CRIMINAL APPEAL 205 of 2002 on 10 September 1996

ORDER

SURYA KANT, J.

The petitioner is a Company incorporated under the laws of SouthAfrica and through this petition under Section 433, 434 and 439 of theCompanies Act, 1956, it seeks the winding up of respondent-Company on theground of inability to pay the principal debt of US $53,228.15 along-with interest@ 24% per annum.

[2]. The brief facts which are broadly not in dispute may be noticed. Therespondent-Company is incorporated under the Companies Act, 1956 and itsRegistered Office is at Ludhiana [Punjab]. The respondent placed an order ofsupply of 60 Bales of Scoured Mohair [Wool], weighing 9831 Kgs. with thepetitioner vide purchase Order No. 073/96 dated 30.03.1996. The material wasto be supplied @ US $6.07 per kilogram amounting to US$63,228.15. Theconsignment was to be shipped to Mumbai and the payment was to be madewithin ninety days from the date of Bill of Lading. The petitioner shipped thegoods from South Africa to Mumbai under the invoice dated 10.09.1996 whichwere got released by the respondent from Mumbai port. It appears that due to

adverse market conditions where Hosiery market had crashed, the respondentcould not make payment of the due amount as per the agreed terms and soughtextension vide letter dated 08.08.1997 [Annexure P-5] with a promise to pay US$10,000 before 30.09.1997 and the balance amount before 30.12.1997. Therespondent after paying US $10,000/- requested the petitioner vide letter dated19.01.1998 [Annexure P-6] to extend the period of payment till 30.04.1998.

[3]. The respondent-Company, however, did not pay anything towardsthe balance liability within the extended period also and sent another requestdated 11.08.1998 [Annexure P-7] promising the petitioner to pay the remainingdues as per the following schedule:- "US $ 8228.15 in September,1998US $ 15000 in December,1998 US $ 15000 in January, 1999US $ 15000 in February, 1999"

The respondent sent one more letter dated 31.08.1998 [Annexure P-8] to theIndian representative of the petitioner assuring to remit the balance payment asper the schedule given above.

[4]. The respondent, however, did not adhere to the revised scheduletoo, whereupon the petitioner got a legal notice dated 04.10.1999 [Annexure P-9]served, calling upon it to pay the balance amount with interest @ 25% perannum from 10.12.1996 onwards, failing which it would be presumed that therespondent was unable to pay the sum so due and would be liable to beproceeded against in a court of competent jurisdiction.

[5]. The respondent sent its reply to the legal notice [Annexure P-10] forthe first time taking a plea that the material supplied by the petitioner was not ofthe agreed specifications nor was it supplied "within the agreed period". Thereply claimed that due to an inordinate delay in the supply of material theconsignment had to be stored in a rented premises and meanwhile there was aheavy slump in the hosiery market and in the month of September, 1998 whenthe bales were opened it was "found that the goods contained in the bales werenot up to the mark and were not as per the specifications given at the time of

placing the order. The goods were found to be of much inferior quality. Therewas a latent defect in the entire consignment as the goods contained brown,black, dead, discolour and short fibre.......".

[6]. The petitioner thereafter filed this winding-up petition on 28.02.2002, inter-alia, alleging that as the respondent is unable to liquidate the outstandingdues and has no means to discharge its debt liability, it is liable to be wound-upunder the orders of this Court.

[7]. The respondent-Company has filed its written statement takingpreliminary objections that [i] the winding up petition is not maintainable; [ii] theverification of the affidavit is not proper and in the format prescribed under theRules; [iii] the material facts have been concealed by the petitioner as the factumof Civil Suit filed by the respondent Company for the recovery of the loss of`10,58,000/- suffered by it as it had to sell the consignment sent by the petitioner@ `19.50 per kilogram, have not been disclosed in this petition;[iv] the civil suitwas filed on 10.07.1999, i.e., prior to issuance of the winding-up notice and [v]that the present petition is barred by period of limitation. On merits, it has beenreiterated that due to delay in the delivery of consignment the respondentsuffered a huge loss as the hosiery market in India had meanwhile crashed andwhen the bales were opened in September, 1998, it was found that the materialsupplied by the petitioner was defective and not of the quality agreed to betweenthe parties. It has been further averred that against its total loss of `12,50,000/-even after adjusting the price for which the consignment was sold in the Indianmarket, the answering respondent is entitled to recover a sum of `10,58,000/-from the petitioner, for which a civil suit had already been filed.

