i T C Ltd. Vs. Fomento Resorts and Hotels Ltd. - Court Judgment

DR. G.F. Couto J.

1. In this petition under section 434(e) of the Companies Act, 1956, I.T.C Ltd., a company incorporated under the Indian Companies Act, 1882, prays that Ferment Resorts and Hotels Ltd. (for short, registered office at Villa Flores de Silva, Erasmo Carvalho Street, Margoa 403601, Goa, be would up as it is unable to pay its debts.

2. The petitioners case is that the company entered into an agreement with them on April 12, 1979, for availing of their consultancy, advisory and operational services. The duration of the agreement was for five years commencing on February 1, 1982, and ending on January 31, 1987, but the company, nonetheless, continued to avail of the petitioners' services up to January 15, 1988. Various amounts were payable to the petitioners by the company as remuneration, fees and charges for technical services and also for reimbursement of expenses incurred by them for and on behalf of the company. The petitioners 'account current' with the company showed as on December 31, 1986, a credit balance in the favor of the petitioners as on December 31, 1986, to Rs. 15,82,659.74, and this amount was incorporated in the company's liability towards the petitioners by the company, and as such, debit notes were issued to the company and debited by the petitioners repeatedly called upon the company and debited by the petitioners in their books of account to the company's accounts. The petitioners repeatedly called upon the company confirmed as due on December 31, 1986. The company, however, not only failed and neglected to pay the said amount, but also, by letter dated November 14, 1988, questioned the balance due in the petitioners' favor and contended that the petitioner's debit notes had been disputed earlier as well as that the company had counter-claims against the petitioners which have already been intimated to them. The company also suggested that the matter could be sorted out by payment of a reasonable sum mutually agreed upon by the parties.

3. It is the further case of the petitioners that, at this stage, by notice dated January 17, 1989, given under section 434 of the Companies Act, 1956, which was duly served on the company, the petitioners demanded payment of the said confirmed amount of Rs. 20,20,882.80 together with interest at the rate of 15% per annum within three weeks of the service of the notice, failing which proceedings for winding up of the service of the notice, failing which proceedings for winding up of the company would be commenced. The company replied to this notice by letter dated February 13, 1989, questioning the petitioners' claim and raising, for the *first time, certain disputes as regards the same. According to the petitioners, the alleged disputes were concocted and raised in an attempt to avoid payment of an amount specifically admitted by the company, and, therefore, by their letter dated April 21, 1989, the petitioners pointed out that deference's raised were devoid of merit and false to the company's knowledge, and demanded immediate payment of the confirmed amount payable as on December 31, 1986. Further, by their letter dated April 27, 1989, the petitioners sent a copy of this notice dated January 17, 1989, to the registered office of the company, allegedly to forestall any technical objections that would be raised by the company, as well as sent a fresh notice dated April 27, 1989, in the same terms of the notice dated January 17, 1989.

4. The company, however, did not make the payment of the amount acknowledged as due as December 31, 1986, or part thereof. In addition, the company, according to the petitioners, is a sick unit, commercially insolvent and unable to pay its debts.

5. The company resists the petition on several grounds. It first contends that the petition is misconceived and not maintainable as it was filed on April 28, 1989, even before the statutory notice was served on the company in its registered office, being also a gross abuse of the process of the court inasmuch as the real intention of the petitioners is to coerce the company to pay a non-existent or a bona fide disputed debt. Secondly, and on merits, the company's case is that it has filed a suit against the petitioners, being Civil Suit No. 114 of 1989/A, in the Court of the Civil Judge, Senior Division, Panaji, on May 23, 1989, i.e., prior to he serving of the notice of the filing by the petitioners of the present winding-up petition. The company claimed in the said suit a sum of Rs.2,85,53,436.81. Thirdly, on the petioner's own showing, the amount as due on December 31, 1986, is on a running account which continued after the said date. Fourthly, there are two other accounts, viz., 'RSA account' (advance against sale of room rights) and 'city ledger account' between the petitioners and the company, being an admitted position that an amount of Rs. 5 lakhs was paid by cheque dated November 5, 1987, by the petitioners to the company and credited in the said ledger account. Fifthly, there are two written agreements, but in addition, it has been orally agreed that regardless of such written agreements, the petitioners would be, in fact, and in practice, in complete charge and control of the project of establishing the hotel as well as of the management, operation and marketing of the same hotel Finally, the company is not a sick unit and not insolvent. It is making profit after the agreement entered into by it with the petitioners came to an end.

