2015 (3) TMI 584 - HC - Companies Law

Winding up petition denied: Company's defense bona fide, not insolvent.

The Court concluded that the winding up petition should not be allowed as the Company had raised a bona fide defence, and the parties had already ... Bona fide dispute - neglect to pay - adjustment and set-off - commercial solvency as relevant to bona fide dispute - winding up petition not to be used as a mode of debt recovery - concurrent remedies - civil suit and winding up petitionBona fide dispute - winding up petition not to be used as a mode of debt recovery - concurrent remedies - civil suit and winding up petition - Whether the winding up petition should be admitted when the company has a bona fide dispute and has filed a civil suit with a counter-claim covering the disputed amount - HELD THAT: - The Court held that a winding up petition is not an appropriate substitute for ordinary debt recovery and must not be used to coerce payment where a company raises a bona fide and substantial defence requiring adjudication by a civil court. Although presentation of a winding up petition for a just debt is a statutory right, the Company Court may refuse admission or stay proceedings where the dispute is bona fide and substantial and the parties have resorted to the civil forum. The concept of 'neglect to pay' involves omission without reasonable cause; mere omission is not neglect where a genuine dispute exists. Adjustment or set-off of amounts retained by the company is recognised in law provided the amounts so adjusted are legally recoverable, and whether such adjustment is sustainable is a question of evidence for the civil court. Commercial solvency is a relevant aid in assessing whether refusal to pay reflects a bona fide dispute or inability to pay, but solvency is not by itself a standalone ground to reject a legitimate dispute. Applying these principles to the facts, the respondent company had instituted a civil suit claiming damages and the petitioning creditor's claim was the subject of a counter-claim (accepted to be taken on record after condonation of delay); there was evidence of admitted adjustments and a pleaded defence which could not be characterised as a mere moonshine or illusory claim. In view of the bona fide dispute and concurrent proceedings in the civil court, the Court found it inappropriate to proceed with the winding up petition.The winding up petition is permanently stayed.Final Conclusion: The High Court declined to admit the winding up petition and permanently stayed the petition on the ground that the company has raised a bona fide dispute and the parties have pending civil proceedings (including a counter-claim); no order as to costs. Issues Involved:1. Non-payment of legally recoverable dues by the Company.2. Validity of the winding up petition in light of the ongoing civil suit.3. Bona fide dispute regarding the debt.4. Company's right to adjust amounts against claims.5. Applicability of Section 221 of the Contract Act.6. Commercial solvency of the Company.Detailed Analysis:1. Non-payment of legally recoverable dues by the Company:The winding up petition was initiated by the petitioning creditor due to the non-payment of dues by the Company, which were related to the value of goods held by the Company, money receivable from various customers, and the amount collected from the sales of the petitioning creditor's products. An agreement dated February 18, 1998, outlined the terms of stock transfer, sales, commission, and remittance of sale proceeds. The agreement was modified on April 10, 2001, and eventually terminated on August 2, 2010, due to a change in management and policy by the petitioning creditor.2. Validity of the winding up petition in light of the ongoing civil suit:The Company filed a suit before the Bombay High Court on November 8, 2010, claiming damages and other expenses. The petitioning creditor issued a statutory notice of winding up on December 8, 2010, which was denied by the Company, citing a lien on the stock against the claim made in the suit. The High Court noted that the suit for recovery of money and the winding up petition can run simultaneously and cannot act as a deterrent against each other. The suit filed by the Company was deemed a bogus suit intended to thwart the winding up petition.3. Bona fide dispute regarding the debt:The defence taken by the Company included the filing of a suit for money against the petitioning creditor, denial of any admission of the alleged amount, adjustment of amounts received or receivable, and a lien on the stock. The Court held that if the dispute is bona fide and substantial, the winding up petition should not be admitted, and the parties should pursue their remedy in the civil suit. The Court found that the Company's defence was bona fide and not a mere moonshine or illusory.4. Company's right to adjust amounts against claims:The Company claimed to have adjusted amounts received or receivable against the claims made in the suit. The Court acknowledged that the adjustment of an amount when the claim made is much more is not impermissible under the law. The plea of adjustment is recognized in law provided the amount for which it is adjusted is legally sustainable and/or recoverable.5. Applicability of Section 221 of the Contract Act:The petitioning creditor argued that Section 221 of the Contract Act is not applicable when there is no dispute on account of commission, disbursement, and services. The Court did not find this argument persuasive, given the context of the case and the ongoing dispute.6. Commercial solvency of the Company:The Court considered the commercial solvency of the Company as a relevant factor. It was noted that the Company's assets and existing liabilities should be such that it can reasonably meet its liabilities. The Court found that the Company was commercially solvent and that the refusal to pay was due to a bona fide dispute rather than an inability to pay. The winding up petition was not intended as a means to recover debts in an ordinary mode of debt recovery and should not be used to pressurize the Company to make payments.Conclusion:The Court concluded that the winding up petition should not be allowed as the Company had raised a bona fide defence and the parties had already approached the Bombay High Court with their claims and counter-claims. The petitioning creditor's claim was not undisputable, and the Company was not commercially insolvent. The winding up petition was permanently stayed with no order as to costs.