Chettinadu Constructions v. Muthukumarasamy Textiles Ltd: Case Study

In the Supreme Court of India

Introduction

Since 2006 the respondent company (M/s. Muthukumarasamy Textiles Limited) has been a Limited Liability corporation engaged in the textile industry. According to the petitioner (M/s. Chettinadu Constructions represented by Proprietor T. Ravi, Dindigul), the respondent Company’s (M/s Muthukumarasamy Private Ltd.) approved share capital is Rs.11 Crores of 1,10,00,000 Rs.10 shares each, and the published, subscribed, and paid-up share capital is Rs. 3 crores, consisting of 30,00,000 Rs.10/- shares each. The main aim of the respondent business is to carry on the manufacturing, processing, importing, exporting, purchasing , selling and dealing with all forms of yarn such as cotton yarn, polyester cotton yarn, synthetic yarn and polyester yarn in all sorts of counts and hosiery products, ready-made clothing made from cotton , wool , silk, jute, etc.

The respondent company had called for quotations from different individuals and construction firms with an intention to improve its current collection of trends and building and functioning. Petitioner submitted its quote for the design of the building and for its operations. The respondent named the petitioner as Construction agent / builder to build the proposed textile building on the premises of the respondent at Dharapuram, Ottanchathiram Road, Erode District, Tamil Nadu. According to the petitioner, the construction work of Spinning Mill at Dharapuram was done in terms of the agreement and design specifications, and fulfilled its obligations under the construction agreement.

Petitioner notes that he also agreed to perform some additional works, and the extra/additional work performed by him was properly ratified / certified by the Architect specified in the agreement. The applicant used to take advance sums from the respondent from time to time to carry out the construction work. The respondent ordered the Spinning Mill, and took ownership of it.

Background

The petitioner raised the Architect’s duly certified first bill, named in the agreement and the respondent paid the first part bill in a phased way. The petitioner raised the second bill against the respondent after completing the balance and additional construction, and the work undertaken. The Architect also approved and certified the second and final bill, dated 22.2.2008, and according to the petitioner, the respondent failed to pay the second bill amount. In the petition, it is estimated that, according to the terms of the agreement, only 5 percent of the bill sum can be held by the respondent for the purpose of carrying out the defect, if any, to be pointed out by them and no defect has been pointed out by the respondent to date. The term specified in the agreement also expired on 21.2.2009 and on 25.3.2009 the sum which had not been charged to the petitioner sent a statutory notice to the respondent and called on the respondent to pay the second bill. It was also mentioned in the notice that winding-up proceedings would be started if the sum is paid. The respondent issued a reply for the said notice citing untenable reasons for failing to pay the sum. The petitioner therefore filed the petition for the winding up of the respondent business in the Madras High Court. In the petition, it is averred that the respondent has become financially insolvent, and the respondent has the habit of defaulting on payment to several other creditors.

When the company’s application for admission was filed, notice was ordered and submitted in C.A.No.671 of 2009 by the petitioner seeking temporary injunction restricting the respondent, his persons, employees, officers or anyone alleging through it to alienate, dispose of or otherwise encumber all equipment, trade stock and raw materials at M/s. Muthukumarasamy Textiles Ltd., Ponnivadi Village, Yeragampatti Pirivu, Dharapuram to Oddanchatram Main Road, Dharapura, Erode District, Tamil Nadu. The Court granted interim injunction by order dated 20.5.2009.

The respondent filed a counter affidavit both for the application for an injunction and in the petition for the company arguing that the petition for the company is untenable because there is no debt owed to the plaintiff by the respondent.

Facts

The legal notice was issued by the petitioner to the respondent on 1.12.2008; the reply notice was issued by the respondent to the petitioner on 13.12.2008; and the filing before the Court of O.P.No.229 of 2009 pursuant to Section 11 of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator are suppressed in the petition of the Company. It is stated in the counter affidavit that the construction agreement was concluded and that the amount payable under the construction agreement is a sum of Rs.4,84,49,674/- and that the entire amount has already been paid, and after receiving that amount, the petitioner falsely raised a claim for Rs.1,37,68,025.73 in respect of additional work allegedly carried out. According to the respondent no such additional construction was made by the complainant and the claim was presented for the first time in the legal notice dated 1.12.2008 stating that one of M/s. Creators’ Mr.S.Kanagaraj was named as the arbitrator to adjudicate on the argument. By reply notice dated 13.12.2008 the respondent refuted the said allegation made by the petitioner. In compliance with Section 11 of the Arbitration and Conciliation Act, 1996, Petitioner also filed O.P.No.229 of 2008 before this Court and requested for the appointment of an Arbitrator to settle the conflict in this aspect. In the counter affidavit it is also claimed that the above-mentioned facts clearly show that no quantified amount is owed to the petitioner as debt by the respondent. The petitioner having opted to file O.P.No.229 of 2009 before this Court requesting the appointment of an arbitrator, this petition of the corporation file for termination, is untenable. It is claimed in the counter affidavit that Rs.3, 25, 00,740/-, which includes the construction of cotton godown, works in the main building, floor works, cotton godown main building cable and other auto comer, sunshade and other works, were mentioned the estimated cost of the total consideration under the construction agreement works and for all the above said works respondent had paid a sum of Rs.4,84,49,674/- and the said payment was made between 20.11.2006 and 7.11.2007. The second bill dated 22.2.2008 was raised after obtaining the entire sum by claiming that the respondent has requested the above sum in the bill for the additional building. The certification alleged to have been made by the Architect in the bill of 22.2.2008 explicitly includes an assurance that the alleged work regarding the bills also allows the engineer to inspect. In addition, the aforementioned alleged bills do not fall within the reach of the construction agreement. Insofar as the accusation that the respondent is unable to pay the debts to many individuals, the same was done with mala fide and deceptive intention in the full knowledge that the respondent is not payable any sum to the petitioner or to anyone.

