Judgment:
Rao, C.J.
1. Admit.
2. This company appeal has been filed by the petitioner in the company petition seeking the winding up of the respondent-company, Sports Equipment (P.) Ltd. By the impugned order the learned Company Judge dismissed company petition No. 219 of 1993 filed under Sections 433, 434 and 439 of the Companies Act, 1956 ('the Act') and refused to admit the petition and order citation. In the appeal the appellant contends that there was deliberate non-payment of the amounts due and no bona fide defense was shown by the respondent and, hence, it is a fit case wherein the winding up petition should have been admitted and citation ordered.
3. The facts of the case are as follows :
The appellant/petitioner is Chem-Crown India Ltd. and it manufactures and sells adhesives for use in the shoe-making industry. Between April, 1988 and July, 1991, the appellant agreed to supply adhesives and Chemicals to the respondent-company [Sports Equipment (P.) Ltd., New Delhi] and these adhesives and Chemicals were accepted by the respondent consumed by them in the manufacture of shoes without any demur. The appellant contended that when it raised several bills on the respondent-company for payment in respect of the goods sold and delivered to the respondent they were accepted without any demur and in fact part-payments were also made from time to time. After giving due credit for the payments made against these bills, there remained a sum of Rs. 1,34,146 as on 24-8-1992. The said amount was reflected in theappellant's account books, balance-sheet and also books of account of the respondent-company. It appears that the respondent issued a cheque for Rs. 16,599 by way of part payment on 2-7-1991, and upon presentation the cheque was returned by the bank. Another cheque for Rs. 36,925 was issued by the respondent to the appellant and was presented on 20-7-1991. It was returned by the bank with the endorsement 'refer to drawer'. After the appellant took up the matter with the respondent the appellant was requested to present the same cheque again and it was so done on 2-8-1991, but was again returned with the same endorsement. However, the cheque for Rs. 16,599 was encashed. On 7-8-1991, the cheque for Rs. 36,925 was returned by the bank with the endorsement 'stopped payment'. The appellant, thereforee, felt that the financial condition of the respondent-company was not stable. It is stated that the appellant wrote a letter dated 16-8-1991, to the respondent to return the unused material lying with them and also assured them to supply fresh stock as replacement, but the respondent-company failed and neglected to do so. It is stated that on 25-10-1991, the appellant clarified that the dispute raised by the respondent in regard to the quality of the adhesive supplied was untenable. Notwithstanding that the appellant undertook to take back the entire unused stock lying with the respondent-company and supply fresh stock and also provide technical assistance in addition thereto. According to the appellant, this was an additional offer in deviation of the original agreement. It is pointed out that in order to get over the demand of the appellant the respondent raised a debit note on 21-5-1992, for Rs. 8,25,791.20 for the alleged loss/damage suffered by it due to allegation of supply of poor quality of materials supplied by the appellant. Vide letter dated 23-5-1992, the respondent admitted that a certain sum was due to the appellant and at the same time claimed the amount referred to in the debit note. The appellant sent a legal notice on 24-8-1992, through its advocate under Sections 433, 434 and 439, calling upon the respondent to make good the outstanding dues along with interest and stated that on the failure to do so, the appellant would be constrained to file an application for winding up. On 14-9-1992, the respondent sent a reply raising various contentions. It was thereafter that the company petition was filed in October, 1992, by the appellant for the winding up of the respondent-company.
4. The learned Company Judge, as already stated, dismissed the petition by order dated 4-1-1995. The learned Company Judge stated in the impugned order that he had gone through the correspondence exchanged between the parties as also the debit note dated 21-5-1992, raised by the respondent on the petitioner and that the said debit note was also prior in point of time to the filing of the winding up petition. The learned Company Judge observed that no winding up order could be passed if there existed a bona fide dispute of fact between the parties though in cases where the dues were admitted or there was no bona fide dispute in existence, an application for winding up could be admitted. He referredto the decision of the Supreme Court in Amalgamated Commercial Traders (P.) Ltd. v. A.CK. Krishnaswami[1965] 35 Comp. Cas. 456. He also observed that it was not open to use the provisions of winding up as a procedure for recovery of money. In such cases recourse must be had to civil action. The learned Judge then noticed that the dishonour of the cheque in the instant case was not because of insufficiency of funds, but because the respondent had directed the bank to stop payment. In the light of this, the learned Judge observed that he was satisfied that there was a bona fide dispute between the parties. He, thereforee, dismissed the company petition without prejudice to the right of the appellant to file a regular suit.