[8]. The petitioner in its rejoinder has controverted the petitioner'spreliminary objections besides disputing the reply on merits and has reiterated itsclaim as contained in the petition.

[9]. I have heard learned counsel for the parties and gone through therecord.

[10]. It was urged on behalf of the petitioner that the factum of placing of

order by it; supply of material; acceptance of consignment; utilization of thematerial sent; terms and conditions including the price rate of the goods are notdisputed by the respondent-Company. Similarly, the payment of US $10,000/- orits failure to pay the balance amount; seeking extensions one after the other withthe promise to pay the last installment of US $15,000/- in February, 1999 oracknowledgments in writing [Annexures P-4 to P-8], too are undisputed facts.The respondent is thus said to have failed to discharge its admitted debt liability,for which it was liable to be wound-up. It was urged that the subsequent andafter-thought plea[s] taken by the respondent in its reply to the legal notice,namely, [i] delay in the delivery of consignment; or [ii] defect in the quality ofconsignment have no factual basis. These objections are only a cloak to avoid the inevitable consequences.

[11]. Learned counsel for the respondent countered the petitioner’s claimand asserted that it is a case where the debt is bona-fidely disputed which cannot be termed as "neglect to pay" within the meaning of Section 433[1][a] of theCompanies Act, 1956. He argued that the jurisdiction of this Court can not beinvoked to serve as a debt collecting agency as it amounts to abuse of theprocess of court, as held in the following decisions:- [i] M/s IBA Health [I] Pvt. Ltd. Vs. M/s Inso-Drive SystemsSDN.Bhd., 2010[10] SCC, 553;SDN.Bhd., 2010[10] SCC, 553; [ii] German Homeopathic Distributors Pvt. Ltd. Vs. Deutsche Homeopathic Union Dhu Arzneimittel GM Bh & Co., 2010[7]RCR [Civil], 2660;RCR [Civil], 2660; [iii] Gleason Works Vs. Punjab Tractors Limited, 101 CC 992; [iv] Dee Print Asia Vs. Curefarst Remedies Limited, 98 CC 90; [v] Madhusudan Gordhandas & Co. Vs. Madhu WoolenIndustries Pvt. Ltd., AIR 1971 SC, 2600;Industries Pvt. Ltd., AIR 1971 SC, 2600; [vi] Mediquip Systems Vs. Proxima Medical, 2005[7] SCC, 42.

[12]. It was argued that the respondent is a running company whosesubstratum is intact and it is a profit making unit. It has employed a large numberof workers, directly or indirectly, and has been timely discharging all its statutoryliabilities including taxes. The respondent Company statedly possesses sound

financial position and, therefore, should not be ordered to be wound-up as heldinTata Iron & Steel Co. Vs. Micro Forge [India] Limited [2000]-27 SCL, 419

[Gujrat].

[13]. The principal issue that arises for consideration and which emanatesfrom the preliminary objection taken by the respondent is whether the winding-uppetition filed by the petitioner is barred by limitation?

