Jyothi Limited v. Boving Fouress Limited.

JUDGMENT

R. V. RAVEENDRAN J. - The petitioner has filed this petition under section 433(e) and (f) of the companies act, 1956 (for short "the act") praying that the respondent-company be wound up as it is unable to pay its debts. The petitioner claims that it supplied eight generators against the respondent's purchase order dated July 25, 1996, and three generators against the respondent's purchase order dated September 11, 1996, and a sum of Rs. 1,49,42,400 was due in that behalf; and that therefore, it sent a notice dated September 27, 1997 under section 434 of the Act, through its counsel, claiming the said sum with interest at the rate of 24 per cent. per annum from the respective due dates (that is from the expiry of 45 days from the date of supplies) to date of payment. The respondent sent a reply dated October 21, 1997, seeking time for payment of the amount due. In the said reply, the respondent neither admitted nor disputed the liability, in regard to interest. The respondent made some payments leaving a balance of Rs. 1,24,42,460. The petitioner filed this company petition for winding up on April 15, 1998, alleging that the respondent was unable to pay its debts that is Rs. 1,24,42,460 towards the supplies and Rs. 37,77,159 towards interest.

Subsequent to the filing of this petition, the respondent has, from time to time, made several payments aggregating to Rs. 1,24,42,460. Thus the entire principal is discharged. The respondent has not, however, paid the sum of Rs. 37,77,159 claimed by the petitioner in the petition as interest, nor the interest which accrued due from the date of petition till the date of payment.

The petitioner contends that in view of the delay in payment, it claimed interest at 24 per cent. per annum on the outstanding, by its letter dated July 24, 1997, and notice dated September 27, 1997. It is pointed out that the respondent did not deny its liability to pay interest in the reply notice and, therefore, the respondent is liable to pay interest at the market rate of 24 per cent. per annum from the expiry of 45 days from the date of invoices. Alternatively it is contended that having regard to section 3 of the interest act, 1978, and section 61(2)(a) of the sale of goods act, 1930, the respondent should at least be made liable to pay interest at the bank rate, up to date of payment.

The respondent contends that its purchase orders (annexures A and B) which contained the terms and conditions of the purchase did not provide for payment of interest. The respondent points out that in the petitioner's letter dated July 10, 1997 (found in annexure C series produced by the petitioner), the petitioner had for the first time stated "please note that I will be constrained to charge you interest for the delayed payment" and this clearly showed that there was no contract to pay any interest, much less interest at the exorbitant rate of 24 per cent. per annum; and that it also showed that even according to the petitioner interest could not be claimed from the date of expiry of 45 days from the date of bills (dated March 30, 1997 and March 31, 1997). It is submitted that the respondent never admitted any liability to pay any interest but had only admitted the liability in regard to the value of the generators supplied by the petitioner; and that as the admitted liability has been fully paid and as the claim regarding payment of interest is seriously disputed, the petitioner cannot insist upon payment of interest in these proceedings and non-payment of disputed interest cannot be termed as inability to pay its debt.

Learned counsel for the petitioner relied on the following decisions in support of its contention that even in the absence of any contract for payment of interest, the company court can require the payment of interest on the basis of section 61(2)(a) of the sale of goods act, 1930, and section 3 of the interest act, 1978 and non-payment of interest as determined by the company court would amount to inability to pay debts under section 433(e) of the Act : (i) Stephen Chemicals Ltd. v. Innosearch Ltd. [1986] 60 Comp Cas 702 (P & H); (ii) Tube Investments of India Ltd. v. Rim and Accessories Private Ltd. [1990] 3 Comp. LJ 322 (Mad); (iii) Rashid Leathers (P.) Ltd. v. Super Fine Skin Traders [1990] 68 Comp Cas 684 (Mad) and (iv) Devendra Kumar Jain v. Polar Forgings and Tools Ltd. [1995] 84 Comp Cas 766 (Delhi). All these cases hold that where the liability to pay interest is either admitted or not disputed, non-payment of interest will amount to inability to pay debts and therefore afford a ground for winding up.

In Stephen Chemical Ltd.'s case [1986] 60 Comp Cas 702, the Punjab and Haryana High Court held that when the liability to pay the principal is not disputed by the company and in fact the company pays the debt in order to avoid winding up, the company court is the appropriate forum to determine as to whether the creditor is entitled to interest or not. It held that the basic policy of law is to avoid multiplicity of proceedings and there was no need to drive the petitioner in the company petition to file a suit for the interest amount.

