Sunil Ambwani, J. - (1.) THIS creditor's winding up petition was filed in the 1 year 2000 to wind up Hindustan Ferro and Industries Ltd., with its registered office at first floor, 117/C -28/81, Sarvodaya Nagar, Kanpur (UP), on the ground that it has failed and is unable to pay its admitted dues for the material supplied to the respondent -company and for which the advance cheques for Rs. 1,15,962 dated December 5, 1997 and Rs. 1,15,963 dated December 12, 1997, have been dishonoured on the instruction of the respondent -company. The statutory notice dated August 7, 1999, was sent by registered post to the registered office of the company demanding a sum of Rs. 2,52,508, to which no reply has been received from the respondent -company. I have gone through the defence taken by the respondent -company in the counter -affidavit of Hausala Prasad Tiwari holding power of attorney on behalf of the board of directors of the company. Paragraphs 7 to 11 of the counter -affidavit are quoted below: 7. That, although the payment for the entire supply was made through post -dated cheques, but the raw material was not used. When the company used the raw material namely, petro carbon supplied by the petitioner in manufacturing the ferro crome and ferro silicon, it was pointed out by the factory manager that petro carbon supplied by the petitioner is not as per required specification, as such the company made a complaint to the petitioner about the defect in the petro carbon supplied by the petitioner. The petitioner assured the company that the goods is as per the specification and asked the company to use the material. It was also assured by the petitioner that in case there is any defect in the final product, viz., ferro crome and ferro silicon the petitioner will indemnify the losses. On this assurance, the company started using the petro carbon supplied by the petitioner. It is also pertinent to mention that the company had also intimated to the petitioner through letter dated August 1, 1997, that the use of petro carbon supplied by the petitioner is at the risk of the petitioner and as assured by the petitioner, if there is any defect in the final product, the petitioner will be bound to indemnify the same. A true copy of the letter dated August 1, 1997, is being filed herewith as annexure CA 2 to this affidavit. That when the product was supplied to the customers by the company, the customers made a complaint about the final product, viz., ferro crome and ferro silicon as such the company made an analysis of the final product and in the chemical analysis, it was found that the ferro silicon was having excess percentage of aluminium and excess sulphur powdering and similarly the ferro crome was having excess percentage of carbon. Both these defects were due to supply of defective petro carbon by the petitioner. That, after ascertaining the defects due to defective supply of petro carbon by the petitioner, the company complained to the petitioner over phone and the petitioner agreed to indemnify the loss to the extent of rupees two lakhs, although the company had suffered a loss to the extent of Rs. 2.82 lakhs. The petitioner also assured the company that a credit note to the extent of rupees two lakhs will be issued shortly. Despite the assurance, the petitioner did not issue credit note of rupees two lakhs, hence the company has written a letter dated December 28, 1998, asking the petitioner to issue credit note of rupees two lakhs so that the payment of two cheques be cleared. A true copy of the aforesaid letter dated December 28, 1998, is being filed herewith as annexure CA3 to this affidavit. 8. That despite assurance given by the petitioner to issue credit note of rupees two lakhs, the petitioner has not issued the credit note of the said amount of rupees two lakhs, as such another request was made by the company to the petitioner to return the two cheques, each amounting to Rs. 1,15,962 and Rs. 1,15,963 so that the balance amount be paid to the petitioner. Despite this request made by the company, neither a credit note of rupees two lakhs was issued nor the cheques were returned to the company as such the company had again, vide its letter dated January 13, 1999, made a request for issuing a credit note so that the balance outstanding could be paid. A true copy of the letter dated January 13, 1999, is being filed herewith and is marked as annexure CA4 to this affidavit. 9. That it is pertinent to mention that the following dealers have suffered loss on account of the defective supply of material by the company. As already stated above, the said defective material was supplied only on account of defective petro carbon supplied by the petitioner. It is reiterated that the defective petro carbon was used by the company only after assurance given by the petitioner to indemnify if the company suffers any loss on account of supply of defective petro -carbon. The details of the customers to whom the company has assured to compensate or indemnify is as under: (Rs.) (a) M/s. Ambika Steel Ltd., 51/2, Industrial Area, Site No. 4, Sahibabad, Ghaziabad 19,931 (b) Sri Ishar Alloy Steel Ltd., Sector -D, Industrial Area, Sukhilia, Sanwer Road, Indore 49,522 (c) M/s. H.C. Ferro Alloy Ltd., 1165, Main Meerut Road, Opposite DPS, Ghaziabad 1,54,510 (d) M/s. Alloys and Chemicals, 410, Konark, 16/2, Manoramganj, Indore 60,785
(2.) A perusal of the defence in these paragraphs shows that the supply was made after receiving post -dated cheques. Initially, the respondent -company pointed out that the material supplied were not as per required specification. However, on the assurance of the petitioner -company these materials were used in manufacturing the product, namely, ferro crome and ferro silicon supplied to the purchasers. It is stated in paragraph 11 that four of the purchasers of the finished products have withheld payments on account of defective material supplied to them. The respondent has relied upon the statement of their accounts showing -an outstanding of the amounts mentioned in paragraph 11. The company which is unable to pay its debts may be wound up by the court. The discretion, however, conferred under Section 433(e) of the Companies Act, 1956, must be exercised on the settled principles of law. Where a creditor, after giving statutory demand notice under Section 434(1) (a) of the Act, applies to winding up the respondent -company, the court has a duty to investigate and to find out whether the conditions of insolvency in the commercial sense are indicated. The proceedings under Section 433 of the Act are not to be used for the purposes of enforcement of an agreement or for recovery of the amount. The object of the proceedings is to find out whether the company is in a position to meet its current liabilities. If it is commercially insolvent it is liable to be wound up, though it may have very valuable assets, which are not immediately realisable.
(3.) IN Dhootpapeshwar Sales Corporation P. Ltd., In re, [1972] 42 Comp Cas 139 (Bom), it was held that "commercially insolvent" means unable to pay its debts or liabilities as they arise in the ordinary course of business.;