REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.  7352        OF 2008 [Arising out of SLP (Civil) No. 15672 of 2005]

M/s. Vijay Industries …Appellant

Versus

M/s. NATL Technologies Limited …Respondent

J U D G M E N T  

S.B. SINHA, J :

1. Leave granted.

2. Whether interest payable on the sum due would be a debt so as to

attract the provisions of Sections 433 and 434 of the Companies Act, 1956

is the question involved herein.

3. Before, however, adverting to the said question, we may notice the

fact of the matter.

Appellant is a small scale unit registered with the District Industries

Centre.  Admittedly, it supplied Castor Oil to the respondent valued at Rs.

89,13,589/-.   A sum of Rs. 49,99,000/- had been paid by the respondent.

The invoices of the credit bills attached with each of the supply contained a

clause relating to payment of interest in the following terms:

“amount  must  be paid  within seven days or  you are liable to pay 2% interest per month.”

4. It is not in dispute that at the foot of each credit bill an officer of the

respondent – company had put its signatures as a token of acceptance.

5. Appellant is said to have adjusted the amount first towards interest at

the stipulated  rate  and balance against  the  principal  amount.   As  despite

demand the amount due and owed to it was not paid by the respondent, a

legal notice was served upon it claiming interest on the said sum.  It was

stated that the appellant had appropriated account of payments made by it

against the interest and balance, if any, against the principal amount.  On the

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basis thereof, a demand for a sum of Rs. 64,58,457/- together with future

interest at the rate of 2% per month was raised.  The said legal notice was

replied by the respondents, stating:

“We have received a legal  notice from Sri  Rao Raghunandan,  Advocate  dt.  06.01.2003.  You are aware  that  after  making  payment  of  Rs.  10.00 lakhs towards Castor Oil Supplies to our plant, we have received a notice under Section 226 (3) of the Income  Tax,  1961  from  the  Income  Tax Department.  As per the notice, we are directed to pay the amounts due to you on account of Castor Oil supplied directly to the department in view of your dues  to  the  department  to  an  extent  of  Rs. 25,43,737/-.

Subsequently,  we  have  paid  by  way  of cheques  to  Income  Tax  Officer  Ward-8(3)  on account of supply of castor oil as detailed below:- Cheque No. Bank     Dated Amount

(Rs.) 074013 Allahabad Bank 09.08.02 2,00,000/- 100313 S.B.H.                   09.09.02 3,34,868/-

                    5,34,868/-

After adjusting the above amounts and our earlier  payment  of  Rs.10.00  lakhs,  the  balance amount  due  to  your  company  on  account  of  oil supplies is only Rs. 27,40,882/-.

In view of the notice served by the Income Tax  Department,  we  could  not  arrange  any payment  directly  to  your  company.   This  matter was brought to your notice and also advised you to obtain  a  direction  from  the  Income  Tax Department  to  pay  the  dues  directly  to  your company.   In  the  circumstances,  we  have  not intentionally defaulted in making arrangements for

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the payment of your dues on account of Castor Oil Supplies from time to time.

We  request  you  kindly  to  obtain  the clearance, so as to enable us to arrange payment of the outstanding amount due to you amounting to Rs. 27, 40,882/-.  In the circumstances, we request you to  kindly advice your advocate  to  withdraw the legal notice served on us forthwith.”

6. Without  disputing  its  liability,  however,  in  view  of  the

correspondence that exchanged between the parties, the respondent offered

to pay a sum of Rs. 2,00,000/- per week to the appellant beginning from

April, 2003.  It is on that assurance the appellant is said to have agreed to

restore supply of Castor Oil provided it deposited 50% of the outstanding

dues and remaining 50% at the rate of Rs. 2,00,000/- per week.

7. In its letter dated 8.09.2003, the respondent stated:

“…We have accounted your payments against the interest  and balances against  Castor Oil  Supplies approximately.  On such account being taken the balance of Rs. 64, 58,457/- upto November, 2002. Accordingly,  the  balance upto  31st  March,  2003 stands  Rs.  69,  75,134/-.   This  amount  carries interest @ 2 % per month.”

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8. A sum of Rs. 8 lakhs was paid in between the period 19.04.2003 to

11.07.2003.  As evidently, the appellant refused to make further supplies, a

meeting took place, the minutes whereof reads, thus:

“As  per  the  discussion  regarding  the  old outstanding and for the continuity of the Business at  present,  Vijaya  Industries  is  rotataing,  One Tanker load for the payment arrangement towards old  outstanding.   The  Representatives  of  NATL Technologies Ltd. have agreed to arrange payment for the values of 2 truck loads of Castor Oil in the month of December.  Against the above payment, the  Company  representative  Sri  Jagadish  Prasad agreed for supply of Three Tanker loads including the  existing  One  Tanker  load  which  is  already supplying.

Basing  on  the  convenience  and as  per  the discussions from time to time NATL have agreed to square up the old outstandings and bring in to the  system  for  the  rotation.   Also  in  principle agreed  to  compensate  Vijaya  Industries  for  the delay  in  payment  on  account  of  earlier  supplies after clearing the entire old dues.”

9. As  the  said  agreement  between  the  parties  arrived  at  in  the  said

meeting was not adhered to, on 23.12.2003 a legal notice under Section 434

of the Companies Act, 1956 was served on the respondent, stating:

“…My client states that as per the invoices raised by it, you are laible to pay interest at 2% per

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month  if  payment  is  not  paid  after  availing  the credit period...”

