Case Number: Civil Appeal No. 1105 of 2021 arising out of Special Leave Petition (Civil) No. 2353 of 2017

Judges Name: Hon’ble Judges R.F. Nariman J, B.R. Gavai J, Hrishikesh roy J

Order dated: 06.04.2021

“Supreme Court held that Company court can not decide on default in a winding up proceedings.”

Facts of the Case:

• The appeal challenges the judgment and order passed by the Division Bench of the Punjab & Haryana High Court in Company Appeal No. 58 of 2015 dated 29.4.2016, arising out of the order passed by the learned Company Judge of the said Court, in Company Petition No.106 of 2009 dated 28.9.2015.
• M/s Indian Acrylics Limited (Respondent) is a manufacturer of acrylic yarn having its manufacturing unit in village Harkrishanpura, District Sangrur. There was a transaction between M/s Shital Fibers Ltd. (Appellant) and the respondent M/ s Indian Acrylics Limited under which the respondent was to supply acrylic yarn to the appellant on credit basis. As per the said arrangement, the supply of raw material commenced from 20.4.2007.
• The respondent supplied material worth Rs.81,98,014.45. There were certain issues raised by the appellant with regard to the quality of the material supplied by the respondent. As such, a sum of Rs. 6,22,073/was credited by the respondent in the account of the appellant on account of material returned and also a credit note of Rs.5,00,000/was given on account of some defect in quality. As per the respondent, appellant had made a payment of Rs.61,83,218/. However, there was an outstanding balance of Rs.8,92,723/as on 28.7.2008. Since despite repeated requests, balance amount was not paid, the respondent issued a statutory notice to the appellant. The same was duly responded to.
• The Respondent filed a Company Petition seeking winding up of the Appellant Company on account of non-payment of debts. The Company Petition was admitted by the Company Tribunal, vide its Order dated 28.09.2015. The Company law Judge gave another opportunity to the Appellant to settle the accounts with respect to the Respondent by 31.12.2015 and also directed the citation to be published upon failure by the Appellant to pay the same.
• The Appellant challenged the Order dated 28.09.2015 before the Division Bench of the High Court. The Division Bench of the High Court, vide its Order dated 24.12.2015 stayed the publication of the admission notice subject to the Appellant paying the outstanding amounts to the Respondent by 31.12.2015. Accordingly, the Appellant paid the outstanding amounts. Thereafter, the Division Bench of the High Court concluded that since the Appellant had satisfied the claim of the Respondent there is no bona fide dispute persisting in the Appeal. Moreover, the Division Bench observed that the Respondent’s claim towards any interest payments can be made to the Company Judge by way of an application for clarification or an appeal or by any other proceedings. Hence, the Appeal was dismissed, vide Order dated 29.04.2016.
• Therefore, the Appellant filed an Appeal before the Supreme Court against the Order dated 29.04.2016.

Supreme Court held:

• The Supreme Court held that it is well settled that if the debt is bona fide disputed and the defense is a substantial one, the court cannot wind up a company. It is equally well settled, that where the debt is undisputed, the court will not act upon a defense that the company has the ability to pay the debt but the company chooses not to pay that particular debt.
• The Court stated that it is equally settled, that the principles on which the court acts are first, that the defense of the company is in good faith and, secondly, the defense is likely to succeed in point of law and thirdly, the company adduces prima facie proof of the facts on which the defense depends.
• Therefore, the court observed the observations of the Division Bench of the High Court whereby the High Court also observed that the contentions of the Appellant are not well-founded. The High Court had observed that in any event, if the Appellant’s case was that the goods were defective, it would have recorded the same in some manner or the other.
• In view of the findings of the Learned Company Judge as well as the Division Bench of the High Court in their respective Orders, the Supreme Court observed that both the subordinate Courts only upon examination of materials placed have found that the defense of the Appellant with regard to the quality of the material supplied by the Respondent was by way of after-thought.
• The Hon’ble Court held that the defense of the appellant could not be said to be bona fide, in good faith and of substance and it found no merit in the appeal. Therefore the Court dismissed the appeal.