5. In this appeal, it is contended by the appellant that the supply of adhesives started from April, May, 1988, and went on up to July, 1991, over a period of three years and four months, and the goods supplied were accepted by the respondent utilised in the manufacture of shoes and the shoes were also sold to retailers, who, in their turn, sold the shoes to their customers. No objection whatsoever was raised by the respondent as to the quality of the adhesive supplied by the appellant at any point of time before the goods were accepted. In fact, each bill raised by the appellant contained a clause our responsibility for the goods ceases after the same leaves our premises. The respondent had not made any arrangement for inspection of the quality of the goods before the same left the company of the appellant, but received the goods without objection and the goods were consumed and sold without any demur admittedly, part payments against the same were made as is clear from exhibit A-3 which shows payments dated 21-7-1988, 15-10-1988, 3-12-1988 and 27-1-1989, of Rs. 11,823.55 each, and Rs. 3,676.40 on 27-1-1989. It also shows payment of Rs. 18,917.60 on 15-4-1989, Rs. 7,352 on 28-4-1989, Rs.7,352.80 on 27-5-1989, Rs. 18,917 on 29-6-1989, Rs. 7,352 on 3-6-1989, Rs. 23,647 on 30-6-1989, Rs. 16,374 on 11-7-1989, Rs. 11,492 on 10-8-1989, Rs. 18,387.20 on 26-8-1989, Rs. 7,805 on 5-9-1989, Rs. 16,998 on 21-9-1989, Rs. 13,109.20 on 17-10-1989, Rs. 9,103.60 on 1-11-1989, Rs. 9,193.60 on 7-11-1989, Rs. 9,193.60 on 23-11-1989, Rs. 4,596.80 on 25-11-1989, Rs. 19,663.80 on 30-11-1989, Rs. 21,595.60 on 4-12-1989, Rs. 4,596.90 on 16-12-1989, Rs. 13,890.40 on 29-12-1989, Rs. 33,576.20 on 14-3-1990, and Rs. 18,537.20 on 30-3-1990.
Exhibit A-3 further shows part payment of Rs. 18,487 on 11-5-1990, Rs. 27,730 on 22-5-1990, Rs. 7,855 on 14-6-1990, Rs. 27,730 on 14-6-1990, Rs. 7,880 on 4-7-1990, Rs. 27,730 on 27-7-1990, Rs. 27,730 on 17-8-1990, Rs. 27,730 on 12-8-1990, Rs. 7,966 on 10-9-1990, Rs. 7,905 on 10-9-1990, Rs. 37,024 on 27-10-1990, Rs. 36,775 on 19-11-1990, Rs. 25,000 on 3-12-1990, Rs. 11,775on 15-12-1990, Rs. 38, 505 on 31-12-1990,Rs.39,109.18 on 23-2-1991 and Rs. 39,109.18 on 7-3-1991.
6. It will be noticed that these large number of payments were made by the respondent mostly by cheques and they were honoured up to 24-9-1991. They also show that over a period of nearly 3 years the goods were being supplied, utilised or consumed by the respondent and monies were being paid without any demur.
7. The dispute arose on 18-7-1991, when the cheque for Rs. 16,599 dated 2-7-1991, was returned by the bankers. It was represented on 29-7-1991, and it was again returned on 2-8-1991, and was again represented on 2-8-1991, when it was encashed. It was at that stage that the appellant-company got some doubts about the financial stability of the respondent.
8. The trouble arose thereafter when the cheque dated 20-7-1991, for Rs. 36,925 was returned by the bankers on 7-8-1991, on the ground that the respondent directed 'stoppage of payment'. From this stage, the disputes intensified. By that date, this sum of Rs. 1,34,146 was due from the respondent.
9. The respondent wrote on 5-8-1991, for the first time alleging that a large number of customers who purchased the shoes manufactured by the respondent with the adhesive supplied by the appellant, were putting in claims for bond failure. The respondent stated that it had brought the problem to the notice of the appellant on 5-8-1991, and wanted to discuss with the appellant about the quality of the adhesives supplied by the appellant resulting in bond failure. The letter also stated that 'In the above circumstances we have had reluctantly to instruct our bankers to stop payment of our cheque No. 29325 dated 20-7-1991, for Rs. 36,925. We would like to discuss this matter with you at the earliest*. It appears that thereafter there was a meeting between the parties on 10-8-1991, and on 16-8-1991, the respondent wrote to the appellant that the appellant was supplying sub-standard (12 per cent solid content) PU cement, whereas the specification for standard quality is 18 per cent solid content supplied by the appellant to Liberty Footwear Co., and that the appellant also confirmed that guarantee for refund of full cost of shoe in the case of bond failure. The letter also says that the appellant agreed to send 20 drums with 18 per cent solid content and agreed that the respondent should suspend production by not using the adhesive with 12 per cent solid content supplied on 12-8-1991. The respondent thereforee, asked the appellant to confirm the above points.
