JUDGMENT
P.V. Narayanan Nambiar, J.
1. These are petitions filed under Sections 433, 434 and 439 of the Companies Act, 1956 (hereinafter referred to as “the Act”) by the creditors with a prayer to wind up M/s. Trend Designs Limited (hereinafter referred to as “the Company”), a Company incorporated under the Act.
2. In C. P. No. 9 of 1996, it is alleged that the Company is indebted to the petitioner for a sum of Rs. 2,68,466,70 in respect of invoices raised against them for executing computerized embroidery work. The petitioner in C. P. No. 10 of 1996 alleges that the company is indebted to them for a sum of Rs. 10,14,628.20 in respect of invoices raised against them for executing computerised embroidery work. It is further alleged in both the Company Petitions that as per the work order, the Company placed orders with the petitioners for executing the embroidery work as per the designs furnished by them for which bills have been raised after affecting delivery of the goods to them. 50% of the charges are paid at the time of placing orders and the balance 50% is paid on delivery of the goods after executing the work. As per the agreement between parties, cloth pieces on which embroidery work is to be done is delivered to the factory of the petitioners at Tirupur and taken delivery of from their factory at Tirupur. The goods will be either sent by professional couriers who are engaged for the purpose by the Company or through their own boys who come and collect the finished materials from the petitioners’ factories. When the Company places an order with the petitioners, they send cut pieces on which embroidery work is to be carried out. The petitioners have been carrying out embroidery work for the Company for a few years. After finishing the work, they had raised different bills, but the amount covered by the bills, has not been paid. It is further alleged in the petitions that the cheque issued by them was dishonoured and that the Company even failed to pay the charges of the professional couriers. The various correspondence between parties also did not yield any result. So, a lawyers’ notice was issued, as provided under Section 434(1) of the Act demanding payment of the amount covered by the bills, but the amount was still not paid. Hence, the petitioners are satisfied that the financial position of the Company is such that it is unable to pay its debts. So, the petitioners pray for winding up of the Company. 3. A common counter-affidavit was filed by the Company in C.P. No. 10 of 1996 in which the liability of the Company is disputed. It is stated therein that the Company is financially, sound and it is in a position to meet its financial commitments, but the amount claimed by the petitioners is not payable. It is further alleged therein that the petitioners did not supply the materials in time as a consequence of which considerable loss was suffered by the Company. The embroidery work is to be sent by shipment to foreign buyers and as the petitioners did not execute their work as agreed upon, the articles had to be sent by AIR which resulted in incurring high expenditure. It is also stated in the counter-affidavit that the Company has suffered a loss of Rs. 35 lakhs due to the delayed execution of orders. In the additional counter-affidavit filed by the Company, it has produced documents to show that the Company is in sound financial position.
4. Before taking a decision on the disputed issue that the Company is unable to pay the debts as a consequence of which it is to be wound up, let me survey the provisions contained in the Act on the subject, Section 433 deals with the grounds under which a Company may be wound up by Court. The Section is extracted hereunder :
“Circumstances in which company may be wound up by Court.
A Company may be wound up by the Court,–
(a) if the Company has, by special resolution, resolved that the Company may be wound-by by the Court;
(b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting;
(c) if the Company does not commence its business within a year from its incorporation, or suspends its business for a whole year;
(d) if the number of members is reduced, in the case of a public company, below seven, and in the case of a private Company, below two;
(e) if the Company is unable to pay its debts;
(f) if the Court is of opinion that it is just and equitable that the Company should be wound up.
From the averments in the Company Petitions, it is clear that the petitioners are relying on Section 433(e) of the Act which says that a Company may be wound up by Court as it is unable to pay its debts. The circumstances under which it could be said that a Company is unable to pay its debts is dealt with in Section 434(1) which is quoted hereunder:
“Company when deemed unable to pay its at debts.
(1) A Company shall be deemed to be unable to pay its debts.-
(a) if a creditor, by assignment or otherwise, to whom the Company is indebted in a sum exceeding five hundred rupees then due, has served on the Company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the Company to pay the sum so due and the Company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor;
(b) if execution or other process issued on a decree or order of any Court in favour of a creditor of the Company is returned unsatisfied in whole or in part, or
(c) if it is proved to the satisfaction of the Court that the Company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the Company.”
On the facts of the case, we are only concerned with Section 434(1) (a) of the Act.
