Company Petition No. 200 of 2004. Case: Walnut Packaging (P) Ltd. Vs The Sirpur Paper Mills Ltd. and Anr.. High Court of Andhra Pradesh (India)
| Case Number | Company Petition No. 200 of 2004 |
| Counsel | For Appellant: M. Ravindranath Reddy, Adv. and For Respondents: Vedula Srinivas, Adv. |
| Judges | V.V.S. Rao, J. |
| Issue | Companies Act, 1956 - Section 433(1)(a) |
| Citation | 88 CLA 70, 9 CLC 1544, 2008 (4) CLJ 360, (2008) 80 CC 200, 144 CompCas 454 |
| Judgement Date | March 18, 2008 |
| Court | High Court of Andhra Pradesh (India) |
Order:
V.V.S. Rao, J.
Petitioner (hereafter called, Walnut) is a private limited company running a small scale industry. Its core business is manufacturing and marketing pre- printed cartons of paper board and notebooks. It also provides customised services to other enterprises. Second respondent (hereafter called, subsidiary company) is a public company set up for manufacturing and marketing of various educational, commercial, computer stationery products. First respondent (hereafter called, holding company) is a public limited company engaged in the business of manufacturing and marketing of pulp and paper of all kinds, paper articles and pulp material. Second respondent is wholly owned subsidiary of first respondent. During the period from 31.1.2001 to 29.5.2001, Walnut statedly processed products of subsidiary and raised invoices for an amount of Rs. 4,80,951/- towards processing/service charges. The business deal consists of subsidiary supplying material and Walnut processing material to required specifications and charge for the same. An amount of Rs. 1,54,755/- was paid leaving alleged balance of Rs. 3,26,197/-. Walnut again issued a legal notice dated 17.9.2001 under Section 434 of the Companies Act, 1956 (the Act, for brevity), demanding payment of balance amount with interest at 35% per annum within 21 days. In reply thereto subsidiary company requested Walnut to return balance material. Request for return of unprocessed pulp board was refused claiming lien for non-payment.
In May 2002, there was mediation between Walnut and subsidiary company before an Advocate of second respondent. It was agreed that subsidiary company would pay Walnut after return of pulp board. Petitioner returned material on 04.6.2002, but amount was not paid. In 2003 Walnut issued notice dated 08.4.2003 under Section 434 of the Act demanding Rs. 6,51,362/- including interest. There was no response. Walnut then contacted Senior Vice President (Corporate Planning) of holding company. At his instance, a General Manager (GM) negotiated with Director of Walnut between 19.12.2003 and 18.1.2004. GM allegedly agreed to pay principal amount as per books of accounts of subsidiary company. In 2004, Walnut addressed letter dated 20.1.2004 to subsidiary company requesting to release principal amount as per latter's books of accounts. There was no expected response. Subsidiary company went back and asked Walnut to accept amount as per books of accounts towards full and final settlement.
In the meanwhile, holding company allegedly transferred an amount of Rs. 77.74 lakhs during 2001-2002 and 2002-2003 from accounts of subsidiary to itself without making payments to small scale units like Walnut. It is also stated that holding company had been regularly declaring dividends to its members deliberately withholding payments to small scale units. As subsidiary company failed to pay alleged admitted amount, Walnut got issued yet another statutory notice dated 23.7.2004. This notice was issued to holding company as well as subsidiary company on the allegation that holding company is also liable to pay dues of subsidiary company. Walnut demanded a sum of Rs. 8,18,081/-. There was no demand to holding company, but it was called upon to take appropriate steps in getting the amounts paid to Walnut within time. It is also informed that failure would entail recovery from holding company by piercing corporate veil of subsidiary company and filing a petition under Section 433 of the Act against holding company seeking winding it up. The said notice was issued without prejudice to right of Walnut to proceed for recovery under the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993.
Subsidiary company as well as holding company sent separate reply notices. In their reply dated 20.8.2004, holding company demurred liability to pay debt of subsidiary company and informed that dragging holding company into the dispute between subsidiary company and Walnut is uncalled for and legally untenable. Subsidiary company in their reply dated 17.8.2004 alleged that statutory notice is bordering on extraneous considerations such as lifting of corporate veil of subsidiary company to rope in holding company, tracing corporate history of other subsidiary companies and also threatening to invoke IDP Act as well as claim Rs. 1.00 lakh towards alleged harassment and charges relating to the issue. They informed Walnut that the amount claimed by petitioner is disputed that it is not a simple debt and that the allegation that subsidiary is not able to pay its debt is not correct. After receiving reply notices, present company petition was filed on 26.11.2004 seeking winding up of holding company and subsidiary company.
Learned Counsel for petitioner submits that debt transaction between Walnut and subsidiary company involves ascertained admitted amount and when once subsidiary company failed to pay amount within three weeks after service of notice under Section 434(1)(a) of the Act, subsidiary company is liable to be wound up under Section 433(e) of the Act. He has taken this Court through correspondence between Walnut and subsidiary company as well as annual reports of subsidiary company for the years 2000-2001 to 2003-2004 to substantiate submission that it is admitted liability. Secondly he submits that directors and employees of subsidiary are also directors and employees of holding company. An amount of Rs. 1.5 crores was extended as a loan by holding company to subsidiary company, who later appropriated cash reserves of Rs. 1.5 crores without paying dues of Walnut. He would urge that subsidiary as an extended arm/department of holding company rendering it liable for the debt of subsidiary company. As holding company also failed to discharge the debt after receiving notice dated 23.7.2004, it has to be wound up, as it is also responsible to pay debts of subsidiary company. Learned Counsel also points out that both the companies operate two different facets of same business of manufacturing paper, paper pulp, pulp board and other paper products and never treated as separate entities by general public, that financial and managerial services are provided by holding companies, that subsidiary company does not enjoy corporate autonomy and holding company used it to defraud creditors so as to escape legal obligations to pay the debt. Subsidiary company is a group company without any independent existence and both companies have community interest and identity as a single economic entity. He would contend that for all purposes, it is the holding company, which is liable to discharge the debt of subsidiary company. He placed reliance on various decisions in support of plea to lift veil and also in support of plea that subsidiary company has acknowledged liability to pay ascertained debt.
Learned Counsel for respondents...
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