It was further stated:

“In view of the above, my client calls upon you  to  pay  an  amount  of  Rs.  65,15,947/-  with further  interest  thereon  at  2% per  month  within three  weeks  from  the  date  of  receipt  of  this notice…”

10. In its reply to the said legal notice, the respondent did not deny or

dispute  demand of  interest.   According  to  it,  the  total  sum due  was  Rs.

16,80,468/ (sic for Rs. 15, 80,460/-), stating:

“In  the  circumstances,  we  advice  you  kindly withdraw the  legal  notice  dated  23rd  December, 2003 so as to enable us to arrange payment for full and final settlement of your dues amounting to of Rs. 16,80,468/- within two months from the date of this letter.”

Even that amount was not paid.

11. Appellant filed a winding up petition under Section 433(e) and 433(f)

read with Section 439 of the Companies Act on 23.01.2004.

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12. Respondent  in  its  counter-affidavit  before  the  learned  Company

Judge denied its liability to pay its interest for the first time, stating that it

was  not  liable  to  pay  any  interest  nor  it  entered  into  any  agreement  in

connection therewith.

13. Appellant  in  its  rejoinder contended that  the credit  bills  mentioned

that the respondent was liable to pay interest at the rate of 2% per month on

delayed payment.   

14. An interim order was passed on 17.02.2004 directing:

“Both  the  learned  counsel  agree  that  the matter can be settled out of Court having regard to the  commercial  relations  between  petitioner  and respondent  for  long  duration.   Sri  V.S.  Raju, learned  counsel  for  respondent  has  given  a Demand Draft bearing No. 097852, dt. 14.06.2004 for an amount of Rs. 2,00,000/- (Rupees two lakhs only)  drawn  on  Punjab  National  Bank,  Bank Street,  Hyderabad,  and  six  post-dated  cheques- five  cheques  bearing  Nos.  216948,  216949, 216950,  216951,  216952  dt.25.07.2004, 25.08.2004,  25.09.2004,  25.10.2004  and 25.11.2004 respectively, each for an amount of Rs. 2,30,000/-  (Rupees  two  lakhs  thirty  thousand only),  and  another  cheque  bearing  No.  216953 dt.25.12.2004  for  an  amount  of  Rs.  2,30,468/-

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(Rupees  two lakhs  thirty  thousand  four  hundred and  sixty  eight  only),  drawn  on  State  Bank  of India,  Commercial  Branch,  Secunderabad,  in favour of the petitioner company in Court today. Learned  counsel  for  petitioner  has  received  the Demand Drafts, without prejudice to the claim of the  petitioner  for  interest  and  seeks  time  for getting  instructions  from  his  client  regarding cheques.

Post on 09.07.2004.”

15. The learned Single Judge, in view of the stand taken by the parties,

while  admitting the  company petition  by an order  dated 10.11.2004 held

that  a prima facie  case has been made out  therefor  having regard to  the

correspondences  passed  between the parties,  the credit  bills  and also the

minutes of the meeting.   

16. Aggrieved by and dissatisfied therewith, the respondent preferred an

appeal.   By  reason  of  the  impugned  judgment,  the  Division  Bench  has

allowed the said appeal.

17. Mr.  Gourab Banerji,  learned senior  counsel  appearing on behalf  of

the  appellant,  would  at  the  outset  bring  to  our  notice  that  there  is  a

difference of opinion on the issue amongst the different High Courts; one

taking a liberal view and another a strict view.   

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We have noticed hereinbefore that the defence of the respondent was:

(i) there has been no agreement between the parties to pay interest;

(ii) it had not been informed about the adjustment of payments made

by it towards interest.

Mr. Banerji  would submit that the High Court committed a serious

error in accepting the aforementioned contentions of the respondent as each

of  the  credit  bill  was  signed  by  the  representative  of  the  respondent  –

company.   

18. The Punjab and Haryana High Court in Stephen Chemical Limited v.

Innosearch Limited [(1986) 60 CC 702], the Madras High Court in Rashid

Leathers P) Ltd. v.  Super Fine Skin Traders [(1990) 68 CC 684] and the

Delhi High Court in Devendra Kumar Jain v. Polar Forgings and Tools Ltd.

[(1995) 84 CC 766] took a liberal view of the matter opining that even if

interest  is  not  payable  by  way  of  an  agreement,  usage  or  custom,  the

Company  Court  will  have  the  requisite  jurisdiction  to  go  into  such  a

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question and admit a company petition for non-payment of interest on the

admitted dues.   

19. In Devendra Kumar Jain (supra), a Division Bench of the Delhi High

Court, opined:

“My conclusion is that in a case where the liability to pay the principal amount is not disputed by the company the creditor need not be forced to initiate separate  litigation  for  recovery  of  the  interest amount and the interest amount can be determined by  the  Company  Judge  in  the  winding  up proceedings and on failure of the company to pay that  amount  the  Company  can  be  ordered  to  be wound up on the ground that it is unable to pay its debts. Interest at the rate of 12% per annum was granted in stead and place of stipulated rate of interest.”

20. We may notice the two decisions of the Andhra Pradesh High Court

in  Multimetals  Ltd. v.  Suryatronics  Pvt.  Ltd. [(1997)  89  CC  259]  and

Bombay Glass Blowing Industries v. Bio Vaccines Pvt. Ltd. [(1999) 98 CC

174]  wherein after the company petition was admitted, the parties adduced

evidences.   A  finding  of  fact  was  arrived  at  that  there  was  no  written

agreement except the printed clause for payment of interest in the invoices.

The court did not rely upon the evidence adduced on behalf of the appellant.