5. In both these cases, the liability of the Company is disputed. In the notice which was sent as reply to the statutory notice under Section 434(1)(a) of the Act, the Company has not only denied the liability, but also raised a counterclaim. Annexure E in C.P. No. 10 of 1996 is the reply notice issued by the Company to Annexure D lawyers’ notice. It is stated in Annexure E that by not effecting timely supply of goods, the Company suffered loss in the form of cancellation of export orders by foreign buyers. There was a resultant loss to the tune of Rs. 35,00,000/-. It is also stated therein that even now 7722 pieces of goods are pending to be supplied by the petitioners which are materials supplied by the Company and its, sister concerns. It is further stated therein that the observation that the Company has defaulted payment is not true to the facts. A counter claim is made to the tune of Rs. 35,00,000/- towards loss sustained by the Company and its associated concerns. Annexure B in C.P. No. 9 of 1996 is the notice demanding payment of Rs. 2,68,466.70 from the Company. Annexure E to C.P. No. 10 of 1996 is the common reply notice to Annexures B and D lawyers’ notices.
6. Counsel on both sides took considerable pains to place the relevant authorities before me in support of their respective contentions. I will
have a brief survey of the same.
7. Counsel for the petitioners relied on the decisions of the Supreme Court reported in M. Gordhandas & Co. Madhu Woollen Indus. P. Ltd. (1972) 42 Comp Case 1 25: (AIR 1971 SC 2600), P.I.C.U.P. v. North India Petro Chemical Ltd. (1994) 79 Com Cas 835 : (1994 AIR SCW 2 495) and Joti Prasad Bala Prasad v. A.C.T. developers (1990) 68 Corn Cas 601 of the Delhi High Court to advance his argument that the Company is liable to be wound up since it is not in a position to pay off the debts.
8. Counsel for the respondent, on the other hand, relied on the decisions reported in Krishna Iyer Sons v. New Era Manufacturing Co. Ltd. (1965) 35 Com Cas 410 : (AIR 1965 Ker 241) Amalgamated Commercial Traders (P) Ltd. v. Krishnaswami (1965) 35 Com Cas 456; P.I.C.U.P. v. North India Petro Chemicals Ltd. (1994) 79 Comp Cases 835 : (1994 AIR SCW 2495); P.O.P. Kejriwal v. Partap Steel Rolling Mills (1994) 81 Com Cas 916; Rainbow Enterprises v. India Brewery & Distillery (1995) 82 Com Cas 74 and V.A. Parekh v. satish Solvent Extraction (1995) 82 Com Cas 362.
9. In the decision reported in M. Gordhandas & Co. v. Madhu Woollen Indus Pv. Ltd. (1972) 42 Com Cas 125 : (AIR 1971 SC 2600) it is held that where the petition for the winding up of a company is based on the ground of the inability of the company to pay its debts, it is well settled that if the debt is bona fide disputed and the defence is a substantial one, the court will not order winding up. The principles on which the court acts are: (i) that the defence of the company is in good faith and one of substance; (ii) that the defence is likely to succeed in point of law, and (iii) that the company adduces prima facie proof of the facts on which the defence depends. It is further stated there in that 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. Relying on the latter aspect, counsel for the petitioners argued that it is a fit case where winding up is to be ordered as the debt is admitted. He brought to my notice paragraph 13 of the counter affidavit in which it is stated “it is respectfully submitted that it is in the above background the Company refused to make payment.” According to counsel for the petitioner, the above sentence in the counter affidavit can be taken as an admission of its liability. Counsel adds that when it is stated that the Company refused to make payment, it clearly amounts to an admission of its liability. I am unable to agree. It is trite law that a written statement or a counter affidavit should be read as a whole. One sentence cannot be carved out and highlighted in order to give a different colour to the defence case. On a reading of the counter affidavit, it is clear that the liability is not admitted and in almost all paragraphs the liability is seen disputed. That apart, the respondent has raised a genuine and bona fide dispute regarding liability. Materials are placed before this Court to show that the dispute is genuine and bona fide. In the circumstances, the solitary sentence in paragraph 13 of the counter affidavit cannot be taken to be an admission by the Company of its liability. It is seen from the decision reported in M. Gordhandas & Co. v. Madhu Woollen Indus. P. Ltd. (1972)42 Com Cas 125 : (AIR 1971 SC 2600), that if the debt is bona fide disputed and the defence is a substantial one, the court will not order winding up. As already stated, the principles on which the court acts are that the defence of the company is in good faith and one of substance, the defence is likely to succeed in point of law and that the company adduces prima facie proof of the facts on which the defence depends.
