SUPREME COURT HOLDS THAT COMPANY COURT CAN NOT DECIDE ON DEFAULT IN A WINDING UP PROCEEDINGS
The #SupremeCourt of India in the case of Shital Fibers Ltd. v Indian Acrylics Limited (Civil Appeal No. 1105/2021), vide its Judgment dated 06.04.2021 held that the Company Court while exercising its powers under Sections 433 and 434 of the #CompaniesAct, 1956 is not in a position to decide the party that has #defaulted in non-compliance with the terms of the deed of #settlement and the #compromise deed that parties had entered into.
In this case M/s Indian Acrylics Limited (‘Respondent’), who is a manufacturer of acrylic, had entered into a transaction with the M/s Shital Fibers Limited (‘Appellant’) to supply acrylic yarn on credit basis. The Respondent supplied part of the material when certain issues were raised by the Appellant with regard to the quality of the material supplied by the Respondent. The Respondent credited a sum of money to the Appellant on account of material returned and some defect in quality. However, the Appellant had not made a payment of outstanding amounts towards the material supplied by the Respondent. Despite several requests, the Appellant did not pay the balance amounts. As a result, the Respondent issued a statutory notice to the Appellant, which was duly responded to by the Appellant. But no payment was made by the Appellant.
The Respondent filed a Company Petition seeking winding up of the Appellant Company on account of non-payment of debts. The Company Petition was admitted by the Company Tribunal, vide its Order dated 28.09.2015. The Company Tribunal however gave another opportunity to the Appellant to settle the accounts with respect to the Respondent by 31.12.2015 and also directed the citation to be published upon failure by the Appellant to pay the same.
The Appellant challenged the Order dated 28.09.2015 before the Division Bench of the High Court. The Division Bench of the High Court, vide its Order dated 24.12.2015 stayed the publication of the admission notice subject to the Appellant paying the outstanding amounts to the Respondent by 31.12.2015. Accordingly, the Appellant paid the outstanding amounts. Thereafter, the Division Bench of the High Court concluded that since the Appellant had satisfied the claim of the Respondent there is no bona fide dispute persisting in the Appeal. Moreover, the Division Bench observed that the Respondent’s claim towards any interest payments can be made to the Company Judge by way of an application for clarification or an appeal or by any other proceedings. Hence, the Appeal was dismissed, vide Order dated 29.04.2016.
The Appellant filed an Appeal before the Supreme Court against the Order dated 29.04.2016. The Appellant contended that the defense of the Appellant was bona fide on account of the defective material supplied by the Respondent. This resulted in a huge loss to the Appellant and as such, it was the Appellant who was entitled to receive the damages from the Respondent. Therefore, the admission of the Company Petition in the first place was wrong in view of Section 433(e) and (f) of the Companies Act, 1956. Section 433 deals with circumstances in which a company may be wound up by Court.
The Supreme Court observed and held as follows:
- It is well settled that if the debt is bona fide disputed and the defense is a substantial one, the court cannot wind up a company. It is equally well settled, that where the debt is undisputed, the court will not act upon a defense that the company has the ability to pay the debt but the company chooses not to pay that particular debt.
- It further stated that it is equally settled, that the principles on which the court acts are first, that the defense of the company is in good faith and, secondly, the defense is likely to succeed in point of law and thirdly, the company adduces prima facie proof of the facts on which the defense depends.
- The Supreme Court examined the facts of the case and found out that the defense taken by the Appellant with respect to the supply of defective material by the Respondent was by way of an after-thought. As such, no document was referred or placed on record to show the defect in quality of the material. However, the Court further pointed out that the Appellant had claimed different amount in its reply to the Respondent’s Notice and in written statement before the Company Judge.
- The Court referred to the observations of the Division Bench of the High Court whereby the High Court also observed that the contentions of the Appellant are not well-founded. The High Court had observed that in any event, if the Appellant’s case was that the goods were defective, it would have recorded the same in some manner or the other.
- In view of the findings of the Learned Company Judge as well as the Division Bench of the High Court in their respective Orders, the Supreme Court observed that both the subordinate Courts only upon examination of materials placed have found that the defense of the Appellant with regard to the quality of the material supplied by the Respondent was by way of after-thought.
- The Supreme Court observed that the defense of the Appellant was not bona fide and substantial. As such, the Appellant failed to adduce prima facie proof of facts for its contentions. Therefore, the Appellant had only taken a contradictory stand in order to defeat the claim of the Respondent.
- The Court referred to its former cases and held that it is not necessary to establish that the entire claim is undisputed, while admitting the petition.
- The Court further held that “the company court while exercising its powers under Sections 433 and 434 of the Companies Act, 1956 would not be in a position to decide, as to who was at fault in not complying with the terms and conditions of the deed of settlement and the compromise deed.”
- It further said that a detailed investigation of facts and examination of evidence or documents is necessary in adjudicating the claim, which could not be done in the proceedings under Section 434 of the Companies Act, 1956. Thus, the Learned Company Judge as well as the Division Bench has rightly found that the defense of the Appellant could not be said to be bona fide, in good faith and of substance.
The Indian Lawyer & Allied Services
Senior Legal Associate
The Indian Lawyer & Allied Services
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