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It  was  in  the  aforementioned  situation,  the  said  Court  in  Bombay Glass

Blowing Industries (supra) held that the provisions contained in Section 3 of

the Interest Act, 1978 or Section 62(1)(a) of the Sale of Goods Act, 1930

would not be attracted, stating:

“From a reading of Section 61 (2)(a) of the Sale of Goods Act, it is revealed that it is the discretion of the Court to award interest at such rate as it thinks fit on the amount of price to the seller from date of tender  of  goods  or  from the  date  on  which  the price  was  payable  and  under  Section  3  of  the Interest  Act,  at  a  rate  not  exceeding  the  current rate of interest. If the proceedings relate to a debt payable  by  virtue  of  a  written  "instrument  at  a certain time from the date when the debt is payable lo the dale of institution of the proceedings and if the  proceedings  do  not  relate  to  any  such  debt, then, from the date mentioned in this regard in the written notice given by the person entitled to the dale  of  institution  of  the  proceedings.  These provisions refer to the sole discretion of the Civil Court  to  award  interest  in a suit  for  recovery of money. Therefore, the concerned creditor is not at all entitled to interest until the Court so orders. In other words, it cannot be said that the creditor is entitled to interest as a matter of right before the institution of the proceedings in the Court. Before that, the alleged amount of interest or damages is unascertained.  The creditor  cannot  claim interest at  any  particular  rate,  in  the  absence  of  any agreement to pay the same, prior to the institution of the proceedings. He cannot claim that from the person  liable  to  pay  the  price  of  goods  he  is entitled  to,  in  addition  to  the  unpaid  price  of goods,  the  interest  claimed  and  calculated according to  his-unilateral  act  and,  therefore,  the concerned person cannot be said to be indebted to

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a certain extent so far as the claim of interest  is concerned. This being the position, how can it be said that  at  the  time of issuance of  the statutory notice,  the  respondent-company was  indebted  to the petitioner-company to pay the interest  at  any rate, much less at the rate of 21 per cent per annum ? and, therefore, on account of default in making payment of interest  as  claimed by the petitioner- company,  it  is  liable  to  be  declared  as commercially  insolvent  The  same  position continues  even  during  the  pendency  of  the proceedings.”

[Emphasis supplied]

21. The Division Bench of the High Court, in its impugned judgment, not

only  relied  upon  the  aforementioned  two  binding  precedents  but  also  a

judgment  of  the  Allahabad  High  Court  in  Ultimate  Advertising  and

Marketing v. G.B. Laboratories Ltd. [(1989) 66 CC 232].

22. We may at the outset notice that Ultimate Advertising and Marketing

(supra) has also been noticed in  Devendra Kumar Jain (supra) to hold that

the Company Judge is the appropriate forum for determining as to whether

the creditor is entitled to interest, where the company admits its liability.

23. It may, however be placed on record that the aforementioned decision

of  the  learned  Single  Judge  of  the  Allahabad  High  Court  in  Ultimate

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Advertising  and  Marketing (supra)  came  up  for  consideration  before  a

Division Bench thereof in  M/s. Ultimate Advertising and Marketing New

Delhi v. G.B. Laboratories Ltd., Kanpur [AIR 1998 Allahabad 320] wherein

inter alia it was held:

“From the cases referred to above by various High Courts,  it  seems  that  the  company  Judge  has  a power to direct the respondent-company to pay the amount of interest but in each case, the facts are to be  examined  as  to  whether  there  is  bona  fide dispute regarding the claim of the interest and if the Court finds that there is bona fide dispute, the petitioner-company cannot make a grievance that the company Judge failed  to  allow the  company petition for winding up the company for payment of the Interest…”

However, on the facts of that case, there was nothing to show that

prior to the issuance of the statutory notice by the appellant, any claim was

made in respect of the payment of interest and furthermore the respondent

had filed a counter affidavit to the said petition denying and disputing the

said assertion of the appellant that an order of winding up of the company

was not passed only for payment of the interest which had been disputed

bonefide.   

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24. We may furthermore notice that even in Kitply Industries Ltd. v. Hari

Narain and Sons Pvt. Ltd. [(1998) 91 CC 715] a similar view was taken by

the  Rajasthan  High  Court.   The  learned  Judge  upon  holding  that  the

principles  enumerated  in  various  decisions  referred  to  therein  must  be

applied in each and every case having regard to the facts thereof, rejected

the claim for payment of interest, stating:

“…In my opinion, in the absence of any agreement between  the  parties,  the  dispute  which  the respondent has raised regarding its liability to pay interest  cannot  be  treated  as  a  fictitious  or frivolous dispute.  There is  sufficient  justification in the claim of the respondent that the dispute is a bona fide  dispute.  It  is  also to  be noted that  the petitioner  has  not  even said  that  the  parties  had agreed  for  payment  within  a  particular  time period…”

The said decision was rendered after trial.

25. We may notice an elaborate judgment of a learned Single Judge of the

Karnataka High Court in Jyothi Limited v. Boving Fouress Limited [(2001)

3 Comp LJ 413 (Karn)] wherein the learned Judge from paragraphs 5 to 8 of

the  judgment  considered  Stephen  Chemical  Limited (supra),  Rashid

Leathers P) Ltd. (supra) and Devendra Kumar Jain (supra), on the one hand

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and from paragraphs 10 to 16 considered Southern Industrial Polymers (P)

Ltd. v.  Amar  Formulators  and  Electronics  (P)  Ltd. [(1984)  56  CC  77

(Karn)],  Anand Steel v.  Bharat Earth Movers Ltd. [(1987) 3 Comp LJ 175

(Karn)],  Multimetals Ltd. (supra),  Unisystems (P) Ltd. v.  Stepan Chemical

Ltd. [(1985) CC 875 (P&H)],  Gangadhar Narsinghdas Agrawal v.  Timble

(P)  Ltd. [(1996)  5  Comp  LJ  342  (Bom)],  Ultimate  Advertising  and

Marketing v.  G.B.  Laboratories  Ltd. [(1989)  66  CC  232]  and  Kitply

Industries Ltd. (supra).