6. A rejoinder was filed by the petitioners denying the allegation made by the company any submitting that the suit referred to in the affidavit- in-reply was instituted to counterblast the present winding-up petition.

7. It is thus seen that the petitioners' case is wholly based on the alleged confirmation made by the company of its liability of Rs. 20,20,882.80 to the petitioners as on December 31, 1986, although at the same time, they claim that afterwards, various other amounts became due and payable to them and were, as such, debited to the company in the books of accounts of the petitioners. In fact, after having averred in paragraph 9 of the petition that they repeatedly called upon the company to pay all the amounts due and payable to them, including , in particular, the admitted and confirmed amount as on December 31, 1986, and further, that the company had failed and neglected to any the said amounts, petitioners stated in paragraph 11 that by notice dated January 17, 1989, they demanded the payment of only the said amount of Rs. 20,20,882.80 with interest thereon, and in paragraph 15, that the company failed to make payment of the said amount or any part thereof. Now, the company disputes the very existence of the said liability for the reason already mentioned. Thus, the question that arises is whether such dispute is genuine and bona fide, or whether the defence raised is frivolous, untenable and put forward with the only intention to avoid payment of its dues to the petitioners.

8. naturally, Mr. Cooper, while pressing for the admission of this petition answered this question against the company. He urged that the defence raised is ex facie bad and frivolous in the background of the admitted liability of Rs. 20,20,882.80 as on December 31, 1986. This liability was confirmed by the company after a detailed examination of the relevant documents on May 13, 1987, and, therefore, it does not lie in the mouth of the company to now challenge that liability. No doubt, the audit of the company's accounts reduced such liability to Rs. 15,82,659.74 and this reduced liability was incorporated in the company's balance-sheet for the year ending on December 31, 1986. But, in any event, the company was owing to the petitioners an amount of money much in excess of Rs. 5 lakhs which was not paid even after the statutory notice was served on it, and, therefore, the kind of defence raised by the company is not bona fide and is clearly untenable. The petitioners are, as such entitled ex debito justitiae to an order winding up the company. Support was sought in this connection in State Bank of India v. Hegde and Golay Ltd. , T.P.Shau and Sons Pvt. Ltd., In re , Wasting house Saxby Farmer Ltd., In re , Durgapur Projects Ltd., In re , United Western Bank Ltd., In re and Madhusudan Gordhandas and Co. v. Madhu Woolen Industries : [1972]2SCR201 . Learned counsel further urged that, in addition the filing of a suit by the company against the petitioners for damages of over Rs. 2,80,00,000 corroborates ad nauseam that the defence raised by the company is not only frivolous but also mala fide, since the grounds, therefore, are imaginary, flimsy, preposterous and against the written agreements by the company with the petitioners. Acts of malfeasance or misfeasance had been alleged without being, as they ought to have been, established to justify the claims for damages. That apart, most of those claims, if not all, being hopelessly barred by limitation, an attempt has been made to circumvent this bar by alleging fraud and existence of an implied trust, Reliance was placed in this respect in Virendra Singh Bhandari v. Nandlal Bhandari ans Sons Ltd [1982] 52 Comp Cas 36 (MP), Rangacharya v. Guru Revti Raman Acharysm AIR v. Mahindra and Mahindra Ltd : [1983]144ITR225(SC) , that the company is a sick unit as it has no financial viability, being, therefore, liable to be wound up.