[14]. According to the respondent Articles 14 and 15 of the Schedule tothe Limitation Act, 1963 are relevant to determine whether or not the winding uppetition has been filed within limitation as it could be instituted within the periodof three years prescribed for filing of civil-suit for the recovery of price of goods,sold and delivered with or without fixed period of credit, under both the Articles.In the instant case, the goods were delivered on 10.09.1996 and the threeyears’ period expired on 09.09.1999. As regard to the letters dated 11.08.1998and 31.08.1998 [Annexures P-7 and P-8], it was maintained that even if theseletters were taken as the acknowledgment of debt, yet the limitation period ofthree years expired on 30.08.2001, whereas the winding-up petition was filed on28.02.2002 and that too in a defective format which was finally removed on09.05.2002 when the petition was re-filed. Reliance is placed on Bhakti HariNayak and Ors. Vs. Vidyawati Gupta, S.C.Agarwala [HUF] & Ors., AIR 2005Calcutta, 145.

[15]. Learned counsel for the respondent further urged that even for arecovery-suit based on the promisory note or the bond payable by installmentsincluding the bond which provides that if default is made in payment of one ormore installments, the whole shall be due, the period of limitation as prescribedby Articles 36 and 37 of the Limitation Act is three years. Similarly, the effect of'acknowledgment of debt in writing' within the meaning of Section 18 of theLimitation Act in the instant case is to be counted w.e.f. 31.08.1998, therefore, also the winding-up petition is hopelessly time-barred from every angle.

[16]. Section 3[1] of the Limitation Act was relied upon to conclude thatsince the winding-up petition was instituted after the prescribed period of

limitation, it is liable to be dismissed. The above noted contentions have been strengthened with the aid of following citations:- [i] Vijay Lakshmi Art Vs. Vijay Productions; 88 CC, 353; [ii] Rameshwar Prosad Kejriwal & Sons Ltd. Vs. Garodia HardwareStores, 108 CC, 187; [iii] Hariom Firestock Limited Vs. Sunjal Engineering Pvt. Ltd., 96

CC, 349,

[iv] Mazboot Packers and Engineers Company Vs. Himachal Pradesh Horticulture Produce Marketing and ProcessingCorporation Limited, 95 CC, 579; Corporation Limited, 95 CC, 579; [v] Jalgaon Re-rolling Industries Limited Vs. Jayabharat CreditsLimited, 1997[2] BC, 328; Limited, 1997[2] BC, 328; [vi] State of Kerala Vs. V.R.Kalliyanikutty, AIR 1999 SC, 1305 and [vii] New Delhi Municipal Committee Vs. Kalu Ram, AIR 1976 SC,1637.

[17]. The Competent Court may wind-up a Company on any of thegrounds prescribed under Section 433 of the Companies Act, 1956, includingthat it is "unable to pay its debts". Section 434 provides that a Company shall bedeemed to be unable to pay its debts if after the receipt of a statutory notice fromthe creditor, it has for three weeks neglected to pay the sum, or to secure orcompound for it to the reasonable satisfaction of the creditor. The Companyshall also be deemed to be unable to pay its debts if the Court after taking intoaccount the contingent and prospective liabilities of the Company, is satisfied onits inability to pay debts. There are a string of decisions laying down that theexpression "debts" referred to in Sections 433 and 434 pertains to the amountdue which is ‘legally recoverable’. The Companies Act does not prescribe anyperiod of limitation to institute a winding-up petition filed by a creditor on theground of inability of a Company to discharge its debt liability. Since the debtwhich the Company does not have the capacity to pay has to be legallyrecoverable, it is to be seen whether the debt claimed by the creditor is within thetime-limitation as prescribed under the Limitation Act.

[18]. The respondent-Company made no payment towards the due

amount after the receipt of the consignment within the agreed period and soughtextension till December 30, 1997 vide its letter dated 08.08.1997 [Annexure P-5].The respondent though made a payment of US $10,000 but soughtpostponement of the balance amount till 30.04.1998 [Annexure P-6]. Nopayment was, however, made even thereafter albeit another extension wasrequested vide letters dated 11.08.1998 and 31.08.1998 [Annexures P-7 and P-8], for the balance payment to be made in four installments commencing fromSeptember, 1998 till February, 1999. The extended schedule also failed tosecure any further payment in favour of the petitioner.