26. We have noticed hereinbefore that the decision of the Allahabad High

Court  in  Ultimate  Advertising  and  Marketing v.  G.B.  Laboratories  Ltd.

[(1989) 66 CC 232] was reversed by the Division Bench.  The said fact was

not brought to the notice of the learned Single Judge.  It was furthermore

not brought to the notice of the High Court that Unisystems (P) Ltd. (supra)

has  also  been  overruled  in  Unisystems  P.  Ltd. v.  Stepan  Chemical  Ltd.

[(1986) 60 CC 753].

The  learned  Judge  opined  that  the  word  “debt”  refers  to  an

ascertained  and  definite  amount  due  to  the  creditor  and  not  a  disputed

amount.  However, it was furthermore held:

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“(a) The term ‘debt’ refers to an ascertained and definite amount ‘due’ and does not refer to a claim for  compensation/  damages  or  a  claim  which requires assessment by a court before it becomes due and payable. (b) The  term  ‘debt’  may  refer  not  only  to ‘principal’ (value of goods or amount advanced), but  also to interest due thereon, where there is a contract  to  pay  interest.   Where  the  contract specifically  provides  for  payment  of  interest,  or where  there  is  an  admission  or  promise  to  pay interest by the company or where in proceedings for  recovery  of  money,  a  competent  court  or arbitrator  has  determined  the  liability  to  pay interest,  then  non-payment  of  interest  (whether with  principal  or  interest  alone)  may amount  to inability to pay debts. (c) Interest  cannot  be  awarded  merely  on  the basis  of  a  term  in  a  bill  or  invoice,  unless  the creditor proves that such provision is based on a contract or agreement on the part of the purchaser to pay interest.  This is because a credit bill or an invoice is a unilateral demand by the supplier and is neither a bilateral agreement nor a promise by the  purchaser  to  pay  interest.   Interest  can  be awarded  on  the  basis  of  a  provision  in  a  bill/ invoice,  if  it  is  supported  by  an  agreement  or promise  to  pay  interest  by  the  purchaser.   Such agreement  may  be  established  with  reference  to correspondence,  or  by countersigning  of  the  bill by  the  purchaser,  or  by  acceptance  by  the purchaser of the term in the bill relating to interest. Where in the absence of an agreement or contract for  payment  of  interest  on  the  value  of  goods supplied,  a  notice  of  demand  is  sent  by  the supplier requiring payment of the value of goods supplied with interest thereon and a reply is sent by the purchaser in general terms seeking time to

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pay  the  bill  amount,  such  reply  cannot  be construed as an admission to pay interest.  Either an  agreement  to  pay  interest  or  a  specific admission or promise to pay interest or an order or decree  granting  interest  by  a  court  or  tribunal empowered  to  award  interest,  is  a  condition precedent to hold that interest is a debt due, for the purpose of a winding up petition.  In the absence of  a  contractual  or  legal  liability,  nor  act  as  an estoppel  in  regard to  a subsequent  denial  by the company in legal proceedings.

(d) Where there is a bona fide dispute in regard to interest, the court  considering a petition under section 433(e) should not decide the issue, merely to avoid multiplicity proceedings.  The purpose of winding  up  proceedings  being  completely different  from  the  purpose  of  proceedings  for recovery of a debt, winding up proceedings are not a  substitute  for  a  civil  suit,  and,  therefore, relegating  parties  to  a  civil  suit  cannot  be considered  as  resulting  in  multiplicity  of proceedings.”

27. We may also notice that a Division Bench of the Calcutta High Court

in Universal Bearing Agency v. Wpil Limited [2006 (2) CHN 530] followed

the decision of the Punjab and Haryana High Court in  Stephen Chemical

Limited (supra).

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28. Keeping in view the aforementioned divergence in the opinions of the

different High Courts, let us consider relevant provisions of the Companies

Act.   

Circumstances in which a company may be wound up by the court are

contained in Section 433 of the Companies Act.  If a company is unable to

pay its  debts  as  contained  in  Clause (e)  thereof,  it  would  be  one  of  the

grounds therefor.   

Section 433 (f) of the Companies Act reads as under:

“A company may be wound up by the Tribunal, -- (a) *** *** (b) *** *** (c) *** *** (d) *** *** (e) *** *** (f) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up;”

Section 434 raises a legal fiction as to when the company would be

deemed to be unable to pay its debts; Clause (a) of Sub-section (1) whereof

reads as under:

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“( 1 ) A company shall be deemed to be unable to pay its debts-- (a)  if  a  creditor,  by assignment  or  otherwise,  to whom the company is indebted in a sum exceeding one  lakh  rupees  then  due,  has  served  on  the company,  by  causing  it  to  be  delivered  at  its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter  neglected to  pay the sum, or  to secure  or  compound  for  it  to  the  reasonable satisfaction of the creditor;”

29. On a plain reading of the aforementioned provisions, it is evident that

what is necessary for invoking the said provision is that despite service of

notice,  the  company  which  was  indebted  in  a  sum exceeding  one  lakh

rupees then due failed and/ or neglected to pay the same within three weeks

thereafter or to secure or compound for it to the reasonable satisfaction of

the creditor.   