The Madras High Court in Rashid Leathers (P.) Ltd.'s case [1990] 68 Comp Cas 684 held that where the liability to pay interest was never in dispute and the respondent-company disputed the liability to pay interest for the first time before the company court and it was evident that such a dispute was raised only to delay the proceedings, the dispute regarding interest was not a bona fide dispute and therefore the company court can examine the liability to pay interest in winding up proceedings. In Tube Investments of India Ltd.'s case [1990] 3 Comp LJ 322, the Madras High Court held that a dispute relating to interest should not be construed as existence of a bona fide dispute and the company court itself is competent to decide such a dispute in the winding up proceedings.

In Devendra Kumar Jain's case [1995] 84 Comp Cas 766, the Delhi High Court held that where the liability to pay the principal amount is not disputed, even though there is no agreement between the parties as to the rate of interest, the company court can determine the reasonable rate of interest on the facts and circumstances and to avoid multiplicity of proceedings also calculate the interest to be paid. It was also held that winding up can be ordered, on failure to pay such interest.

On the other hand there are a series of decisions which take a different view. I will refer to them briefly :

In Southern Industrial Polymers (P.) Ltd. v. Amar Formulators and Electronics (P.) Ltd. [1984] 56 Comp Cas 77 this court observed that, where payment by the respondent during the pendency of the petition, of the entire principal and the interest at the admitted rate, clearly indicated that the respondent was commercially solvent, a petition under section 433 for winding up should not be admitted merely to decide the dispute regarding interest (that is difference between interest claimed and interest admitted and paid).

In Anand Steels v. Bharath Earth Movers Ltd. [1989] 65 Comp Cas 777; [1987] 3 Comp LJ 175 this court held that once the respondent pays the admitted part of the claim, but raises bona fide disputes in regard to the claim for interest and the claim for the price of the goods which according to it were not delivered, the jurisdiction under section 433 of the companies act should not be used to determine such disputed questions and the company court should relegate the petitioner to the civil court to make a claim for the disputed amount in a properly framed suit.

In Multimetals Ltd. v. Suryatronics Pvt. Ltd. [1997] 89 Comp Cas 259; AIR 1997 AP 13, a learned single judge of the Andhra Pradesh High Court dissented from the decision of the Madras High Court in Rashid Leathers (P.) Ltd.'s case [1990] 68 Comp Cas 684 and the decision of the Punjab and Haryana High Court in Stephen Chemical Ltd.'s case [1986] 60 Comp Cas 702 by relying on the well-settled principle that a company can be wound up only when it is proved that the debt claimed is ascertained, definite and undisputed and that the company has failed to pay the same, and winding up cannot be ordered if there is a bona fide and substantial defence denying the liability. In that case there was no contract to pay interest on overdue bills. Reliance was placed on section 61(2)(a) of the sale of goods act and section 3 of the interest act in support of the claim for interest. The court held that those provisions cannot be invoked in proceedings for winding up to contend that non-payment of interest that may be awarded under those provisions amounted to inability of the company to pay its debts. It was held that section 61(2)(a) of the sale of goods act, gave discretion to the civil court to award interest in the absence of any stipulation for interest in the contract, that too in a suit for recovery of money or damages; and as winding up proceedings were not in the nature of a suit for recovery of money, the petitioner seeking winding up of a company cannot invoke section 61(2)(a) of the sale of goods act. He also held that the provisions of the interest act give a discretion to a court to award interest only in a suit or in proceedings for recovery of money (that is a suit for recovery of debt, or damages or interest) and cannot be invoked to establish a claim for interest in winding up proceedings. The court held that winding up proceedings, not being proceedings for recovery of debt, damages or interest, the company court cannot be used as a forum by the creditor to establish a claim for interest and recover it.

In Unis Systems (P.) Ltd. v. Stepan Chemical Ltd. [1985] 58 Comp Cas 875 (P & H), a learned single judge of the Punjab and Haryana High Court held as follows :

"The principal amount admittedly has been paid. Learned counsel for the petitioner, however, contends that the petitioner is entitled to get interest on the amount which was wrongly withheld. Learned counsel opposite has controverted this claim and states that there is no stipulation between the parties regarding the payment of interest. Learned counsel for the petitioner does not dispute the fact that there is no agreement for the payment of interest but he claims it on the basis of bills submitted. This claim thus being hotly disputed, no winding up order can be passed on its basis."

In Gangadhar Narsinghdas Agrawal v. Timble Pvt. Ltd. [1992] 74 Comp Cas 846, the Bombay High Court held that where there is no stipulation for payment of interest, winding up cannot be ordered on the ground that interest is not paid by the company.

In Ultimate Advertising and Marketing v. G.B. Laboratories Ltd. [1989] 66 Comp Cas 232, the Allahabad High Court refused to order winding up when the principal amount was paid after the filing of the winding up petition and there was a bona fide dispute about the interest. A similar view was taken by the Himachal Pradesh High Court in Gayson Rolling Mills (P.) Ltd. v. Hemkunt Iron and Steel (P.) Ltd. [1999] 95 Comp Cas 194.

