Supreme Court Upholds Winding Up Order in Debt Dispute: Shital Fibers Ltd. vs. Indian Acrylics Limited (6 April 2021)

Date of the Judgment: 6 April 2021

Citation: Civil Appeal No. 1105 of 2021 (Arising out of Special Leave Petition (Civil) No. 2353 of 2017)

Judges: Justice R.F. Nariman, Justice B.R. Gavai, and Justice Hrishikesh Roy

Can a company avoid being wound up by claiming a dispute over the quality of goods, even when there’s a clear debt? The Supreme Court of India recently addressed this in a case between Shital Fibers Ltd. and Indian Acrylics Limited. The core issue was whether Shital Fibers’ claim of defective goods was a genuine defense against a winding-up petition filed by Indian Acrylics for unpaid dues. The Supreme Court, in a unanimous decision authored by Justice B.R. Gavai, upheld the High Court’s decision to wind up the company, finding no bona fide dispute.

Case Background

The case revolves around a business transaction between Shital Fibers Ltd. (the appellant), a buyer, and Indian Acrylics Limited (the respondent), a supplier of acrylic yarn. Starting from 20 April 2007, Indian Acrylics supplied acrylic yarn to Shital Fibers on credit, amounting to ₹81,98,014.45. Shital Fibers raised concerns about the quality of the supplied material. Consequently, Indian Acrylics credited ₹6,22,073 to Shital Fibers’ account for returned material and issued a credit note of ₹5,00,000 for quality defects. After accounting for payments of ₹61,83,218 made by Shital Fibers, an outstanding balance of ₹8,92,723 remained as of 28 July 2008. Despite repeated requests, Shital Fibers failed to pay the balance, leading Indian Acrylics to issue a statutory notice. When the payment was not made, Indian Acrylics filed a company petition seeking the winding up of Shital Fibers for its inability to pay its debts.

Timeline

Course of Proceedings

The Company Judge admitted the company petition filed by Indian Acrylics, seeking to wind up Shital Fibers, but gave Shital Fibers an opportunity to settle the accounts by 31 December 2015. The Judge directed that only if settlement failed, the citation would be published. Shital Fibers appealed to the Division Bench of the Punjab & Haryana High Court, which stayed the publication of the admission notice, provided Shital Fibers paid the outstanding amount by 31 December 2015, which they did. The Division Bench, while dismissing the appeal, held that there was no bona fide dispute and that Shital Fibers had satisfied the claim. However, it did not address the issue of interest claimed by Indian Acrylics and clarified that the dismissal was without prejudice to Indian Acrylics’ claim for interest. Shital Fibers then appealed to the Supreme Court.

Legal Framework

The case primarily concerns the interpretation and application of Section 433(e) and (f) of the Companies Act, 1956. These sections deal with the circumstances under which a company can be wound up by the court. Specifically, Section 433(e) states that a company may be wound up if it is unable to pay its debts. Section 433(f) allows for winding up if the court is of the opinion that it is just and equitable that the company should be wound up. The court also considered Section 434 of the Companies Act, 1956, which specifies when a company is deemed unable to pay its debts. The court also examined the principles established in previous judgments regarding bona fide disputes and the requirements for admitting a winding-up petition.

Section 433 of the Companies Act, 1956 states:

“A company may be wound up by the Court, –
(e) if it is unable to pay its debts,
(f) if the Court is of the opinion that it is just and equitable that the company should be wound up.”

Arguments

Appellant (Shital Fibers Ltd.) Arguments:

• Shital Fibers argued that they had a bona fide dispute regarding the quality of the material supplied by Indian Acrylics. They claimed that the defective material caused them significant losses, entitling them to damages from Indian Acrylics.
• They contended that the Company Judge should not have admitted the petition, as their defense was substantial and not a mere “moonshine” defense.
• Shital Fibers asserted that Indian Acrylics’ claim could not stand even in summary proceedings under Order XXXVII of the Code of Civil Procedure, 1908, and that the requirements under Section 433(e) and (f) of the Companies Act, 1956, are even more stringent.
• They argued that since there was no agreement to pay interest on delayed payments, the High Court’s direction to consider the interest claim was legally flawed.
• Shital Fibers relied on the judgments in Mediquip Systems (P) Ltd. vs. Proxima Medical System Gmbh, Vijay Industries vs. NATL Technologies Ltd., and IBA Health (India) Private Limited vs. Info-Drive Systems Sdn. Bhd. to support their case.

Respondent (Indian Acrylics Limited) Arguments:

• Indian Acrylics argued that Shital Fibers failed to pay the outstanding amount despite repeated requests. They had to issue a statutory demand notice under Section 434 read with Section 433(e) of the Companies Act, 1956.
• They submitted that Shital Fibers’ reply to the statutory notice was vague and did not present a specific defense. Indian Acrylics pointed out that Shital Fibers had changed their stance from their reply to the notice to their submissions before the Company Court.
• Indian Acrylics contended that the Company Judge and the High Court rightly concluded that Shital Fibers’ defense was not bona fide, and thus, no interference was warranted in the concurrent findings of fact.