9. In turn, Mr. Chagla took the opposite view, forcefully contending that on the one hand, the defence raised by the company is genuine and bona fide and on the other, the conduct of the petitioners in rushing to the court and in filling the winding up petition should, in the facts of this case, be stigmatised as an abuse of the process of the court,and therefore, the petition should be similarly dismissed even at the stage of admission. Winding up petitioners are not intended to be exploited as a normal alternative to the ordinary mode of debt realization nor to pressurize or coerce a company to pay amounts claimed regardless of such claims being disputed he submitted, placing reliance on the observation made in J. N. Roy Chowdhury (Traders) P. Ltd. v. Janinti Enterprises : 90CWN974 , Amalgamated Commercial Traders Pvt. v. A. C. K. Krishnaswami and Madhusudan Gordhan das and Co. v. Madhu Woollen Industries P. Ltd. [1972] 42 Comp Cas 125. Unfortunately, however, this is what the conduct of the company discloses, and, therefore, on this ground alone, the petition is liable to be dismissed. Indeed, they not only filed the petition on the basis of a disputed debt, but defective, inasmuch as the same was filed even before the statutory notice under section 434 of the Companies Act was served on the company in its registered office. that apart, the alleged debt was in a running account which was not closed and which was continued up to January, 1989, it being also an admitted fact that there existed two more accounts between the parties which were not yet closed and settled. Equally, most symptomatic is that though the alleged confirmed amount of Rs,20,20,882.80 was reduced to Rs.15,82,659.74 after audit, the petitioners still claimed the payment of over rupees 30 lakhs, having filed the petition on April 28, 1989, for an amount allegedly due and payable to them as on December 31, 1986. Pertinent also is indicative of the pressure tacts of the petitioners, the letter dated January 31, 1989, written by them to the IFCI, New Delhi stating that the company has failed to pay to the petitioners their dues which were in excess of Rs. 65 lakhs and that a winding-up notice under section 434 of the Companies Act had been already issued and further legal proceedings would be initiated against the company for other dues.

10. On merits, learned counsel urged that, although it is no doubt true that if a creditor establishes his credit as clear and undisturbed;e and the company fails to pay such debts without reasonable or valid excuse, such creditor is entitled ex debito justice to a winding up order as held in Goel Bros and Co. Pct. Ltd. v. Yashodan Chit Fund Pvt. Ltd. [1980] 50 Comp Cas 963 (Bom), Federal Chemical Works Ltd., In re [1964] 34 Comp Cas 963 (All) and Glove agency P. Detractive P. Ltd. v. Subbiah Machine Tools. P. Ltd. : 1984(2)KarLJ207 , the fact remains that the petitioners did not at all establish that their alleged credit is unimoeachavle, and that therefore, winding up order is warranted. He submitted that it is the case of the petitioners themselves that the allegedly confirmed amount of Rs.20,20,882.80 was reduced to Rs.15,82,559,74 after audit and that it was only the latter amount which was incorporated in the balance sheet of the company for the year ending on December 31, 1986. This admission by the petitioners indicates that the alleged written confirmation made on May 13, 1987, as otherwise the annexure P-2 to the petition shows had no the finality attributed to it by the petitioners in this petition. He further contended that is an admitted position that much after the said confirmation, representatives of the petitioners and those of the comp;any sat across the table in an attempt to settle the accounts,the negotiations/discussions having lasted, at least, up to November, 1988, such discussions corroborate that the accounts between the petitioners and the company were not finalized, the, therefore, no clear balance in favour of any party can be established and the company's letter dated November 14, 1988 (annexure P-3 to the petition) also establishes that the company has raised dispute on several grounds. This letter was send to the petitioners much before the statutory notice which is dated January 17,1989, and hence, it cannot be said that the defence raised is not genuine and bona fide.

11. As regards the suit filed by the petitioners, Mr. Chagla conceded that the suit is not merely based on the alleged oral agreement but it is mainly based on a true construction of the written agreements and breaches of the duties cast upon they by the petitioners. Such a suit is not at all barred by limitation,and it is based on the aforesaid breaches and the consequent accountability of the petitioners in the discharge of the same duties under the agreements. The defence is thus a good defence.

12. Finally, as far as the solvency of the company is concerned, learned counsel invited my attention to what is averred in paragraphs 17 and 19 of the affidavit-in-reply. According to him, such solvency of the company can not be a subject of doubt. Therefore, according to Mr. Chagla, the ground of insolvency of the company is not available to the petitioners to get a winding up order as regards the company.

13. It is well-settled that a winding up petition should not be allowed to be taken recourse of as a means to recover debts from a company. It is not a legitimate way to enforce payment of debts which are bona fide disputed by a company and cannot be used as a weapon to pressurize and coerce the company to make payments. This clear position of law also flows from the authorities relied upon at the Bar and thus, in truth, it is not necessary for me to advert to such authorities. I may, however, make a brief reference to some of them namely, to J Enterprises' case : 90CWN974 , wherein the court held that winding up petitioners are not intended to be exploited as a normal alternative to the ordinary mode of debt realization and further, that the claim should not be a running claim but one which is crystallized, as well as to Madhusudan Gordhandas' case : [1972]2SCR201 , Wasting house Saxby Farmer's case , United Western Bank Ltd.'s and Goel Bros. and Co Pvt.'s case .