The petitioner’s learned counsel argued that the second bill presented by the petitioner was confirmed by the architect in compliance with the terms of the agreement and that there is no disagreement regarding the respondent’s responsibility in paying that sum. The learned counsel also relied on Clause 13 of the Agreement to back his claim. Clause 26 of the Agreement allows for the resolution of all conflicts and disagreements of some kind between the parties pursuant to which the petitioner lodged a motion pursuant to Article 11 of the Arbitration and Conciliation Act, 1996; for appointment of an Arbitrator and the said filing of the petition will not be an embargo to maintain this petition seeking winding up.

The learned counsel relied on this Court’s judgement in Hind Mercantile Corporation Private Ltd. v. J.H.Rayner & Co. Ltd.[1] for the implication that the Company’s claim would not be abated by merely filing a request for the appointment of Arbitration. He also cited the Supreme Court judgement stated in Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd.[2] and argued that the arbitrator had no jurisdiction to order the winding up of the Company and that the winding-up petition could not be referred to the arbitrator.

On the other hand, the learned counsel for the respondent submitted that the petitioner had approached this Court by not stating the correct facts, in particular with regard to the petitioner’s notice issued on 1.12.2008, the respondent’s reply issued on 13.12.2008, disagreeing with the proposal to appoint an arbitrator viz., Sri. S.Kanagaraj of M/s. Creators and the subsequent filing of arbitration O.P.No.229 of 2009 under Section 11 of the Arbitration and Conciliation Act, 1996, praying this Court to appoint a sole arbitrator for resolving the dispute between the petitioner and respondent. Even the learned counsel argued that there is no debt owed to the plaintiff by the respondent. The learned counsel argued that if a debt is properly challenged and the defence is serious, the Court would not wind up the business. The learned counsel also cited the Supreme Court’s decision to the effect that if a dispute is already referred to Arbitration and the same is awaiting adjudication, no winding-up petition can be sustained as there is bona fide protection, which must be deterred. An unreported opinion of this Court’s Bench Division in O.S.A.No.319 of 2007 dated 4.9.2008 is also cited to demonstrate that while a case is pending in respect of liability, the motion of the plaintiff to pressurise the respondent to make payment is untenable.

Issues

1. When did the actual arbitral proceedings commenced as contained in Section 21 of the Arbitration and Conciliation Act, 1996?
2. Whether winding up petition is maintainable after the disputes are raised or referred to arbitration and when the adjudication is pending?

Related Provisions

• Sections 433(e) & (f), 434(1) and 439(1) of the Companies Act, 1956
• Section 11 of the Arbitration and Conciliation Act, 1996
• Section 21 of the Arbitration and Conciliation Act, 1996
• Section 557 of the Companies Act, 1956

Related cases

Cases related to Issue 1:-

Issue- when did the actual arbitral proceedings as contained in Section 21 of the Arbitration and Conciliation Act, 1996 commenced?

These case laws will help to determine that when the arbitrational procedure is deemed to be commenced.

1. Milkfood Ltd. v. GMC Ice Cream (P) Ltd.[3]

As noted earlier, Section 21 of the 1996 Act specifies when the arbitral proceedings will be considered to have begun. While Section 21 can be understood to lay down a provision for the purposes of the said Act, the same must be given its full force in view of the fact that it also contains the repeal and saving clause. Accordingly, Article 21 of the Act must be read in view of Section 85(2) (a) of the 1996 Act. If so understood, the notification service and/or the issuance of a request for the appointment of an arbitrator in the arbitration agreement must be treated as deciding the start of the arbitration proceedings.

Keeping in view the fact that in all the decisions, referred to hereinbefore, the Court has applied the meaning given to the expression commencement of the arbitral proceeding as set out in Section 21 of the 1996 Act with respect to Section 85(2)(a) of the 1996 Act, thereof, we do not hesitate to argue that, in this case too, notification of the appointment of an arbitrator will be the appropriate date for the start of the arbitration proceedings.

2. P. State Sugar Corporation Ltd. v. Jain Construction Co[4]

The only question that remains for consideration is whether the Act of 1996 refers to the facts of the present case.

