2013 (8) TMI 578 - HC - Companies Law

Winding up u/s 433(e) r.w 434(1)(a) - Inability to pay Debts - Petition for winding up was made on the ground of Defendant s inability to pay its debts Held that - The order of winding up of the company to be kept in abeyance for a period of eight weeks to give JIL one last opportunity to make payment to E&Y of the admitted liability to the satisfaction of E&Y The present petition will be disposed of leaving it open to E&Y to institute other appropriate proceedings in accordance with law to recover the balance amount claimed by it - If such payment was not made by JIL to E&Y Following order would become immediately operational - The OL was appointed as the Provisional Liquidator ( PL ) of the JIL. The OL was directed to take over all the assets, books of accounts and records of the JIL immediately upon this order becoming effective - The OL shall in that event also prepare a complete inventory of all the assets of the JIL before sealing the premises in which they are kept - He may also seek the assistance of a valuer to value the assets - He was permitted to take the assistance of the local police authorities, if required Decided in favor of Petitioner.

Issues Involved:
1. Inability to pay debts.
2. Validity and enforceability of the engagement and success fees.
3. Admission of liability and the effect of correspondence between the parties.
4. Discrepancy in the claimed amount due to fluctuating foreign exchange rates.
5. Commercial solvency of the respondent company.

Detailed Analysis:

1. Inability to Pay Debts:
The petition was filed by Ernst and Young Private Limited (E&Y) under Section 433(e) read with Section 434(1)(a) of the Companies Act, 1956, seeking winding up of Jagson International Limited (JIL) on the ground of its inability to pay its debts. E&Y claimed that JIL failed to pay the admitted debt of Rs.7,94,65,462 along with interest @ 12% per annum despite several reminders and a legal notice.

2. Validity and Enforceability of the Engagement and Success Fees:
The engagement between E&Y and JIL was formalized through a Letter of Engagement (LOE) dated 1st April 2008, which outlined the structure of fees as 'Engagement fees' and 'Success fees'. Clause 3.3.1 and 3.3.2 detailed these fees. The engagement fees were payable at different milestones, and the success fees were contingent upon the transaction closing. Despite JIL's contention that the transaction did not materialize as originally envisaged, Clause 3.3.2 of the LOE made it clear that the success fee would not be prejudiced even if the transaction evolved from the original terms. The Court found that E&Y was entitled to the success fee as they had provided assistance in obtaining finance, which was within the scope of the LOE.

3. Admission of Liability and Effect of Correspondence:
JIL's letter dated 27th January 2011 acknowledged the receipt of E&Y's invoice and cited cash-flow mismatches as the reason for non-payment, which constituted an admission of liability. Further, emails from JIL's Director, Mr. Pradeep Gupta, requesting more time for payment, reinforced this admission. The Court noted that JIL did not dispute the invoices or terminate the LOE, nor did it communicate any objections to the fees claimed by E&Y until the present proceedings.

4. Discrepancy in the Claimed Amount Due to Fluctuating Foreign Exchange Rates:
The Court acknowledged the discrepancy in the figures due to fluctuating foreign exchange rates. However, it accepted E&Y's readiness to accept the success fee at the original rate of 0.9% as stated in the LOE, provided JIL made the payment.

5. Commercial Solvency of the Respondent Company:
JIL argued that it was commercially solvent with an annual turnover of Rs.220 crores and 250 employees, and thus should not be wound up. However, the Court referred to the Supreme Court's observations in IBA Health (India) (P.) Ltd v. Info-Drive Systems SDN. BHD, stating that commercial solvency is not a standalone ground to reject a winding-up petition if the debt is undisputedly owing and the company refuses to pay without genuine and substantial grounds.

Conclusion:
The Court found that JIL had an admitted liability towards E&Y, which it was unable to pay. The petition was admitted, and the Official Liquidator (OL) attached to the Court was appointed as the Provisional Liquidator (PL) of JIL. The OL was directed to take over all assets, books of accounts, and records of JIL. This order was kept in abeyance for eight weeks to allow JIL a final opportunity to make the payment to E&Y. If JIL failed to make the payment within this period, the OL would proceed with the liquidation process. The petition was listed for further hearing on 25th September 2013.

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