[19]. The ancillary question that arises for determination is whether theperiod of limitation stood revived and deserves to be computed afresh within themeaning of Section 18 of the Limitation Act, 1963 in view of the acknowledgmentof its liability made by the respondent in the last communication dated31.08.1998 [P-8]? Equally important is the question whether for the purpose of'acknowledgment of the debt', the date of letter [P-8], namely, 31.08.1998 isrelevant or the date namely 'February, 1999', in which the respondent agreed topay the last installment?

[20]. Section 18 of the Limitation Act says that where before the expiry ofthe prescribed period of limitation in respect of any property or right, anacknowledgment of liability in respect of such property or right has been made inwriting signed by the party against whom such property or right is claimed, "afresh period of limitation shall be computed from the time when theacknowledgment was so signed”. InTilak Ram Vs. Nathu, AIR 1967 SC, 935,the Hon'ble Supreme Court deciphered the following requirements to attractSection 18 of the Limitation Act:- [i] an admission or acknowledgment; [ii] such acknowledgment must be in respect of a liability regarding a property or right; [iii] acknowledgment must be made before the expiry of limitation period ;

[iv] it should be in writing and signed by the party against whom such rightis claimed.

[21]. The limitation period to institute proceedings against the respondentas on 31.08.1998 when it lastly acknowledged its debt liability had not admittedlyexpired for the obvious reason that the respondent had prior thereto alsoacknowledged such liability on 08.08.1997 and 19.01.1998 and meanwhile evenmade part payment as well. The letter dated 31.08.1998 [P-8], thus, fullysatisfies the ingredients of Section 18 of the Limitation Act.

[22]. The afore-said conclusion nonetheless falls short of answering thereal issue, namely, should the renewed period of limitation be counted from31.08.1998 or from February, 1999?

[23]. Whenever a debtor acknowledges his liability and promises to paythe due amount on a future date and the creditor accepts such offer, the causeof action to take legal action for the recovery of such due amount standssuspended. It is only if the debtor fails to honour his promise to make paymenton the consented date that the cause of action will arise afresh or revive infavour of the creditor. The respondent though acknowledged its liability on31.08.1998 but it was preceded with a promise to make the due payment by wayof four installments, commencing from September, 1998 onwards. The cause ofaction that arose in favour of the petitioner was in September, 1998 only whenthe respondent failed to pay the first agreed installment.

[24]. Since the respondent-Company volunteered to split its debt liability infour parts and promised to pay each part of the due amount on different futuredates and since none of the part was contingent or subject to or dependent uponthe previous part, it appears to me that every default would give rise to a freshcause of action in favour of the petitioner to the extent of the defaultedinstallment. However, such a cause of action can not renew the period oflimitation for the previous abandoned cause of action if the petitioner-creditorhad failed to initiate legal action within the prescribed period of limitation inrelation thereto.

[25]. The winding-up petition in the instant case was instituted on28.02.2002, though returned by the Registry due to some objections and finally itwas re-filed after the removal of those objections, on 09.05.2002. Even if therespondent's objection regarding the date of institution of the winding-up petitionis over-ruled, yet the three years’ period of limitation in respect of the threeinstallments, which the respondent-Company agreed to pay during the months ofSeptember, 1998; December, 1998 and January, 1999, stood expired on orbefore 31.01.2002. The petitioner's claim qua the installments agreed to be paidby the respondent in the months of September, 1998, December, 1998 andJanuary, 1999 thus was time barred after the expiry of the limitation period ofthree years as on 31.01.2002. Hence the winding-up petition instituted on28.02.2002, in relation to these three claims, is held to be barred by limitation.

[26]. On the same analogy and reasons, a suit for recovery or a winding-up petition for non-payment of the admitted and acknowledged debt of US$15,000 which the respondent promised to pay in February, 1999, could beinstituted within limitation till February 28, 2002. The winding-up petition inrelation to the fourth installment agreed to by the respondent was, thus, institutedwithin the prescribed period of limitation.