30. The fact that despite receipt of a legal notice dated 23.12.2003, no

payment has been made to liquidate the debt on the part of the company is

not in dispute.  Admittedly, appellant had been supplying Castor Oil to the

respondent.  The fact that the respondent did not pay the price of the said

supplies,  on  presentation  of  the invoices,  is  also  not  in  dispute.   It  also

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stands admitted that the parties negotiated as regards the manner in which

the payments could be made.  In a meeting held on 25.11.2003, promises

were  made  to  square  up  the  old  outstanding  dues  and  bring  it  into  the

system for  the purpose of rotation.   The agreement spoke of payment of

compensation to the appellant for the delay in payment on account of earlier

supplies  after  clearing  the  entire  old  dues.   There  cannot  be  any doubt

whatsoever  that  when,  in  principle,  the  respondent  had  agreed  to

compensate the appellant for the delay in payment, the same must be by way

of interest payable on the principal amount or otherwise.   

31. Respondent never denied the demand of interest  as such,  but in its

reply dated 30.12.2003 merely stated that a sum of Rs. 16,80,468 (sic for

Rs. 15,18,460) was due.   

Construction  of  the  aforementioned  provision  came  up  for

consideration before this Court  in  Amalgamated Commercial  Traders (P.)

Ltd. v.  A.C.K. Krishnaswami and Another [(1965) 35 CC 456], wherein it

was held:

“It is well-settled that "a winding up petition is not a legitimate means of seeking to enforce payment

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of  the  debt  which  is  bona  fide  disputed  by  the company.  A  petition  presented  ostensibly  for  a winding up order  but  really  to  exercise  pressure will  be dismissed,  and under  circumstances  may be  stigmatized  as  a  scandalous  abuse  of  the process of the court. At one time petitions founded on disputed debt  were directed to stand over till the  debt  was  established  by action.  If,  however, there  was  no  reason  to  believe  that  the  debt,  if established,  would  not  be paid,  the  petition  was dismissed.  The  modern  practice  has  been  to dismiss such, petitions. But, of course, if the debt is  not  disputed  on  some substantial  ground,  the court may decide it on the petition and make the order."”

32. Yet again in M/s. Madhusudan Gordhandas & Co. v. Madhu Woollen

Industries  Pvt.  Ltd. [(1971)  3  SCC  632],  this  Court  upon  considering

Amalgamated  Commercial  Traders  (P.)  Ltd. (supra)  and  various  other

English cases opined as under:

“20. Two rules are well settled. First, if the debt is bona fide disputed and the defence is a substantial one, the court will not wind up the company. The court  has  dismissed  a  petition  for  winding  up where the creditor claimed a sum for goods sold to the company and the company contended that no price had been agreed upon and the sum demanded by  the  creditor  was  unreasonable.  (See  London and Paris Banking Corporation) Again, a petition for winding up by a creditor who claimed payment of an agreed sum for work done for the company

21

when the company contended that  the  work had not  been  properly  was  not  allowed.  (See  Re. Brighton Club and Horfold Hotel Co. Ltd.)”

The court furthermore opined:  

(i) Where the debt is undisputed, the court will not act upon a defence

that the company has the ability to pay the debt but did not choose

to pay that particular debt.

(ii) Where, however, there is no dispute that the company passed the

creditor a debt entitled him to a winding up order but the exact

amount of the debt is disputed, the court will make a winding up

order without requiring the creditor to quantify the debt precisely.  

(iii) The principles which the court acts are first 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  adduced  prima  facie  proof  of  the  facts  on  which  the

defence depends.

33. Section 433 of the Companies Act does not state that the debt must be

precisely a definite sum.  It has not been disputed before us that failure to

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pay agreed interest or the statutory interest would come within the purview

of the  word ‘debt.   It  is  one thing to  say that  the amount of  debt  is  not

definite or ascertainable because of the bona fide dispute raised thereabout

or there exists a dispute as regards quantity or quality of supply or such

other defences which are available to the purchaser; but it is another thing to

say that although the due as regards the principal amount resulting from the

quantity or quality of supply of the goods stands admitted but a question is

raised as to whether any agreement had been entered into for payment of

interest or whether the rate of interest would be applicable or not.  In the

latter  case,  in  our  opinion,  the  application  for  winding  up  cannot  be

dismissed.

34. In M/s. Madhusudan Gordhandas & Co. (supra), this Court referred to

the decisions of the Chancery Division in  Re. Tweeds Garages Ltd. [1962

Ch 406], holding:

“From  those  sections  it  appears  that  the  only qualification which is required of the petitioners in this case is that they are creditors and about that, as  I  have  said,  there  is  really  no  dispute. Moreover, it  seems to me that it  would, in many cases, be quite unjust to refuse a winding-up order to  a  petitioner  who  is  admittedly  owed  moneys which have not been paid merely because there is

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a dispute as to the precise amount owing.  If I may refer  to  an  example  which  I  suggested  in  the course of argument, suppose that a creditor obtains judgment against a company for ₤10,000 and after the  date  of  the  judgment  something  is  paid  off. There is a genuine bona fide dispute whether the sum paid  off  is  ₤10  or  ₤20.   The  creditor  then presents a petition to have the company wound up. Is  the  company  to  be  entitled  to  say:  “It  is  not disputed that you are a creditor but “the amount of your debt  is  disputed and you are not,  therefore, “entitled  to  an  order”?   I  think  not.   In  my judgment,  where  there  is  no  doubt  (and there  is none  here)  that  the  petitioner  is  a  creditor  for  a sum  which  would  otherwise  entitle  him  to  a winding-up order, a dispute as to the precise sum which is owed to him is not of itself a sufficient answer to his petition.”

