2010 (8) TMI 169 - HC - Companies Law

Winding up petition on the ground that it is unable to pay its debts - Held that - In the event of the Respondent paying the Petitioner an amount of ₹ 58,24,000 on or before 10-2-2011 and a further sum of ₹ 2,24,00,000 in 18 equal monthly instalments payable on or before the 10th day of each month commencing from 10-2-2011 together with interest on the reducing balance at 13 per cent per annum the company petition shall stand dismissed. In the event of the company making default in payment of any three instalments or the last two instalments the company petition shall stand admitted without further orders and in that event to be advertised in free press journal, Maharashtra Times and Maharashtra Government Gazette. The Petitioner to deposit an amount of ₹ 10,000 with the Prothonotary and Senior Master of this Court within four weeks from the date of default.

Summary

Issues Involved:
1. Petition for winding up of the respondent-company due to inability to pay debts.
2. Legality and enforceability of derivative transactions.
3. Financial condition and potential revival of the respondent-company.
4. Appropriate relief and payment schedule for the petitioner.

Detailed Analysis:

1. Petition for Winding Up:
The petitioner sought the winding up of the respondent-company on the grounds of its inability to pay debts. The respondent had availed various facilities from the petitioner, including a revolving facility to hedge foreign currency exposure. The respondent admitted liability for sums due under forward contracts but faced financial difficulties.

2. Legality and Enforceability of Derivative Transactions:
The respondent argued that the transactions were illegal and contrary to public policy, constituting a wager under Section 23 of the Indian Contract Act. However, the court found no merit in this defense, referencing statutory provisions and circulars permitting such transactions. Sections 45U(a) and 45V of the Reserve Bank of India Act, 1934, and relevant provisions of the Foreign Exchange Management Act, 1999, validated the transactions. The court concluded that the transactions were legal, valid, and binding.

3. Financial Condition and Potential Revival:
The respondent faced a severe financial crisis but employed about 2,500 people. A consortium of 13 banks, led by the State Bank of India, had sanctioned a financial arrangement for the respondent, indicating a possibility of overcoming the crisis. The assessment note highlighted the respondent's reputable position in the diamond industry and the impact of global recession on its financial health. The court acknowledged the respondent's temporary financial difficulties but noted the potential for revival based on the consortium's support and restructuring plan.

4. Appropriate Relief and Payment Schedule:
The court decided against immediate winding up, considering the respondent's potential to overcome financial difficulties. Instead, a phased payment schedule was ordered. The respondent was directed to pay Rs. 58,24,000 by 10-2-2011 and Rs. 2,24,00,000 in 18 equal monthly installments with interest at 13% per annum. Failure to pay any three installments or the last two installments would result in the petition being admitted and advertised.

Conclusion:
The court balanced the interests of the petitioner and the respondent, emphasizing the public interest in allowing the respondent an opportunity to recover financially. The phased payment schedule provided a structured approach to settle the petitioner's dues while considering the respondent's potential for revival.