14. In M. Gordhandas' case : [1972]2SCR201 , the supreme Court held that two rules are well-settled, the first being when the debt is bona fide disputed and the defence is a substantial one, the court will not wind up the company, and the second,m that when the debt is undisputed, the court will not act upon the defence that the company has the liability to pay but chooses not to pay and the creditor will, in such case, be entitl,ed to a winding up order. The court further observed that the principles on which the court acts are :(1) the defence of the company has to be in good faith and one of substance ; (2) the defence should be likely to succeed in point of law ; and (3) the company should adduce prima facie proof of the facts on which the defence depends. The court also observed that an improper motive can be spelt out where the petition is presented to coerce the company to satisfy some groundless claims against it.

15. In Wasting house Saxby Farmer Ltd.'s case , the court held that a defence raised by a company should be bona fide but should not be allowed to taken up without concrete material on which such allegation is made being produced.

16. Similarly, in United Western Bank Ltd.'s case , Kania. J. (as he then was) observed that when the defence is that the debt is disputed, the court has to see first whether the dispute on the fact of it is genuine or merely a cloak to cover the company's real inability to pay the debts. The inability is indicated by its neglect to pay the debt within three weeks, after proper demand was made. He added that neglect is to be assessed on the facts of each case.

17. In Goel Bros. and Co. P. Ltd.'s case , Aggarwal J. held the view that after a creditor establishes that the debt is clear, valid in law, unimpeachable and undisputable, the creditor is entitled to a winding up order ex debito justitiae. But if the debt is disputed and the dispute is bona fide and genuine, no winding up order can be made. He clarified that neglect to pay is not equivalent to omission to pay for it requires that such omission is without reasonable cause or valid excuse.

18. Applying now the law as above to the case at hand, can it be said that the defence raised by the company is frivolous and was taken up for the mere purpose of avoiding payment? Is the alleged debt of the petitioners cleaar, valid in law and undisputable Or, is the defence genuine and bona fide

19. In my considered opinion, the answers to these vital questions flow clearly from the uncontroverted facts. Such facts indicate that the defence is not frivolous but genuine, and in addition, it appears that the debt claimed is merely a running debt which is not yet crystallised.

20. It is, no doubt, true that on May 13, 1987, a reconciliation statement of the petitioners' 'account current' as on December 31, 1986, was made taking into consideration the balances as per the petitioners' books of accounts as well as those of the company and that aan amount of Rs.20,20,882.80 was confirmed but 'subject to final confirmation of service/incentive fees and central marketing expenses'. This confirmation which is at annexure P-2 to the petition was signed by one Mr. N.J.Desouza and bu one Mr. Dilip Verlekar, president and accounts officer, respectively, on behalf of the company, as well as by two representativess of tedly, reduced to Rs.15,82,659.74 after auditing and it was the latter amount of Rs.15,82,659,74 that was incorporated in the balance-sheet of the company for the year ending on December 31, 1986. These circumstances, unmistakably, indicate that the so called confirmation made on May 13, 1987, was not final, and, therefore, the said debt of Rs.20 lakhs and odd has not crystallised.

21. That apart, it is the petitioners' own case that although the agreement entered into by them with the company was for a period of five years, commencing on February 1, 1982, and ending on January 31, 1987, the company, none the less, availed of their services up to January 15, 1988. It is equally revealed by the material placed before me that three accounts were in existence as regards the petitioners, namely, (a) 'account current' ; (b) 'city ledger account' and (c) 'RSA account' (advance against sale of room rights). Apparently, these accounts were not yet closed at the time the statutory notice under section 434 of the Companies Act was issued, and hence, it has been established that, ultimately, there existed a balance due and payable to the petitioners by the company.

22. These facts assume particular relevance in the background that after the aforesaid confirmation and incorporation of the debt in the balance sheet for the year ending on December 31,1986, there were, admittedly, protracted discussions for reconciliation of statements of accounts between the representatives of the petitioners and those of the company, discussions which lasted up to November, 1988, and which were followed by the company's letter dated November, 1988 whereby some disputes had been raised. Petitioners did not reply to the said letter the tone of which is quite conciliatory, and on the contrary, much after allowing about two months to pass, the statutory notice dated january 17, 1989, was issued. The company replied to this notice by its letter dated February 13, 1989, once again mentioning the raised disputes and alleging acts of commission and omission on the part of the petitioners which entitled them to make some claims for compensation. By their letter dated April 21, 1989, the petitioners denied the company's allegations, and then filed the present winding up petition on April 28, 1989, although admittedly, the notice had been sent to the registered office of the company only on the previous day, i.e., on April 27, 1989. In turn, the company filed on May 32, 1989, the aforesaid suit for the damages against the petitioners, the filing being before the company was served with the notice of this winding up petition.

