M/S SHITAL FIBRES LTD. vs. M/S INDIAN ACRYLICS LTD.

1 REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION  CIVIL APPEAL NO.   1105         OF 2021 [Arising out of Special Leave Petition (Civil) No.2353 of 2017] SHITAL FIBERS LTD.    ...APPELLANT(S) VERSUS INDIAN ACRYLICS LIMITED    .... RESPONDENT(S) J U D G M E N T   B.R. GAVAI, J.  1. Leave granted.  2. The present 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 Digitally signed by R Natarajan Date: 2021.04.06 17:16:59 IST Reason: Signature Not Verified 2 learned   Company   Judge   of   the   said   Court,   in   Company Petition No.106 of 2009 dated 28.9.2015.   The   facts,   in   brief,   giving   rise   to   the   present 3. appeal are as  under: The respondent – M/s Indian Acrylics Limited is a manufacturer of acrylic yarn having its manufacturing unit in village Harkrishanpura, District Sangrur.   There was a transaction between the appellant – M/s Shital Fibers Ltd. 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 3 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.  As the payment was not made despite   notice   being   duly   served   on   the   appellant,   the respondent   filed   the   aforesaid   Company   Petition   seeking winding up of the present appellant for its inability to pay admitted debts.   The learned Company Judge vide order dated 28.9.2015 admitted the Company Petition.  However, while doing so, the learned Company Judge observed, that since   the   appellant   was   an   on­going   concern,   an opportunity should be granted to it to settle the accounts with the respondent by 31.12.2015.  Only in case of failure of the settlement, the citation was directed to be published. Being aggrieved thereby, the appellant preferred an appeal before the Division Bench of the High Court.  By an order dated 24.12.2015, the Division Bench of the High Court, while issuing notice, stayed the publication of the admission   notice,   subject   to   the   appellant   paying   the 4 amount   in   question   by   31.12.2015.       Accordingly,   the amount was so paid by the appellant.   Though   the   Division   Bench   of   the   High   Court came to a conclusion, that there was no bona fide dispute and   as   such,   there   was   no   question   of   directing   the respondent to repay the amount, since the appellant had satisfied the respondent’s claim to the extent mentioned in the order impugned in the appeal, it dismissed the appeal.   However, insofar as the claim of the respondent with regard to interest at the rate of 24% per annum is concerned, the Division Bench of the High Court found it not necessary to enter into the question, as to whether the appellant was liable to pay interest to the respondent since the learned Company Judge had not gone into that issue. However, the Division Bench clarified, that the dismissal of the   appeal   was   without   prejudice   to   the   respondent’s contention regarding interest which may be claimed either by way of an application for clarification before the learned Judge or by way of an appeal or by any other proceeding. Being aggrieved thereby, the present appeal.  5 4. Shri Karan Nehra, learned counsel appearing on behalf   of   the   appellant   submits,   that   the   defence   of   the appellant was a   one.  He submitted, that it was a bona fide specific   case   of   the   appellant,   that   on   account   of   the defective material supplied by the respondent, the appellant had suffered huge losses and as such, it was the appellant who   was   entitled   to   receive   the   damages   from   the respondent.     He submitted, that in view of  the  specific defence, which could not be said to be a moonshine defence, the learned Company Judge ought not to have admitted the Company   Petition.     He   submitted,   that   the   claim   of   the respondent could not stand even if it was made in summary proceedings   under   Order   XXXVII   of   the   Code   of   Civil Procedure, 1908.   He submitted, that requirements under Section   433(e)   and   (f)     of   the   Companies   Act,   1956 (hereinafter referred to as “the said Act”) stood on a much higher pedestal and as such, the learned Company Judge has erred in admitting the petition.   He submitted, for the 6 same   reason,   the   Division   Bench   has   also   erred   in   not interfering with the direction of the learned Company Judge. Shri  Nehra   further   submitted,   that   since   there 5. was no agreement between the parties to pay interest on the balance/delayed   payment,   the   direction   issued   by   the Division Bench of the High Court to consider the claim of the respondent for interest does not stand the scrutiny of law.  6. Shri Nehra relies on the judgments of this Court