Re.  Tweeds  Garages  Ltd. (supra),  apart  from  M/s.  Madhusudan

Gordhandas  & Co. (supra),  has  inter  alia  been  followed  by the  Bombay

High Court in Pfizer Ltd. v. Usan Laboratories P. Ltd. [(1985) 57 CC 236]

holding that only because there is a dispute in regard to the rate of interest,

the winding up petition cannot be thrown out on that ground alone.  Pfizer

Ltd. (supra)  has  been  followed  by  the  Bombay  High  Court  in  Ispat

Industries Ltd., in RE [(2005) 2 Comp LJ 235].  Pfizer Ltd. (supra) was a

case of principal plus interest.

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35. Our attention, however, has also been drawn to a recent decision of

this Court in Mediquip Systems (P) Ltd. v. Proxima Medical System GMBH

[(2005) 7 SCC 42] wherein the questions of law which fell for consideration

before this Court inter alia were:

“(i) Whether the Division Bench of the High Court at  Calcutta  was  justified  in  dismissing  the appellant’s  appeal  summarily  holding,  inter  alia, that  the  appellant  was  not  entitled  to  stay  of operation  of  the  order  passed  by  the  Company Judge  under  appeal  or,  in  other  words,  whether dismissal  of  connecting  stay  petition  could  be justified  reason  alone  for  dismissing  appeal summarily which was based on cogent grounds? (ii) Whether the appellant Company can be said to be indebted to the respondent petitioning creditor in  respect  of  US  $  11,000  equivalent  to  INR 4,69,480 when the said sum was not remitted by the  said  petitioning  creditor,  namely,  Proxima Medical System GmbH? (iii)  Whether  the  winding-up  proceedings  under the relevant provisions of the Companies Act are maintainable  against  the  Company  by  the  said respondent petitioning creditor when it is evident from  the  document  issued  by  Deutsche  Bank (remitter’s  banker)  and foreign inland remittance certificate (issued by the Company’s banker) that US $  11,000  was  remitted  by another  company, namely, Pameda Medizinische Systems GmbH and not by the petitioning creditor? (iv)  Whether  the  Division  Bench  as  well  as  the Company Judge,  in  exercise  of  their  jurisdiction under  the  Companies  Act,  erred  in  directing  the Company to deposit Rs 4,69,480  to  secure  the

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alleged claim of the petitioning creditor when the petitioning creditor was not the remitter of the said amount and such was seriously disputed before the Company Judge and the Company Judge did not adjudicate the disputes at controversy and directed the  petitioning  creditor  to  file  suit  in  respect thereof?  (v)  Whether  the Division  Bench  in  passing  the order  under  appeal  was  justified  to  direct  the Company to deposit the balance amount when an earlier Division Bench by an interim order reduced the  quantum  of  deposit  from  Rs.  4,69,480  as directed by the Company Judge to Rs 2 lakhs  in  compliance  whereof  the  Company  had duly deposited Rs. 2 lakhs on 11-11-2002 and the petitioning  creditor  failed  to  present  any  suit within three months thereof as per direction of the Company Judge? (vi) Whether the Division Bench was justified in passing the order under appeal by dismissing the stay  application,  on  extraneous  considerations, when  an  earlier  Division  Bench  by  an  interim order granted stay of advertisement subject to the appellant’s depositing Rs. 2 lakhs which was duly deposited  by the  Company to  the  satisfaction  of the Court?”

In that case, on the premise that no clear cut finding had been arrived

at by the Company Judge that the debt was prima facie due and payable by

the company to the creditor  and the impugned order had been passed  in

purported exercise of jurisdiction not vested in the Company Court for an

application for winding up of the Company, it had no jurisdiction to direct

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the company to deposit the amount payable to a third party or to a party

other than the petitioning creditor.  Thus, what was in question was whether

the Company Judge could issue a direction to the company to make payment

to  a  third  party.   Holding  that  such  a  jurisdiction  is  not  vested  in  the

company court, it was held:

“18. This Court in a catena of decisions has held that  an  order  under  Section  433(e)  of  the Companies Act is discretionary. There must be a debt due and the company must be unable to pay the  same.  A  debt  under  this  section  must  be  a determined  or  a  definite  sum of  money  payable immediately  or  at  a  future  date  and  that  the inability referred  to  in  the  expression “unable  to pay its debts” in Section 433(e) of the Companies Act should be taken in the commercial sense and that  the  machinery  for  winding  up  will  not  be allowed  to  be  utilised  merely  as  a  means  for realising debts due from a company.

*** *** *** 21. The debt under Section 433 of the Companies Act  must  be  a  determined  or  a  definite  sum of money payable immediately or at a future date…”

36. It  is,  however,  of  some  interest  to  note  that  the  Division  Bench

referred to  a decision of  the Madras High Court  in  Tube Investments  of

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India Ltd. v. Rim and Accessories (P) Ltd. [(1990) 3 Comp LJ 322] where

the following principles relating to bona fide dispute had been evolved:

“(1) If there is a dispute as regards the payment of the sum towards principal, however small that sum  may  be,  a  petition  of  winding  up  is  not maintainable  and  the  necessary  forum  for determination of such a dispute existing between the parties is the Civil Court; (2) The  existence  of  a  dispute  with  regard  to payment of interest cannot at  all  be construed as existence  of  a  bona  fide  dispute  relegating  the parties  to decide such a dispute  before the Civil Court  and  in  such  an  eventuality,  the  Company Court itself is competent to decide such a dispute in the winding-up proceedings; and (3) If there is no bona fide dispute with regard to the sum payable towards the principal, it is open to  the  creditor  to  resort  to  both  the  remedies  of filing of a civil suit as well as filing of a petition for winding-up of the company.”

