Company Court cannot decide in winding up proceeding which party defaulted with the compromise; Supreme Court clarifies jurisdiction of Company Court  

Supreme Court: In a corporate dispute case, the 3-Judge Bench comprising of R.F. Nariman, B.R. Gavai* and Hrishikesh Roy, JJ., held that,

“The company Court while exercising its powers under sections 433 and 434 of the Companies Act would not be in a position to decide, as to who was at fault in not complying with the terms and conditions of the deed of settlement and the compromise deed.”

The respondent–M/s Indian Acrylics Ltd. was a manufacturer of acrylic yarn which had entered into a transaction with the appellant–M/s Shital Fibers Ltd., under which the respondent was to supply acrylic yarn to the to the appellant on credit basis. As per the arrangement, the respondent supplied material worth Rs.81,98,014.45 regarding which there was an outstanding balance of Rs.8,92,723 to be paid to the respondent. As the payment was not made despite notice being duly served on the appellant, the respondent filed a Company Petition seeking winding up of the present appellant for its inability to pay admitted debts.

Findings of the Courts Below

The Company Judge granted an opportunity to the appellant to settle the accounts with the respondent and in case of failure to make the settlement; the citation was directed to be published. The order of Company Court was challenged before the High Court by the appellant. Meanwhile, the disputed amount was paid by the appellant. The High Court held that there was no bona fide dispute as the appellant had satisfied the respondent’s claim. Although, the High Court denied to enter into the claim with regard to interest at the rate of 24% per annum, as to whether the appellant was liable to pay interest to the respondent, it granted liberty to the respondent to seek interest amount by way of application or appeal.

Issues Before the Court

The appellant claimed that his defense was bona-fide as the respondent had supplied defective material. On account of which, the appellant had suffered huge losses and as such, he was  entitled to receive the damages from the respondent.

Observations and Analysis by the Court

The Bench observed that it is well settled that where the debt is undisputed, the court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt. The principles on which the court acts are firstly, that the defence of the company is in good faith and one of substance, secondly, the defence is likely to succeed in point of law and thirdly the company adduces prima facie proof of the facts on which the defence depends. Relying on the decision in Madhusudan Gordhandas & Co. vs. Madhu Woollen Industries Pvt. Ltd., (1971) 3 SCC 632, the Bench stated that, If the debt is bona fide disputed and the defense is a substantial one, the court cannot wind up the company.

Regarding the claim of the appellant that defective material was supplied by the respondent; the Court concurred with the findings of the Company Judge and the High Court that the defence sought by the appellant was an after­thought, as no document was placed on record in support of such contention.  

The Bench stated that the defence of the appellant was neither bona-fide nor substantial as no prima facie evidence was produced by the appellant to buttress his claim. Lastly, the Court held that, “The company Court while exercising its powers under sections 433 and 434 of the Companies Act would not be in a position to decide, as to who was at fault in not complying with the terms and conditions of the deed of settlement and the compromise deed.”

Hence, holding the defence of the appellant not to be bona fide, in good faith and of substance, the Bench dismissed the appeal for being devoid of merit.

[Shital Fibers Ltd. v. Indian Acrylics Ltd., CA No. 1105 of 2021, decided on 06-04-2021]


Kamini Sharma, Editorial Assistant has put this story together 

*Judgment by: Justice B.R. Gavai

Know Thy Judge| Justice B.R. Gavai

Appearance before the Court by:

For the Appellant: Adv. Karan Nehra

For the Respondent: Adv. Tarun Gupta

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