Appellate Court allows interest recovery in winding-up proceedings, sets aside non-payment order

The appellate court set aside the company court's order directing non-payment of interest as a condition for further winding-up proceedings. It held that while interest could be awarded, the court must establish the company's inability to pay the debt for winding-up. The court allowed the appeals, permitting the respondents to pursue interest recovery through separate civil suits, with no costs awarded.

---

---

Issues Involved:
1. Tenability of directing non-payment of interest as a condition for further proceedings in the winding-up process.
2. The court's power to award interest.
3. Relevant conditions for winding-up.

I. Tenability of Directing Non-Payment of Interest:

The core issue in the appeal was the tenability of directing the non-payment of interest on the debt as a condition for further proceedings for publication in the winding-up process of the company. The suppliers, who are sister companies, provided certain rubber products to the company and were not paid the contracted sums. They filed applications for winding up under section 433(e) read with sections 434(1) and 439 of the Companies Act, 1956. The company paid the principal amounts but did not pay the interest component. The learned judge directed the company to pay interest at 18% per annum on the outstanding amount within four weeks, failing which the company petition would be admitted, and steps would be taken to publish the same in newspapers and the Official Gazette.

II. Contentions by the Appellant:

The appellant argued that the invoices did not reference the payment of interest or stipulate any time for payment. The company denied its liability to pay interest in its replies. The appellant cited several cases to argue that if the debt was bona fide disputed, there could not be a "neglect to pay" within section 434(1)(a) of the Companies Act. They also argued that the company petition should not be used to apply pressure to recover contracted debts.

III. Contentions by the Respondent:

The respondent argued that although the original invoices did not mention the payment of interest, the petitioners issued notices requiring the company to make payments within 90 days. They relied on a Division Bench decision of the Calcutta High Court, which directed the payment of principal with interest from the date of service of statutory notice. The respondent contended that the non-payment of interest was unjustified and the company court had jurisdiction to award such interest.

IV. The Court's Power to Award Interest:

The court's power to award interest while determining the existence of a debt cannot be doubted. The debt may include the interest component. Where the contract specifies payment of interest, there is no difficulty. However, if the written contract does not contain a stipulation of interest, the provisions of the Interest Act, 1978, apply. Section 3 of the Interest Act allows the court to award interest if it thinks fit, at a rate not exceeding the current rate of interest, for specific periods.

V. Juxtaposing Facts to Law:

The principal amounts due were paid during the pendency of the proceedings, but the interest component was denied. The invoices did not reference interest or payment terms. Subsequent notices demanded interest at 18% per annum. The court noted that the petition itself is not a proceeding for recovery of debt but for winding up, and it is one thing to find liability for interest but another to direct further proceedings towards winding up for its non-payment.

VI. Relevant Conditions for Winding Up:

The court below recorded that interest at 18% per annum was payable by the company. However, it could not have directed further proceedings for winding up without concluding that there exists an inability to pay the debt. The court must find that the company is unable to pay the debt to justify winding up. The Supreme Court decisions cited were relevant in establishing that there is a bona fide dispute regarding the debt, including interest, and there is no reason to conclude commercial insolvency.

VII. Conclusion:

The court set aside the order of the company court and allowed the appeals. It allowed the respondents to take independent action for recovery of interest through separate proceedings, such as civil suits. The appeals were allowed on these terms, with no costs.

---