In that case also a bona fide dispute was raised by the company.   

It  was  furthermore  found  that  there  was  no  general  allegation  or

averment that the company was unable to pay its dues and other obligations

in  the  sense  of  its  innumerable  creditors.   It  was  in  the  aforementioned

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situation  that  Section  433(f)  of  the  Companies  Act  was  found  to  be not

applicable.

37. In this case, on the date of filing of the application, dues in respect of

at least  a part  of  the debt  which was more than the amount specified in

Section 433 of the Companies Act was not denied.  It is not a requirement of

the  law that  the  entire  debt  must  be  definite  and  certain.   The  Division

Bench of the High Court proceeded on the basis that the entire sum covering

both the principal and the interest must be undisputed, holding:

“Except making a bald allegation in the company petition that the petitioner had come to know that the  respondent  company  owes  large  sums  of money to its creditors and it is not in a position to meet its debt obligations and as, therefore, become commercially  insolvent,  the  petitioner  has  not taken necessary care to prima facie establish the same. The only piece of evidence available on the side  of  the  petitioner  is  that  the  respondent  is indebted to the petitioner a sum which is claimed towards  interest  on  the  delayed  payment. Assuming  for  a  moment  that  the  respondent company is  liable  to  pay interest  on the  delayed payments  and it  has not paid the said amount to the petitioner, could it be said that the respondent neglected  to  pay  the  debt  particularly  when  the respondent is disputing the liability of payment of interest on the delayed payments and when there is no such written agreement in between the parties for such payment of interest.”

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38. The Division Bench upon noticing the fact of the matter formulated

the question “as to whether the respondent is liable to pay interest at 2% per

month  on  delayed  payments  and  what  that  is  being  disputed  would  it

constitute  prima  facie  a  valid  ground  for  admission  of  the  company

petition?” It was held:

“…The petitioner seeks to rely upon the invoices which according to him contain at the foot a clause for payment of interest on delayed payments. Such a clause, even assuming is there, since it has not been placed by means of any cogent evidence in this case, in view of the judgment of the Rajasthan High  Court  in  Kitply  Industries  case  (supra), cannot constitute an agreement between the parties for payment of interest.  The legal  position,  thus, seems to be obvious. Before seeking a company to be wound up on the ground that it is unable to pay its debts, it  must be shown before the Court that the  debt  claimed  against  the  company  is ascertained  and  definite  and  that  the  company failed  to  pay  the  same.  Mere  failure  to  pay  the amount would not constitute the requisite 'neglect to  pay'  as  envisaged  under  Clause  (a)  of  Sub- section  (1)  of  Section  434  of  the  Act  when  the company bona fide disputes the very liability and hence the defence taken up by it is of substance.”

It was furthermore held:

30

“Having regard to the facts and circumstances of the instant case, we are of the considered view that the  claim  of  the  petitioner  towards  interest  on delayed  payments  since  not  covered  by  any specific agreement between the parties inter se is a contentious  issue  and  the  dispute  as  regards  the payment  of  interest  is  bona  fide  and  it  cannot, therefore,  legitimately  be  concluded  that  the respondent  has  neglected  to  pay.  The  petitioner, who pleaded inter  alia in his petition that as  per the trade practice payments made shall be adjusted towards interest first and balance, if any, shall be adjusted towards principal later, failed to establish the  same  by  any  prima  facie  evidence.  In  the absence of any such trade practice, appropriating the amounts towards interest first and the balance, if  any  towards  principal  next  becomes inappropriate,  in  which  event  the  claim  of  the petitioner that the respondent is liable to pay Rs. 65,15,947/- basing upon such calculations cannot be  accurate.  The  total  amount  claimed  by  the petitioner  as  due  in  that  view  of  the  matter becomes doubtful and not definite. It is still got to be ascertained if the claim of the respondent were to be considered that there has been no agreement for payment of interest on delayed payments. For the  above  reasons,  it  cannot  be presumed prima facie  that  the  respondent  is  unable  to  pay  its debts.”

39. The findings of the High Court, with respect, are not correct for more

than one reason; firstly, because the Division Bench did not hold that the

invoices were not proved by cogent evidence; secondly, question of leading

evidence  would  arise  only  after  the  company  petition  is  admitted  and,

31

thirdly, issuance of invoices and signature of the respondent thereon is not

disputed.   

40. The judgment of the Division Bench also contains a legal flaw insofar

as it failed to take into consideration that the appellant had in fact issued

three  notices  being  dated  6.01.2003,  8.09.2003  and  legal  notice  dated

23.12.2003  specifically  mentioning  that  the  payments  had  been  adjusted

towards  interest  first  and  balance,  if  any,  shall  be  adjusted  towards  the

principal.  Thus, a prima face case was made out.

41. This brings us to the question as to why an interest is payable.  An

interest is inter alia payable by way of restitution.   

In Clariant International Ltd. and Another v.  Securities & Exchange

Board of India [(2004) 8 SCC 524], this Court held:

“25. A direction in terms of Regulation 44 which was  in  the  interest  of  securities  market indisputably  would  have  caused  civil  or  evil consequences  on  the  defaulters.  Clause  (i)  of Regulation 44, however, does not provide for any penal  consequence.  It  provides  for  only  civil consequences. By reason of the said provision, the power of the Board to issue directions is sought to be  restricted  to  pay the  amount  of  consideration

32

together  with  interest  at  a  rate  not  less  than  the interest payable by banks on fixed deposits. Both the Board and the Tribunal have proceeded on the basis that the interest is to be paid with a view to recompense  the  shareholders  and  not  by way of penalty  or  damages.  Such  a  direction,  therefore, was  for  the purpose  of  protecting  the  interest  of investors and not “in the interest of the securities market”.  The  transactions  in  the  market  are  not thereby affected one way or the other. The Board, as  noticed  hereinbefore,  has  a  discretion  in  the matter and, thus, it may or may not issue such a direction. The shareholders do not have any say in the matter. As a necessary concomitant, they have no legal right.”