Disputes between the parties emerged in the year 1991. On 1-5-1991 the respondent filed an application. It invoked the contract for arbitration as provided for in clause 34 of the contract. Therefore the arbitral proceedings were put in motion. As regards Section 21 of the 1996 Act, the arbitral proceedings relating to a particular dispute start on the date on which the respondent submitted the request for referral to arbitration.

Cases related to issue 2

Issue- Whether winding up petition is maintainable after the disputes are raised or referred to arbitration and when the adjudication is pending?

Pradeshiya Industrial & Investment Corporation of U.P. v. North India Petrochemicals Ltd. and Another[5]

As mentioned above, it should be noted that the second respondent has already referred the dispute to arbitration pursuant to clause 27 of the promoter agreement for adjudication alleging substantive violations of the promoter agreement and as an option for contract violation damages. The said quantity is the basis of the winding-up petition, since it is one of the arguments before the arbitrators in the arguments document. One more point needs to be noted; as per the notice dated October 31, 1992, the promoters agreement had already been terminated.

In view of the above, the appellant refused the duty to pay the balance not only in the petition for the corporation but also before the arbitrators for different reasons. It was advised, inter alia, that the winding-up petition was untenable. The argument itself was a dubious one. It was a matter that needed to be adjudicated. Therefore, it was not a debt as provided for in Sections 433 and 434 of the 1996 Act.

4. Tube Investments of India Ltd. v. Rim and Accessories (P) Ltd[6], Comp has evolved following principle related payment of sum towards the principal :-

(i) if there is a dispute over the payment of the sum to the principal, however small that amount may be, a motion for termination shall not be denied and a civil court shall be the appropriate venue for deciding any dispute between the parties;

(ii) the existence of a dispute over payment of interest can not in any way be perceived as the existence of a bona fide dispute relegating the parties to a civil court because, in such a situation, the Company Court itself is qualified to determine the dispute in the winding-up proceedings;

(iii) Where there is no bona fide conflict over the amount owed to the borrower, it shall be open to the creditor to obtain all remedies to file a civil suit and to file a motion for the liquidation of the company.

Judgement

On the question of when did the arbitration process eventually began the court ruled that the arbitration proceedings began as per Section 21 of the Arbitration and Conciliation Act, 1996, which is extracted hereunder:

“Commencement of arbitral proceedings, unless otherwise decided by the parties, the arbitral proceedings in respect of a specific dispute shall begin on the date on which the respondent receives a request for referral of that dispute to arbitration.”

Accordingly, section 21 of the Act must be read in view of Section 85(2) (a) of the 1996 Act. Once it is so construed, indisputably the service of notice and/or issuance of request for appointment of an arbitrator in terms of the arbitration agreement must be held to be determinative of the commencement of the arbitral proceeding.

 Keeping in view the fact that in all the decisions, referred to hereinbefore, this Court has applied the meaning given to the expression commencement of the arbitral proceeding as contained in Section 21 of the 1996 Act “the court has no hesitation in holding that, service of a notice for appointment of an arbitrator would be the relevant date for the purpose of commencement of the arbitration proceeding.”

Therefore the court stated that it is clear that arbitration proceedings have already started in the conflict between the petitioner and the respondent.

The court decided upon the issue of winding up of the company by establishing two rules:-

First, if the debt is contested bona fide and the defense is strong, the court will not wind up the company. A winding-up petition was rejected by the court where the creditor requested a quantity of goods sold to the company and the company argued that no price had been negotiated and that the amount sought by the creditor was unfair.. Again, a request for winding-up by a creditor requesting reimbursement of the negotiated amount for the company’s works while the company argued that the work had not been completed properly was not permitted.

Second, the court would not rule on a claim where the debt is undisputed that the company has the capacity to pay the debt but the company decides not to pay the specific debt. However, where there is no question that the corporation owes the creditor a debt entitling him to a winding-up order but the exact amount of the debt is contested, the court will issue a winding-up order without requiring the creditor to specifically calculate the debt. The principles on which the court acts are, firstly, that the company’s defense is in good faith and, secondly, that the defense is likely to be successful in law and, thirdly, that the company presents prima facie evidence of the facts on which the defense relies.

Frequently Asked Questions

1. How is actual time of commencement of process of Arbitration determined?
2. What are the principles established by court in order to pass a judgement related to winding up of a company?
3. What are the important cases acknowledged by the court in deciding this case?
4. How Section 21 of the Arbitration and Conciliation Act, 1996 came into picture in this case
5. Relevance of Companies Act,1956

References

• www.lawerservices.in
• www.casemine.com
• www.indiankanoon.com
• www.scconline.com
• www.manupatra.in

[1] [1971] 41 Comp Case 548

[2] (1999) 5 SCC 688

[3]  7 SCC 288 (2004)

[4]  7 SCC 332 (2004)

[5]  3 SCC 348     (1994)

[6]  2003 129 STC 238