Issues Framed by the Supreme Court

The Supreme Court considered the following issue:

1. Whether the defense raised by Shital Fibers regarding the quality of the material supplied by Indian Acrylics was a bona fide and substantial defense to resist the winding-up petition filed by Indian Acrylics.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

• Madhusudan Gordhandas & Co. vs. Madhu Woollen Industries Pvt. Ltd. [ (1971) 3 SCC 632 ] – Supreme Court of India: This case was cited for the established principles on winding up of a company, stating that if a debt is bona fide disputed and the defense is substantial, the court will not wind up the company. It also states that the defence should be in good faith, of substance, likely to succeed in point of law, and supported by prima facie proof.
• Mediquip Systems (P) Ltd. vs. Proxima Medical System Gmbh [ (2005) 7 SCC 42 ] – Supreme Court of India: This case was distinguished as the court found a bona fide dispute concerning the claim, unlike the present case.
• Vijay Industries vs. NATL Technologies Ltd. [ (2009) 3 SCC 527 ] – Supreme Court of India: This case was cited to emphasize that it is not a requirement of law that the entire debt must be definite and certain for admitting a winding-up petition.
• IBA Health (India) Private Limited vs. Info-Drive Systems Sdn. Bhd. [ (2010) 10 SCC 553 ] – Supreme Court of India: This case was distinguished as it involved a bona fide dispute requiring detailed investigation of facts, unlike the present case.

Legal Provisions Considered by the Court:

• Section 433(e) of the Companies Act, 1956: This section states that a company may be wound up if it is unable to pay its debts.
• Section 433(f) of the Companies Act, 1956: This section states that a company may be wound up if the Court is of the opinion that it is just and equitable that the company should be wound up.
• Section 434 of the Companies Act, 1956: This section specifies when a company is deemed unable to pay its debts.

Judgment

How each authority was viewed by the Court:

• Madhusudan Gordhandas & Co. vs. Madhu Woollen Industries Pvt. Ltd. [(1971) 3 SCC 632]: The principles laid down in this case regarding bona fide disputes were affirmed and applied to the present case, but the court found that the present case did not meet the criteria of a bona fide dispute.
• Mediquip Systems (P) Ltd. vs. Proxima Medical System Gmbh [(2005) 7 SCC 42]: This case was distinguished, as in that case, the Court had found a bona fide dispute.
• Vijay Industries vs. NATL Technologies Ltd. [(2009) 3 SCC 527]: The principle that the entire debt need not be undisputed for admitting a winding-up petition was relied upon.
• IBA Health (India) Private Limited vs. Info-Drive Systems Sdn. Bhd. [(2010) 10 SCC 553]: This case was distinguished as the facts required detailed investigation, which was not the case here.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the lack of a bona fide dispute and the contradictory stance taken by Shital Fibers. The court emphasized that the defense raised was an afterthought and not supported by any documentary evidence. The fact that Shital Fibers had used the goods and not raised a dispute in their reply to the statutory notice also weighed against them. The court also considered that the company had taken contradictory stands in order to defeat the claim of the respondent. The court also noted that the appellant had failed to adduce prima facie proof of facts contended by it.

The court’s reasoning was based more on the factual aspects of the case, such as the lack of evidence and the contradictory stands taken by Shital Fibers, than on complex legal interpretations. The court’s decision was driven by the fact that the defense was not genuine.

The court considered whether the defence was in good faith and of substance, whether the defence was likely to succeed in point of law and whether the company had adduced prima facie proof of the facts on which the defence depended. The court found that the appellant failed on all these counts.

The court rejected the argument that the company was an ongoing concern making profits, stating that it was not a requirement in law to establish that the entire claim is undisputed for the petition to be admitted. The court also noted that the High Court had not issued a direction to grant interest as claimed by the respondent but had clarified that the dismissal was without prejudice to the respondent’s contention regarding interest.

The court observed that the defence of the appellant was not a bona fide one nor a substantial one. The court also noted that the appellant had taken contradictory stands in order to defeat the claim of the respondent. The court also concurrently found that the appellant had failed to adduce prima facie proof of facts contended by it.

“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.”

Key Takeaways

• A company cannot avoid a winding-up order by raising a dispute about the quality of goods if the dispute is not bona fide and is an afterthought.
• A company’s defense must be supported by evidence and should not be contradictory to previous statements.
• The court will not entertain defenses that are not made in good faith and are merely to delay or avoid payment of debt.
• The entire debt need not be undisputed for a winding-up petition to be admitted.
• Companies must maintain consistent positions and provide evidence to support their claims in legal proceedings.

Potential Future Impact: This judgment reinforces the principle that companies cannot use frivolous disputes to avoid paying their debts. It sets a precedent that courts will scrutinize defenses closely, especially those that appear to be an afterthought or are not supported by evidence. This will likely make it more difficult for companies to delay or avoid winding-up proceedings by raising unsubstantiated claims.

Directions

No specific directions were issued by the Supreme Court, other than dismissing the appeal. The court upheld the High Court’s decision, which had already allowed the respondent to pursue their claim for interest through other legal means.

Specific Amendments Analysis

There was no discussion about any specific amendments in the judgment.

Development of Law

The ratio decidendi of this case is that a company cannot avoid a winding-up order by raising a dispute about the quality of goods if the dispute is not bona fide, is an afterthought, and is not supported by evidence. The judgment reinforces the existing legal position that a company cannot use frivolous disputes to avoid paying its debts. There is no change in the previous position of law, but the judgment clarifies the application of the principles related to bona fide disputes in the context of winding-up petitions.

Conclusion

The Supreme Court dismissed the appeal of Shital Fibers Ltd., upholding the decision of the High Court to wind up the company. The court found that Shital Fibers had failed to establish a bona fide dispute regarding the quality of goods supplied by Indian Acrylics and had taken contradictory stands. The decision reinforces the principle that companies cannot use frivolous disputes to avoid paying their debts and that courts will scrutinize defenses closely. This judgment serves as a reminder that businesses must maintain consistent positions and provide evidence to support their claims in legal proceedings.