23. A careful analysis of the above uncontroverted facts discloses that not only the claimed amount of Rs.20,20,882.80 as payable as on December 31, 1986, had not crystallised, but also that the was a running debt that had to be adjusted after the three accounts above referred to were closed and settled. It also reveals that the so called confirmation of the debt could not, in the circumstances, be acted upon and that is why the petitioners and the company had been having discussions up to November, 1988, for settlement of their accounts. It is also apparent that in the course of such discussions, the company disputed several claims made by the petitioners, amounts of which were shown in their favour and also raised several claims, as can be inferred from the company's letter dated November 4, 1988. Thus, it cannot honestly be denied that a dispute was raised by the company much before statutory notice was served on them, and hence, in the background of the prolonged discussions for settlement of accounts, the defence raised has all the trappings of a genuine and bona fide defence.

24. This finding is by itself sufficient for me to dispense with dealing with the filing of the suit for damages by the company against the petitioners. Much ado was, however, made by the petitioners on that count in order to establish that the defence of the company is male fide. Hence, I will advert to it briefly for the purpose of determining whether or not the suit was instituted merely as a defence against the filing of this petition.

25. At the outset, I may state that I am not inclined, for want of adequate and relevant material, to accept, at this stage, the submission made on behalf of the petitioners that the claims in the said suit were made merely as a desperate defence against the present petition. The company's letter dated November 14, 1988, which was amplified in the letter dated February 13,1989, written in reply to the statutory notice also works to some extent in the opposite direction. But, even if such submissions were to be accepted, it is impossible to hold, with the material before me, that the suit is mala fide, frivolous and badly barred by limitation. I restrain myself from commenting on the merits of the said suit as well as on the question as to whether or not the claims are barred by limitation, since any observations made by me may adversely influence the learned trial court after evidence is led by the parties. I may only say that ist is premature, and in any event, impossible to arrive at a definite finding in that regard with the scanty material placed before this court. But, after a careful reading of the agreement dated April 12, 1979, in conjunction with the 'personal policy of the petitioners', I may also say that the stand taken by the company in the suit that the effective management and control of the company's hotel was with the petitioners cannot be ruled out.

26. As regards the alleged insolvency of the company, both the parties relied on reports made by chartered accounts. Unfortunately, those reports are contradictory in terms and without a deep analysis of the accounts of the company, such reports are not of much help to this court in order to adjudicate on the question as to whether or not the company is insolvent . Relevant, however, is the fact that the allegation made in paragraph 19 of the affidavit-in-reply as regards the profits made by the company after the agreement with the petitioners came to an end, the alleged payment made to the financial institutions, the credit it has in the market and that no suits were filed against it by any other creditor, had not been denied. Therefore, there is no material at all before me to hold the company as commercially insolvent.

27. Before parting with this case, I may also say that the conduct of the petitioners gives strong support to Mr. Chagla's contention that this petition was filed with the improper motive to coerce and to bring pressure on the company to make the payment of the clamed amount of Rs.20,20,882.80. Indeed, the circumstance that the petitioners held discussions with the company for the settlement of accounts even after the alleged confirmation and for a long period of time, that the statutory notice was given more than two months after the company wrote the letter dated November 14, 1988, raising disputes, that the petitioners did not give any reply to the said letter and that the petition was filed even before the statutory notice was served on the company, are strong indicatives of the intention of the petitioners to coerce the company to pany the claimed amount, and possibly, other disputed claims without caring to analyse the company's objections. This intention is corroborated by the writing of the letter dated January 31, 1989, by the petitioners to the I.F.C.I. stating that the company has failed to pay to them Rs.65 lakhs and that a winding up notice has been given, as well as by their subsequent unusual conduct in court and arrogant behaviour towards the company so eloquently reflected in their letter dated September 15, 1989, whereby they offered inspection of the documents 'now and here' after hacking treated with the utmost contempt the polite request made by the company for inspection of documents and petitioners' accounts, on the very day the company had given inspection of its books of account to the petitioners.

28. The petition is, therefore, rejected with costs.