Reference may also be made to the decision of the Rajasthan High Court in Kitply Industries Ltd. v. Hari Narain and Sons (P.) Ltd. [1998] 91 Comp Cas 715. In that case the petitioner did not produce any agreement/contract for payment of interest on the value of goods supplied under the contract. However, the petitioner contended that in the bills for the supply, there was a printed provision for charging interest. The court held that the petitioner had to prove an agreement to pay interest when the contract was made, and it was not sufficient if the bills had a provision for interest.

Thus, the preponderant view is against the company court examining or deciding bona fide disputed claims relating to interest. Such dispute may either relate to the liability to pay interest or relate to the rate of interest or the date from which the interest is to be charged. The reason is not far to seek.

It is now well settled that a winding up petition is not an alternative forum for enforcing recovery of a debt nor is it a legitimate means of enforcing payment of a debt which is bona fide disputed and therefore a winding up petition presented with the intention of exercising pressure upon a company to pay a disputed debt should be dismissed. The proceedings for winding up should not be used as a tool to realise debts due from the company, without initiating proceedings for recovery of the debt. See the decision of the Supreme Court in Harinagar Sugar Mills Co. Ltd. v. M. W. Pradhan [1966] 36 Comp Cas 426; AIR 1966 SC 1707, Amalgamated Commercial Traders (P.) Ltd. v. A. C. K. Krishnaswami [1965] 35 Comp Cas 456 (SC) and Madhusudan Gordhandas and Co. v. Madhu Woollen Industries Pvt. Ltd. [1972] 42 Comp Cas 125; AIR 1971 SC 2600. In proceedings for winding up, the court considers the question whether a company is unable to pay its debts (whether principal and/or interest), only to find out whether the company should be ordered to be wound up, and not to ensure or facilitate recovery of the debt due to the alleged creditor. Further a company court which follows a summary procedure in deciding petitions for winding up, will not decide bona fide disputes requiring detailed investigation.

A company court can direct winding up, when the company is unable to pay its "debts". The word "debt" as noticed above refers to an ascertained and definite amount due to the creditor. To become a "debt", an amount should either be due by the debtor under an agreement/promise to pay, or admitted to be due by the debtor, or determined to be due by the debtor by a competent court. It does not include claims for damages or compensation which have to be assessed by a court before they become due and payable. When there is no contract or agreement to pay interest on the invoice amounts relating to supplies, if the company court wants to allow interest on delayed payments under section 61(2)(a) of the sale of goods act, 1930 or section 3 of the interest act, 1978, the company court is really assessing and quantifying the loss caused to the creditor on account of non-payment of invoice amounts in time. That is not permissible. Awarding interest on delayed payment, when there is no contract or promise for payment, is nothing but award of damages for the delayed payment.

In a petition under section 433(e), the court can examine whether the dispute raised by the company in regard to the claim of the petitioner is bona fide or whether the defence of the company to the claim is frivolous, intended merely to avoid an undisputed liability. But it should not decide the claims which are disputed bona fide nor quantify the loss suffered by the petitioner and award damages, nor award interest to compensate the loss on account of delay on the part of the company in paying the bills. Exercise of such power, would be beyond the scope of proceedings for winding up, as such proceedings are not meant to ensure recovery of debts by creditors, nor ensure that the creditor does not suffer loss on account of delay in payment.

A bona fide defence is not the same as a just, reasonable and strong defence. The business ethics and practices of many a company may not always measure up to moral ethical standards expected by courts. If the company shows a profitable functioning or demonstrates financial solvency by discharging the entire admitted liability, and puts forth a bona fide defence or raises a bona fide dispute in regard to the balance of the claim (which may partly or wholly consist of interest), the court considering a winding up petition under section 433(e) will have to relegate the creditor to the civil court to pursue his remedy by way of a suit, instead of converting every winding up petition into a suit for recovery, with a mini-trial.

I, therefore, respectfully disagree with the view of the Madras and Delhi High Courts, that even where there is no agreement to pay interest, the company court should determine whether interest is payable and if so the rate of interest by exercising power under section 61(2)(a) of the sale of goods act and/or section 3 of the interest act, 1978 and that non-payment of interest so determined would amount to inability on the part of the company to pay its debts.

I may now summarise the legal position as to claims for "interest" in a proceeding for winding up under section 433(e) of the Act :

(a) The term "debt" refers to an ascertained and definite amount "due" and does not refer to a claim for compensation/damages or a claim which requires assessment by a court before it becomes due and payable.

(b) The term "debt" may refer not only to "principal" (value of goods or amount advanced) but also to interest due thereon, where there is a contract to pay interest. Where the contract specifically provides for payment of interest, or where there is an admission or promise to pay interest by the company or where in proceedings for recovery of money, a competent court or arbitrator has determined the liability to pay interest, then non-payment of interest (whether with principal or interest alone) may amount to inability to pay debts.