3 Drive Systems Sdn. Bhd. . Shri Tarun Gupta, learned counsel appearing on 7. behalf of the respondent submits, that since the appellant, in spite of various communications sent by the respondent requesting it to pay the outstanding amount, had failed to do  so,   it  was   required   to   issue   statutory   demand   notice under Section 434 read with Section 433 (e) of the said Act. 1 (2005) 7 SCC 42 2 (2009) 3 SCC 527 3 (2010) 10 SCC 553 7 It is submitted, that the said notice was duly served upon the appellant and also replied to.   Apart from making a vague denial and stating that the claim of the respondent is a matter  of  record, no specific  defence  was  taken.      He further submits, that the appellant had totally changed the stand   taken  by   it  before   the  learned   Company  Court  as against the stand taken by it in the reply to the statutory notice.   He therefore submits, that the learned Company Judge as well as the Division Bench of the High Court had rightly held, that the defence of the appellant was not a bona fide  one.  He submitted, that no interference would be warranted in the concurrent findings of fact.   This   Court   in   the   case   of   8. Madhusudan Gordhandas & Co.   vs.   Madhu Woollen Industries Pvt. 4 Ltd. ,  observed thus: “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 4 (1971) 3 SCC 632 8

9 9. It is therefore well settled, that if the debt  is  bona fide  disputed and the defence is a substantial one, the court will not wind up the company. It is equally 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.  It is equally settled, that the principles on 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 adduces prima facie proof of the facts on which the defence depends. 10. As to whether the defence of a Company is in good faith or as to whether it is of a substance and as to whether it is likely to succeed in point of law and as to whether the company adduces prima facie proof of the facts on which defence depends, would depend upon the facts of each case.   11. In the present case, in the statutory notice dated 25.8.2008,   the   respondent   –   Company   has   specifically stated as under: 10 “4.  That   in   that   regard   a   sum   of Rs.35,14,776.30   was   outstanding against you against various bills as on   25.8.2007   against   the   material supplied to you by my client, vide following invoices:

5. That   after   the   said   invoices   no material has been supplied to you by my client and the above amount of Rs.35,14,776.30 was payable by you   to   my   client.     My   client requested   to   you   vide   various communications   dated   16.11.07, 22.11.07,   23.11.07,   26.11.07, 27.11.07,   28.11.07,   26.11.07, 1.12.07,   3.12.2007,   5.12.2007, 6.12.2007,   7.12.2007,   8.12.2007, 10.12.2007,   11.12.2007, 12.12.2007,   13.12.2007, 15.12.2007,   17.12.2007   and 21.12.2007   to   pay   the   above   said outstanding amount.  6. That   in   response   to   the   above letters/faxes   no   communications 11 have been received from you by my client   rather   you   made   lumpsum payments   of   Rs.15   lac   through cheques,  material returned by you worth   Rs.6,22,073.00   and adjustment of Rs.5 lac was made by way of credit note.   The details of which are as follows:

The   total   amount   remains recoverable by my client from you is Rs.8,92,723.45p   (8,92,703.30   + 20.15)   as   on   8.5.2008   after receipt/credit of the above amounts of   Rs.26,22,073.00   as   mentioned above.” 12 12. In   reply   to   the   said   notice,   the   appellant   has stated thus: “4. In reply to para no.4 of your notice, it   is   a   matter   of   records   and   it clearly   shows   about   the   business worth of my client. 5. In reply to para no.5 of your notice, it is a matter of record.   However, there is nothing due to your client from   my   client,   rather   on   the contrary   is   true   as   mentioned   in previous paras. 6. Para no.6 of the notice is not correct and   does   not   depict   the   correct picture, rather on the contrary your client   himself   had   been  coming   to my   client   and   settled   the   amount and   agreed   to   return   Rs.   25   Lacs out of which Rs.5 lacs returned, rest of the amount was not returned. 7. Para   no.7   of   your   notice   is   wrong and   incorrect.     Detailed   reply   has already   been   given   in   previous paras.” 13. It is thus clear, that in response to paragraph 4 and 5 wherein the respondent has specified its claim, the only reply given is, that it is a matter of record and that it shows about the business worth of his client. No doubt, that in paragraph 6, it is stated, that the respondent had himself 13 been coming to the appellant and settled the amount and agreed to return Rs.25 lakh out of which only Rs. 5 lakh was returned. 14. From the perusal of the written statement filed to the   Company   Petition,   it   would   reveal,   that   the   main contention   of   the   appellant   was,   that   it   was   a   running company making profits and further, that the claim of the respondent was not admitted by it.  It was contended, that the petition was filed only to pressurise the appellant to pay the dues which were neither admitted nor legally due.   It was also stated in the written statement that 15. till 26.6.2007 there was no issue with regard to supply of raw material by the respondent.  However, with effect from 26.6.2007 it was noticed, that raw material supplied was defective   and   the   goods   which   were   sold   in   the   market utilizing the said raw material were received back with some complaints.     It   was   stated,   that   the   goods   which   were supplied by the respondent vide invoices dated 26.6.2007 onwards were defective and the products manufactured by the appellant – company using the said raw material (i.e. 14 acrylic yarn) were returned by the dealers and importers due to defective quality.  It was stated, that the appellant – Company had returned the defective raw material to the respondent – Company, which remained unused.   It was stated, that the respondent had acknowledged the same and credited an amount of Rs.6,22,073/­ in the account of the appellant.   It is further stated, that after various meetings and negotiations, the respondent agreed to compensate the appellant   on   account   of   supply   of   defective   material   by issuing a credit note of Rs.5 lakh.   It was further stated, that   as   per   the   account   of   the   appellant,   an   amount   of Rs.53,648/­   was   receivable   from   the   respondent   after making all the adjustments.   16. The learned Company Judge after considering the rival contentions observed thus: “8. There is no document referred to by learned counsel for the respondent – Company   written   by   it   to   the petitioner   –   Company   regarding defect in quality.  In response to the statutory   notice   issued   by   the petitioner   –   Company,   the   stand taken by the respondent – company in reply was that raw material worth Rs.25,00,000/­   supplied   by   the 15 petitioner   –   Company   to   the respondent   –   company   was   lying with it in poor condition and could not be used in production.  Against promised   compensation   of Rs.25,00,000/­, credit note of only Rs.5,00,000/­   was   given.     As against   a   claim   of   Rs.8,92,723/­ claimed by the petitioner, a sum of Rs.11,07,297/­   is   due   from   the petitioner   –   company   to   the respondent – company  on account of losses suffered due to poor quality of   yarn   supplied.     Demand   of   the aforesaid   amount   was   raised.     In reply to the petition, the stand taken is   altogether   different.     No   doubt, the   issue   regarding   defective material was raised, however, it was stated   that   the   entire   material supplied   by   the   petitioner   – company was used, as a result of which   the   product   was   defective, which was not marketable and on that   account,   the   respondent   – company   suffered   losses.     The products  were  sold  in  the   market, which   were   returned   back.     No communication   has   been   referred to,   which   was   addressed   by   the respondent   –   company   to   the petitioner – company, pointing out such defects.  It was further sought to be claimed that after giving credit note of Rs.5,00,000/­ in May, 2008, the petitioner – company agreed to give rebate to the extent of 50% on the total invoices on account of the 16 defective material.  The calculations were made in the following terms. 