Yet again, this Court in Alok Shanker Pandey v. Union of India and

Others [(2007)  3  SCC 545]  has  held  that  interest  is  payable  by way of

accretion on capital.   

The question came up for  consideration  in  Meka Venkatadri  Appa

Rao Bahadur Zamindar Garu and others v.  Raja Parthasarathy Appa Rao

Bahadur Zamindar Garu [AIR 1922 PC 233] wherein it was held:

“…There is a debt due that carries interest. There are  moneys  that  are  received  without  a  definite appropriation on the one side or on the other, and the rule which is well established in ordinary cases is  that  in  those  circumstances  the  money is  first applied in payment of interest and then when that

33

is satisfied in payment of the capital. That rule is referred to by Rigby, L.J., in Parr’s Banking Co. v. Yates in these words: “The  defendant’s  counsel  relied  on  the  old  rule that does, no doubt, apply to many cases, namely, that, where both principal and interest are due, the sums  paid  on  account  must  be  applied  first  to interest.  That rule, where it  is applicable, is only common  justice.  To  apply  the  sums  paid  to principal where interest has accrued upon the debt, and is not paid, would be depriving the creditor of the  benefit  to  which  he  is  entitled  under  his contract.”

The said decision has been followed by this Court  in  Meghraj and

Others v.  Mst.  Bayabai  and  others [(1969)  2  SCC 274,  para  5]   and  a

Constitution  Bench  of  this  Court  in  Gurpreet  Singh v.  Union  of  India

[(2006) 8 SCC 457, para 19].   

In Alok Shanker Pandey v. Union of India and Others [(2007) 3 SCC

545], this Court held:

“8. We are of the opinion that there is no hard- and-fast  rule about  how much interest  should be granted  and  it  all  depends  on  the  facts  and circumstances of each case. We are of the opinion that  the  grant  of  interest  of  12%  per  annum  is appropriate  in  the  facts  of  this  particular  case. However,  we  are  also  of  the  opinion  that  since interest  was  not  granted  to  the  appellant  along

34

with the principal amount, the respondent should then in addition to the interest at the rate of 12% per annum also pay to the appellant interest at the same rate on the aforesaid interest from the date of payment  of  instalments  by  the  appellant  to  the respondent till  the date of refund of this amount, and the  entire  amount  mentioned above must be paid to the appellant within two months from the date of this judgment.”

42. Interest is also payable in terms of the provisions of Section 62(1)(a)

of the Sale of Goods Act.  Interest may be held to be payable in terms of

Section 3 of the Interest Act, 1978 as also in terms of Sections 5 and 6 of

the Interest on Delayed Payments to Small Scale and Ancillary Industrial

Undertakings Act, 1993.

In Krishna Chemicals v. Orient Paper and Industries Ltd. [(2005) 128

CC 72], the Orissa High Court held:

“The  interest  amounts  as  claimed  by  the petitioners in the two cases against the Company however  may  not  be  in  accordance  with  the provisions  of Sections  4 and  5 of the Act,  1993. The fact that the exact amount of interest claimed by the petitioners against the Company is disputed can  be  no  ground  to  dismiss  the  petition  for winding up for non-payment of the interest so long as the liability to pay interest of the Company to

35

the petitioners exists under Sections 4 and 5 of the Act,  1993  and  admittedly  such  liability  has  not been  discharged  by  the  Company.  As  has  been held  by  the  Supreme  Court  in  Madhusudan Gordhandas and Co. v. Madhu Woollen Industries Pvt.  Ltd.  (supra)  in  the  portion  of  the  judgment quoted  above,  where  there  is  no  doubt  that  the Company owes the creditor a debt entitling him to a winding up order  but  the exact  amount  of  the debt is disputed the Court will make a winding up order without requiring the creditor to quantify the debt precisely.”

The provisions of the Interest on Delayed Payments to Small Scale

and Ancillary  Industrial  Undertakings  Act,  1993  were  applied  in  Assam

Small  Scale  Industries  Development  Corpn.  Ltd.  and  Others v.  J.D.

Pharmaceuticals and Another [(2005) 13 SCC 19]

43. For the reasons aforementioned, we have no other option but to set

aside the judgment of the High Court.  The question, however, which arises

for consideration is whether at this stage we shall remit the matter back to

the learned Single Judge to admit the company petition or dispose of the

matter ourselves.   We choose to adopt the latter  course.   We are of the

opinion that interest of justice would be subserved if we in exercise of our

jurisdiction under Article 142 of the Constitution  of India direct  that  the

respondent  to pay simple interest on the admitted sum at the rate of 12%

36

per annum on the balance amount instead of 24% per annum within eight

weeks from the date of amount became due till it is paid failing which the

consequences provided in law shall ensue.

44. We  have  passed  this  order  with  a  view  to  avoid  multiplicity  of

proceedings  and  for  the  purpose  of  avoiding  unnecessary  delay  in  the

interest of parties.   

45. The appeal is allowed.  No costs.

………………………….J. [S.B. Sinha]

..…………………………J.     [Cyriac Joseph]

New Delhi; December 17, 2008

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