[27]. The respondent's objection that the instant winding-up petition hasnot been instituted or is deemed to have not been instituted within the limitationperiod when it was re-filed after removal of objections on 09.05.2002, in myconsidered view, is wholly misconceived and untenable. If the plaintiff orpetitioner, as the case may be, fails to comply with the substantive law whilepresenting a plaint or petition, which is crucial for determining inter-se rights ofthe parties, it can be safely inferred that no such plaint or petition is deemed tohave been presented in the eyes of law. However, if the non-compliance pertainsto a procedural lapse only, the inter-se legal rights of the parties would remainunaffected. Suffice it to say that the Rules not only are the hand-maid of justicebut are also the tools to secure substantial justice. The respondent has no wherepointed out the non-observance of a substantive law by the petitioner as on

28.02.2002 when the petition was returned by the Registry.

[28]. It is equally well settled that the winding-up jurisdiction of a CompanyCourt can not be invoked for realizing debts due from the Company though aCompany in debt can be ordered to be wound-up if it is incapable to repay theadmitted debt. It would be wholly immaterial whether the substantial part of thepetitioner's claim is time-barred and only a part thereof is legally recoverable.The acknowledgment of its debt by the respondent-Company in communicationsone after the other clearly establishes that the extensions were sought by therespondent-Company as it was in financial crisis and unable to pay the dueamount.

[29]. The plea that the respondent has bona-fidely disputed its debtmerely deserves to be noticed and rejected. There was not even a whisper bythe respondent after the receipt of the consignment on 10.12.1996 that therewas a delay to its detriment or that the bales sent were of inferior quality contraryto the agreed terms and conditions. The respondent claims to have stored theconsignment till it was opened in September, 1998 and if there was any adverseimpact on the quality of material, it could be as a result of sheer and grossnegligence of the respondent as well. The fact of the matter is that all theseissues were raised only after October, 1999 in the reply to the legal notice whichis ex-facie a coined excuse of the respondent.

[30]. The third and last plea taken by the respondent, namely, that arunning and profitable Company should not ordinarily be ordered to be wound-up, deserves favourable consideration. The cited case-law indeed supports theplea that where the Company is capable to discharge its debt liability or when itis a profit making Company, which has generated employment, the CompanyCourt should in public interest, be reluctant in admitting the winding-up petition orissuing resultant directions like the appointment of a Provisional Liquidator.

[31]. In view of the categoric and un-controverted plea taken by therespondent regarding its sound financial condition, it appears expedient at thisstage to direct the respondent Company at this stage to make payment of US

$15,000 to the petitioner as a part of its admitted debt liability along with interest@ 8.25% per annum, which the respondent-Company had agreed to pay for thecredit period of 90 days. The interest shall be calculated from 10.12.1996 tillactual payment of the principal amount of US $15,000.

[32]. It may, however, be also noticed that the respondent-Company hadfiled a suit for recovery of Rs.3 lacs along with interest @18% per annum againstthe petitioner in the Civil Courts at Ludhiana on 16.07.1999 which was decreedex-parte on 28.09.2011 and a decree for recovery of `3 lacs with pendente-liteinterest @18% per annum from the date of institution of the suit till the date ofdecree, with a future interest @6% thereafter, till the actual realization, waspassed. Since the petitioner has not challenged the ex-parte decree, therespondent while liquidating the claim of the petitioner shall be at liberty to set-offand adjust the amount receivable in terms of the Civil Court decree. The dueamount shall be paid to the petitioner within a period of two months from the dateof receipt of a certified copy of this order.

[33]. With a view to enable the respondent to comply with this order,further direction to admit the winding-up petition, publication of notice of winding-up or appointment of the provisional liquidator to take-over the respondent-Company, are kept in abeyance till further orders, though with liberty to thepetitioner that in the event of non-compliance of this order by the respondent-Company, it may move an appropriate application for further directions.

[34]. Disposed of.Dasti.

February 01, 2013.dinesh

[ SURYA KANT ]JUDGE