9. From the aforesaid calculations, it is evident that now the stand is that the   respondent­   company   is   to recover a sum of Rs.53,648/­ from the   petitioner   –  company,   whereas in reply to the notice, the claim was to the tune of Rs.11,07,297/­.  It is further relevant to add here that in reply to the petition, the story that settlement between the parties had taken place in May, 2008 regarding rebate on the invoice value is merely 17 an after thought just to defeat the petition, as no such plea was taken when reply  to  the statutory notice was given in September, 2008. 10. In view of the aforesaid discussion, I do not find that the defence raised by   the   respondent   –   company   is reasonable   as   the   debt   cannot   be said to be disputed, which has not been   paid   despite   statutory   notice and   even  pendency   of   the   present petition in this court for a period of about six years.  Hence, the petition deserves   to   be   admitted.     Ordered accordingly.” It could thus be seen, that the learned Company 17. Judge has found, that the defence taken by the appellant with   regard   to   the   products   of   the   respondent   being defective   in   quality   was   by   way   of   an   after­thought, inasmuch as, no document was placed on record in support of such contention.   It was further found, that whereas in reply to the notice the appellant had claimed, that it was entitled   to   recover   an   amount   of   Rs.11,07,297/­,   in   the calculations   given   in   written   statement,   the   amount   is Rs.53,648/­.   18 18. This finding of fact is affirmed by the Division Bench of the High Court with following observations:  “7. The contention is not well­founded. We see no reason to draw such an inference.     Indeed,   the   grant   of credit would also indicate that the respondent fairly acknowledged the defects   when   there   were   any   and that the rest of the consignment met with the contractual specifications. It is necessary, therefore, to examine the   other   surrounding   facts   and circumstances   to   judge   the   rival contentions.  8. Firstly, when the appellant raised a dispute   about   the   quality   and   the same   was   acknowledged   by   the respondent   it   was   reflected   in   its conduct by the grant of credit. It is reasonable to presume that if there were any other defects and, 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.     The appellant,   however,   contends   that the discussions in this regard were only oral.  In the facts of this case it is difficult to accept this contention. The   appellant’s   case   has   varied between   its   reply   to   the   statutory notice and its written statement.   The   respondent   served   a statutory   notice   dated   25.08.2008. The   appellant’s   reply   dated 19 10.09.2008   to   the   statutory   notice does not refer to an oral agreement much   less   an   agreement   by   the respondent   to   pay   the   appellant compensation   for   the   alleged defective   goods.     This   belies   the defence now raised in the reply. 9. There   is   yet   another   fact   which clearly   disentitles   the   appellant   to any credit in respect of the balance goods.     The   appellant,   admittedly, retained the goods and, in fact, used the  goods, namely, synthetic  yarn, in the manufacture of its products, such as blankets.  Having done so, the appellant cannot refuse to pay for   the   same.     If   the   goods   were defective,   the   appellant   ought   to have   rejected   the   same.     Having utilised the raw material supplied by the respondent, it is now not even possible for the appellant to return the same to the respondent.   Moreover,   the   appellant nowhere raised the contention that its   customer,   who   purchased   the final   product,   raised   grievance regarding the quality of the product. Moreover,   the   appellant   has   not furnished  any details regarding its transactions   with   its   customers involving   the   sale   of   goods manufactured from the raw material supplied by the respondent.   There is   nothing   to   indicate   that   the appellant suffered any damages on 20 account   thereof   or   that   the appellant was not paid for the same. 10. In these circumstances, the learned judge rightly rejected the appellant’s contentions.  In our opinion, there is no bona fide dispute raised by the appellant   in   respect   of   the respondent’s claim.”  It   is   thus   amply   clear,   that   both   the   learned 19. Company   Judge   as   well   as   the   Division   Bench   upon appreciation of the materials placed on record have found, that the defence as sought to be raised by the appellant with regard   to   the   quality   of   the   material   supplied   by   the respondent being defective was by way of an after­thought. The Division Bench found, that when the appellant raised a dispute about the quality, the same was acknowledged by the respondent and it was reflected in its conduct by the grant of credit.  It observed, that the respondent had fairly acknowledged the defects when there were any and it was reasonable to presume, that if there were any other defects, it would have recorded the same in some manner or the other.     The   Division   Bench   further   found,   that   it   was 21 difficult   to   accept   the   case   of   the   appellant,   that   the discussions with regard to defective material were only oral. It further found, that in the reply to the statutory notice there were no mention at all with regard to oral agreement. The Division Bench further found, that the contention of the appellant,   that   the   goods   manufactured   utilizing   the defective   raw   material   supplied   by   the   respondent   being returned by the dealers and thereby the appellant suffered any damages, was also not supported by any document.   It was concurrently found, that the defence of the 20. appellant was not  bona fide  one nor a substantial one.  On facts,   it   was   also   found,   that   the   appellant   had   taken contradictory   stand   in   order   to   defeat   the   claim   of   the respondent.     It   was   also   concurrently   found,   that   the appellant had failed to adduce prima facie proof of facts contented by it.  21. Insofar as the contention of the appellant, that the appellant was an on­going Company running into profits and that the claim of the respondent was not admitted by it, is concerned, it is not a requirement in law. Reliance in this 22 respect could be placed on various judgments of this Court including the one in the case of  Vijay Industries  (supra). 22. Insofar   as   the   reliance   placed   by   the   learned counsel for the appellant on the judgment of this Court in