10. Exhibit A-5, letter dated 7-9-1991, was addressed by the appellant to the respondent informing the respondent that the PU adhesive Chemstik 201 being supplied by the appellant for the last several years was having a solid content of 16 per cent and 12 per cent as mentioned in the respondent's letter dated 16-8-1991, and there was no bonding problem. The appellant had been supplying PU adhesive Chemstik 201 containing solid content of 16 per cent and 12 per cent for several years and the respondent had never complained in the last 3 years over any bonding problem. For the first time, such a dispute was raised by the respondenton 16-8-1991. The appellant, thereforee, stated that if there was any bond failure, then it was only because of the high humidity content in the atmosphere and that the appellant was not responsible. The appellant also pointed out that Liberty Grade PU Adhesive with 19 per cent solids for direct injection moulded shoes of leather upper to PVC was being supplied to Liberty who were paying higher price of Rs. 100 per litre by way of immediate payment, and that the appellant stood guarantee for the bond failure, and that if the respondent could likewise agree, the same arrangement could be made. Alternatively, the appellant submitted that if the respondent had returned the entire unused material, it could have arranged fresh stock of Liberty Grade PU adhesive. But, so far, there had been no word from the respondent. The appellant, thereforee, demanded payment of the amounts that were due.
11. In reply thereto, the respondent informed the appellant that the appellant had 'admitted' supplying sub-standard PU adhesive, and that was the reason why the shoes manufactured by the respondent were not in keeping with the required specification. The respondent stated that it received complaints from customers in India and abroad, particularly, in respect of bond failure resulting in substantial claims. The appellant was requested to supply replacement of PU adhesive Chemstik 201 with solid content of 18 per cent as per industrial standards, and that the balance sub-standard PU adhesive would be returned. The respondent also stated that it was calculating damages as of now, and that they would be submitted to the appellant for payment.
12. It will be noticed from the aforesaid reply that the respondent construed the appellant's letter dated 7-9-1991, as one containing 'admission' in regard to supply of sub-standard adhesive. We do not find any such admission in that letter. In the letter dated 7-9-1991, the appellant promised to supply adhesive with 19 per cent solid content, if the respondent agreed to pay the same higher price of Rs. 110 per litre as was being paid by Liberty. The appellant also informed the respondent that it was supplying adhesive with solid content up to 16 per cent and it is not known how the earlier goods supplied for three years were accepted and no dispute was raised in regard to the quality of adhesive all these years. Further, the very bills submitted by the appellant stated that the responsibility of the appellant for the goods ceased after the same left its premises. Admittedly, the respondent did not have the quality of the goods tested before they left the appellant's premises.
13. The appellant, thereforee, wrote a further letter dated 25-10-1991, stating that no proper test report was conducted by the respondent in respect of the adhesives supplied by the appellant to prove that the adhesives supplied were wholly and solely responsible for failure of the footwear goods. The respondent did not have any investigation done to assess the quality of the adhesives supplied. The appellant, thereforee, informed the respondent that the allegations were baseless. It alsopointed out that after long storage of the adhesive with the respondent they might have even lost their life and the appellant cannot be penalised. It was also pointed out that the appellant has got a technical cell consisting of technicians trained in the U.K. and they also render technical service to the customers, and that the appellant is prepared to have such technical assistance provided to the respondent.
14. After nearly nine months, on 21-5-1992, the respondent raised a plea for damages and raised a debit note of Rs. 8,25,791.20 on account of the cost of 5,980 pairs of shoes exported and being returned to the respondent because of bond failure, which, according to the respondent was due to the bad quality of adhesive. Of course, no suit has been filed against the appellant.
15. On 23-5-1992, the respondent wrote a letter to the appellant referring to certain discussions and stating that without prejudice to what is stated in the subsequent paragraphs of the letter, the sum due to the appellant was not Rs. 1,34,146 but much less. The appellant was requested to have a break-up of the amount furnished. The respondent also mentioned that it was getting supplies of adhesives from the appellant for the last several years and that the initial supplies were found to be satisfactory, but last year complaints began to pour in from its customers about bond failure, and that it was because of the poor quality of the adhesives supplied. The appellant was requested to pay the amount of damages of Rs. 8,25,791.20.
16. It was at this juncture that the appellant gave a notice to the respondent under Section 433(e) claiming Rs. 1,34,146 with interest. It was also pointed out that the amount was not disputed by the respondent and the dispute was raised for the first time in October, 1991. The allegation that the adhesives supplied were of poor quality was only an afterthought and having accepted the goods and used it in the business, it was too late in the day to deny liability to pay. It was also pointed out that the appellant was not liable to pay the amount demanded, vide the respondent's letter dated 23-5-1992. The allegation that the bond failure in the footwear was on account of inferior quality of adhesives supplied by the appellant was denied.