10. The High Court of Delhi had occasion to consider an application under Section 433(e) of the Act in the decision reported in Joti Prasad Bala Prasad v. A.C.T. Developers (1990) 68 Com Cas 601 wherein the Court held that an application under Section 433(e) of the Act is maintainable even in a case where the Company raised a counter claim against the petitioner when the Company had taken delivery of the goods without objection regarding the quality of the goods supplied and without raising any objection notwithstanding the appellant’s failure to conform to the time schedule. The counter claim was held to be vague, indefinite and made on doubtful basis and the two letters on which the respondent Company placed reliance were held to be fabricated subsequently. Counsel also relied on the decision reported in P.I.C.U.P. v. North India Petro Chemical Ltd. (1994) 79 Com Cas 835 : (1994 AIR SCW 2495) wherein the Court observed that 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 defnece is likely to suceed in point of law and thirdly, the company adduces prima facie proof of the facts on which the defence depends.
11. The main thrust of the argument of counsel for the respondent is that the Company cannot be said to be in a financially, unsound position and that it is unable to pay the debts as its credit worthiness is very high. Reliance was placed by counsel on Annexures XVI and XVII. Going by Annexure XVI, which is the balance sheet and Profit and Loss account of the Company and its sister concerns for the year ending 31-3-1995, it is seen that the net profit for the year is Rs.1,79,73,658.50 and the net current assets is Rs. 7,64,04,318.11. Annexure-XVII is the balance sheet and Profit and Loss account of the Company and its sister concerns for the year ending 31 -3-1996 which shows a net profit of Rs. 37,34,341.36 and net current assets of Rs. 7,58,30,561.87.
12. The expression “unable to pay its debts” in Section 433 (e) of the Act should be taken in its commercial sense, that is to say, the Company is unable to meet its current demands. The Company should be plainly and commercially insolvent; its assets and its existing liabilities must be such as to make it reasonably certain that the existing and probable assets would be insufficient to meet the existing liabilities P.I.C.U.P. v. North India Petro Chemical Ltd. (1994) 79 Com Cas 835 : (1994 AIR SCW 2495). A similar view is taken in the decision reported in Krishna Iyer Sons v. New Era Manufacturing Co. Ltd. (1965) 35 Com Cas 410 : (AIR 1965 Ker 241). The language of the Section “is unable to pay its debts” means that the Company is commercially involvent. In other words, the Company has no where with all to meet its commercial liabilities. But, in the instant case, it is seen from Annexures XVI and XVII that the financial position of the Company is such that it is in a position to pay the amount claimed by the petitioners in the Company Petitions. The Karnataka High Court in Rainbow Enterprises v: India Brewerey & Distillery (1995) 82 Com Cas 74 dismissed an application filed under Section 433(e) of the Act alleging inability of pay the price of goods supplied to the petitioner, The court held that the Company having raised several objections such as the discrepancy in invoice price and the goods not conforming to the order, the defence of the company could not be brushed aside as not bona fide and no case for winding up was made out. In the decision reported in V. A. Parekh v. Satish Solvant Extractions (1995) 82 Com Cas 362 wherein also the dispute was regarding payment of price for the goods supplied to the Company, the Bombay High Court held that when the defence raised by the Company was bona fide, the petition was liable to be dismissed. A similar view was taken in the decision reported in P.O.P. Kejriwal v. Partap Steel Rolling Mills (1994) 81 Com Cas 916.
13. To sum up, these are not cases where the Company is unable to pay the debts as it is commercially insolvent. It is in a financially sound position to pay the amount claimed by the petitioners in the Company Petitions. It is not admitted its liability due to the petitioners. The liability is very much in dispute. The defence raised is a bona fide one and there is prima facie proof regarding the bona fides and genuineness of the dispute. Under these circumstances, the Company cannot be ordered to be wound up taking shelter under Section 433(e) of the Act. So, the prayer to that effect is rejected.
14. But in view of the apprehension of the petitioners that the Company is unable to meet its liabilities and in view of the stand taken by the Company that it has got high liquidity, there will be a direction to the Company to provide bank guarantee for a period of two years for the amount of Rs. 2,68,466.70 in C.P. No. 9 of 1996 and Rs. 10,14,628.20 in C.P. No. 10 of 1996 within a period of four weeks from today subject to further orders of this Court. If the petitioners are able to substantiate their claim inappropriate proceedings, they can enforce the bank guarantee and realise the amount.
The Company Petition are disposed of as above.