in the said case this Court came to a finding, that there was a bona fide dispute concerning the claim of the appellant.  It was also found, that there was no clear cut finding by the learned single judge, that a debt is   prima facie   due and payable by the Company to the petitioning creditor.  It was further found, that the company court had no jurisdiction to direct the company to deposit the amount payable to a third party or to a party other than the petitioning creditor.  As such, on facts, the said judgment would not be applicable to the facts of the present case. 23. In the case of  Vijay Industries   (supra) relied by the appellant,   the learned single judge after finding, that a prima facie case has been made out, admitted the company petition.  However, in appeal, the Division Bench set aside 23 the order of the learned single judge.       This Court while setting aside the order of the Division Bench observed thus:

24

25

26

27 After observing the aforesaid, this Court further held, that the appellant was also entitled to the payment of interest.   24. It can thus clearly be seen, that this Court had clearly held, that it is not necessary while admitting the petition to establish that the entire claim is undisputed.  We fail  to   understand,  as   to   how   the   said  judgment  of   this Court in   (supra) would be applicable to the Vijay Industries facts of the present case.   As a matter of fact, in the said case, this Court on consideration of the invoices had come to a conclusion, that the appellant was also entitled for the interest on delayed payment.  25. In the present case, the Division Bench has not issued a direction to grant the interest as claimed by the respondent. On the contrary, it has declined to enter into the question, as to whether the appellant was also liable to pay the interest since the learned company judge had not referred to the said issue.   The Division Bench therefore, while dismissing the appeal, has done so without prejudice to the respondent’s contention regarding interest which may 28 be claimed either by way of an application for clarification before the learned judge or by way of an appeal or by any other proceeding.   26. We find, that the judgment of this Court in the

also not be applicable to the facts of the present case.  In the said case, it will be relevant to refer to the following observations of this Court. 

29 27. This 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.     It   was   found,   that   in   the   said   case,   a   detailed investigation   of   facts   and   examination   of   evidence   and interpretation of various terms and conditions of the deed of settlement and the compromise entered into between the parties   was   necessary   in   adjudicating   the   claim,   which could not be done in the proceedings under Section 434 of the said Act.  In the said case, it was also noticed, that the claim   was   in   respect   of   contingent   debt   and   that   the disputes   between   the   parties   had   been   compromised   in terms of settlement deed.  28. Such is not the case here.  On facts, the learned Company Judge as well as the Division bench have found, that the defence of the appellant could not be said to be bona fide,  in good faith and of substance.   30 29. We   are   therefore   of   the   considered   view,   that there is no merit in the appeal. The same is accordingly dismissed.   There shall be no order as to costs. Pending applications, if any, shall stand disposed of. …….…....................., J.                              [R.F. NARIMAN] …….…....................., J.                                                  [B.R. GAVAI] …….…....................., J.                                              [HRISHIKESH ROY] NEW DELHI; APRIL 06, 2021