(c) Interest cannot be awarded merely on the basis of a term in a bill or invoice, unless the creditor proves that such provision is based on a contract or agreement on the part of the purchaser to pay interest. This is because a credit bill or an invoice is a unilateral demand by the supplier and is neither a bilateral agreement nor a promise by the purchaser to pay interest. Interest can be awarded on the basis of a provision in a bill/invoice, if it is supported by an agreement or promise to pay interest by the purchaser. Such agreement may be established with reference to correspondence, or by countersigning of the bill by the purchaser, or by acceptance by the purchaser of the term in the bill relating to interest. Where in the absence of an agreement or contract for payment of interest on the value of goods supplied, a notice of demand is sent by the supplier requiring payment of the value of goods supplied with interest thereon, and a reply is sent by the purchaser in general terms seeking time to pay the bill amount, such reply cannot be construed as an admission to pay interest. Either an agreement to pay interest or a specific admission or promise to pay interest or an order or decree granting interest by a court or Tribunal empowered to award interest, is a condition precedent to hold that interest is a debt due, for the purpose of a winding up petition. In the absence of a contractual or legal liability, mere omission to deny a demand made in a notice will not create a liability, nor act as an estoppel in regard to a subsequent denial by the company in legal proceedings.

(d) Where there is bona fide dispute in regard to interest, the court considering a petition under section 433(e) should not decide the issue, merely to avoid multiplicity proceedings. The purpose of winding up proceedings being completely different from the purpose of proceedings for recovery of a debt, winding up proceedings are not a substitute for a civil suit and therefore relegating parties to a civil suit, cannot be considered as resulting in multiplicity of proceedings.

(e) Interest under section 61(2)(a) of the sale of goods act, can be awarded by a court in a suit for recovery of the price of goods. Interest under section 3 of the interest act, can be awarded in any proceedings for recovery of any debt or damages or in any proceedings for interest (on any debt or damages already paid). Both these provisions specifically provide that interest can be awarded only in proceedings to recover money. They do not contemplate award of interest in proceedings which are not for recovery of money. Proceedings for winding up being proceedings not for recovery of money, no interest can be permitted or granted under section 61(2)(a) of the sale of goods act, 1930, or section 3 of the Interest Act.

(f) Award of interest either under section 61(2)(a) of the sale of goods act or under section 3 of the interest act, is by way of damages, that is, making good the loss suffered by the seller/creditor, by denial of the use of the money due to him by the purchaser/debtor, by wrongfully withholding the money. These provisions are invoked only when there is no contract to pay interest. Thus a claim for interest based on section 61(2)(a) of the sale of goods act or under section 3 of the interest act, is not a claim for a "debt" which is an ascertained sum due. This court cannot therefore compute and award interest based on section 61(2)(a) of the sale of goods act or section 3 of the interest act. Nor can this court hold that non-payment of such interest granted and computed in winding up proceedings amounts to inability to pay a "debt".

Let me consider whether non-payment of interest by the respondent, in this case, amounts to inability to pay its debts. The contracts in this case (purchase orders dated July 25, 1996 and September 11, 1996) do not provide for interest. The bills dated March 30, 1997 and March 31, 1997, under which the supplies are made are not produced to show that they contained any term regarding interest. It is not even the case of the petitioner that the bills provide for interest. The letter dated July 8, 1997, demanding payment of the bill amounts does not refer to interest. Interest is demanded for the first time in the letter dated July 10, 1997, by saying that "I will be constrained to charge you interest for the delayed payment", thereby making it clear that there was no earlier agreement for payment of interest. If that is so, the demand for interest is not in pursuance of any contract or agreement. There is no admission by the respondent to pay interest. On the other hand, the respondent has denied its liability to pay interest. Interest cannot be claimed or awarded under section 62(1)(a) of the sale of goods act and/or section 3 of the interest act as these proceedings are not proceedings for recovery of money. Therefore, this court cannot hold in these proceedings that the respondent is due to the petitioner, any interest, nor quantify the same. There is also a bona fide dispute in regard to the liability to pay interest, the rate of interest and the date from which the interest is payable. While it may be open to the petitioner to establish a claim for interest in a civil suit, under section 61(2)(a) of the sale of goods act and/or section 3 of the interest act, I am satisfied that the petitioner has not made out any admitted or undisputed liability to pay interest, in these proceedings.

Having regard to the fact that the respondent has paid the entire principal amount during the pendency of this petition and thereby established its financial and commercial solvency and in view of the bona fide dispute regarding interest, there is no inability to pay any debt and consequently this petition for winding up is dismissed.