 406). 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.”
(Emphasis supplied)
The Court must form an opinion that the defence taken by the Company is in good faith and is one of substance and that defence is likely to succeed in point of law and the Company adduces prima facie evidence in proof of the facts on which the defence depends.
10. The Learned Counsel for the petitioner also drew my attention to a passage in the book “The New Frontiers of Company Law” by S.C Sen (1971 Edition page 249) under the Caption ‘Bonafide disputed debt’. The Learned Author has stated thus:
“It is not only competent for, but is the duty of the Court to go into the question of genuineness or otherwise of the dispute raised by the company and to see whether the dispute is on the face of it genuine or merely a cloak on the company's real inability to pay its debts. Per Beaman, J., in Tulshidas v. Bharat Khand Cotton Mills.”
The respondent-company is a Government Company. Its turnover goes into crores of rupees as it manufactures heavy earth moving equipments. Now properly understood Justice Beaman's observations covers only cases where a defence is putforward not in regard to the liability but as a screen or a cover to hide the inability of the Company to pay its debts. Now, to say that a Government Company is not able to pay a debt of Rs. 3 lakhs and therefore has raised this dipute would be making travesty of truth. Therefore, that passage is also not of much assistance to the petitioner.
11. The Learned Counsel for the petitioner drew the attention of the Court to the scanty evidence, which the respondent-Company has placed before the Court which does not establish non-delivery of goods. On the other hand, the documents marked clearly establish that delivery has taken place. This Court should not look at the evidence from the point of view of conclusive proof of the transactions. What this Court should examine is whether the evidence adduced in any way supports the assertion of the respondent-Company in its objection that it has a tenable defence to dispute deli very. R.W 1 an employee in the Stores Department, despite innumeral contradictions in his testimony, has stated (which was not challenged in the cross examination) that one employee in the Department has been kept under suspension and domestic enquiry has been commenced against him in regard to his complicity in manipulation of the records in the Stores Department and Receiving Department. As earlier noticed, the specific averment in para-21 of the statement of objections is that the petitioner in collusion with the employees has manipulated the documents and obtained payments for delivery which have not been effected. Therefore, the Company Court trying the case in summary procedure is not the proper Court to determine delivery or nondelivery that is now complained of by the respondent and the petitioner. If the case of the respondent Company is one of collusive fraud committed by the petitioner, that can be established only in a properly framed suit filed by the petitioner or in a criminal case launched by the State on the complaint of the respondent-Company. That a complaint has been made to the police is not in dispute and that ultimately the complaint may result in a prosecution need not now be debated. If it does not within a reasonable time result in prosecution, the petitioner's case for having effected delivery becomes that much stronger.
12. Once the respondent-Company has paid a large sum of Rs. 10 lakhs and disputes to pay the interest claimed and the price of the alleged undelivered goods, this Court should not proceed to determine the question of delivery or nondelivery, for the reasons already stated that, that should be done only in a Civil Court, where proper evidence may be led after proper issues are raised on the specific pleadings. Collateral pleadings in defence of winding up petition cannot be said to be adequate to raise those issues.
13. It is in that view of the matter and on the correct understanding of the Supreme Court decision in Gordhandas's case, this Court has no choice but to relegate the petitioner, at this stage, itself to the Civil Court for the balance of the price of the alleged un-delivered supplies of steel. It is only when such a claim is made in a properly framed suit in a Civil Court the respondent will have the opportunity to plead his defence in detail for establishing collusion and fraud. That Court which tries that suit will arrive at the proper conclusion and give its decision on the evidence led before it and that should not be anticipated by the Company Court in its summary jurisdiction.
14. Therefore, on the facts of this case, the proper thing that this Court may do is to relegate the petitioner to claim the balance of price in a properly framed suit, in the appropriate Court having jurisdiction.
15. If the petitioner obtains a decree in the suit which he may file, then this Court will certainly have no hesitation to pass an order of winding up, on a Company Petition being filed.
There ore, this petition is rejected.
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