17. On 24-8-1992, a lawyer's notice was issued by the appellant to the respondent under Sections 433, 434 and 439 setting out the various facts mentioned above and a reply was sent by the respondent's counsel on 14-9-1992.
18. This is the correspondence between the parties.
19. From the aforesaid correspondence, the question is whether there is any admission of liability by the respondent and whether there is a bona fide dispute raised by the respondent.
20. In our view, the correspondence exchanged between the parties discloses that the respondent-firm did not dispute the fact that Rs. 1,34,146 was due from it to the appellant. No such stand was taken inthe earlier part of the correspondence. It will be noticed that the statement of account, as reflected from the appellant's books, showed a balance of Rs. 1,34,146 as on 24-8-1990, and by August, 1991, the respondent had in fact sent a cheque for Rs. 36,925 and again stopped payment thereof. The first letter of the respondent was dated 5-8-1991. The only reason given for stopping payment of cheque for Rs. 36,925 was that they wanted to discuss about the quality of the adhesives supplied by the appellant in regard to bond failure. In the entire correspondence the amount was not disputed till we come to the letter dated 23-5-1992, when the respondent stated that the sum was not Rs. 1,34,146 'but much less'. How much less was never specified by the respondent.
21. thereforee, it can safely be inferred that to start with the respondent proceeded on the basis that as per the terms of the contract and the statement of account the sum due was Rs. 1,34,146.
22. As regards the quality of the goods supplied, it will be noticed that the supply started in April, 1988, and went on till July, 1991,and a large number of payments were made as stated earlier. We have given details of all those payments to show that in respect of all the consignments over a period of three years and four months, no dispute was raised by the respondent regarding the quality of the goods supplied. For the first time, the dispute was raised in August, 1991. This is clear from the letter emanating from the respondent dated 5-8-1991. We have already referred to the fact that the bills under which the goods were supplied to the respondent clearly mentioned that the responsibility of the appellant ceased for the goods after the same left its premises. As pointed out further in the letter of the appellant dated 7-9-1991, the goods supplied by the appellant had solid content of 16 per cent and 12 per cent, respectively. It is true that the goods supplied to Liberty were having 19 per cent solid content because of the higher price of Rs. 110 per litre by way of immediate payment and because of the guarantee for bond failure which they had given to the Liberty. As pointed out by the appellant in their letter dated 25-10-1991, there was no test report that the appellant's adhesive either at the appellant's end before the goods left the factory premises, or at the time of receipt of the goods by the respondent being of inferior quality, or at any time before the adhesives were used by the respondent for the manufacture of shoes. Over a period of three years and four months, the adhesives were supplied, received without objection as to the quality, utilised, goods produced, sold to retailers, who in their turn, sold to the customers. The matter relates to the sale of goods. There is no contract that the quality was to be of the same level as that supplied to Liberty nor that any test was to be conducted either at the appellant's premises before the goods were dispatched nor at the respondent's premises when the goods reached there. The complaints were only raised after the adhesives were consumed in the manufacture and the shoes were sold to the retailers and other customers.
23. On these facts, it is difficult for us to say either that the amount was not admitted to be due or that the respondent has raised a bona fide dispute with regard to the quality of the goods.
24. It was noticed during the arguments that the objections were raised long after the goods were consumed. We asked the learned counsel for the respondent whether there was no method by which the quality of the adhesive could have been got tested by the respondent before the same was released from the appellant's place. The learned counsel for the respondent submitted to us that there was no system or method by which the quality of the adhesives could be tested by the respondent. This Explanationn appears to us to be totally unacceptable. It cannot be that in the field of adhesives which are in the market all over the world, there is no method of finding out the standard of adhesives. In fact the appellant has in its letter dated 25-10-1991, stated that it has a technical cell which consists of technicians trained in the U.K. and the appellant also renders necessary technical services to its customers. Nowhere in the correspondence or in the pleadings is it mentioned that there is no method by which the respondent could have the quality of the adhesives tested before the adhesives were dispatched to the respondent.
25. We are unable to find that any bona fide dispute is raised by the respondent to the company petition. We are conscious of the limitations of the company jurisdiction and that the procedure for winding up should not be allowed to be adopted for recovery of monies which could otherwise be recovered by way of a suit. But the accepted principles are that the amount being admitted and not paid in spite of demand, and if there is no bona fide dispute raised by the respondent it will be open to the Company Court to proceed with the various steps in a winding up petition.
26. In the result, we set aside the order of the learned Company Judge. We think that a case for admission of the company petition and for issue of citation has been made out. But before doing so, we would think it proper to give a further chance to the respondent by giving it time of four more weeks for payment of the amount due failing which the company petition shall stand admitted and the appellant can approach the learned Company Judge for issue of the citation and for taking further steps in the matter.
27. The company appeal stands disposed of accordingly.