2013 (10) TMI 452 - HC - Companies Law

Winding up petition - recovery of debt - it was contended that respondent failed to Create a mortgage of the residential flat by deposit of title deeds - Convert the bonds into equity shares despite the exercise of option by the Appellant. Consequently, in terms of the letter of restructuring, more particularly Clause 11, the entire debt due under the facility became payable and was recalled by the Appellant. - Single Judge bench rejected winding up application - Held that - once the Respondent committed a default in complying with the terms and conditions of the letter of sanction, the Appellant was justified in recalling the amount due under the facility. The amount became due and payable on default. There is clearly a debt due and payable which fulfils the mandatory institution of a proceeding for winding up. An effort was made to mislead the Company Judge by filing before the learned Single Judge in Annexure 6, a typed statement that would seem to suggest that collateral security to secure the amount of Rs.3.50 crores was created in respect of three residential properties. As a matter of fact, it is not disputed at the hearing that the title deeds were not deposited with the Appellant. An equitable mortgage cannot be created without the deposit of title deeds and merely on a typed statement. The petition for winding up shall stand admitted and there shall be consequential orders in usual terms for the issuance of an advertisement and publication.

Summary

Issues:
- Dismissal of winding up petition based on breach of restructuring terms.
- Whether debt due and payable justifies winding up petition.
- Compliance with terms of restructuring facility.
- Interpretation of handwritten endorsement regarding legal proceedings withdrawal.
- Justification for recalling entire debt due to default under restructuring terms.
- Replacement of debt by contractual settlement.
- Substantial compliance with restructuring terms.
- Error in dismissing winding up petition.

Analysis:

The judgment by the High Court of Bombay dealt with the dismissal of a winding up petition based on a breach of restructuring terms. The Appellant had granted a Reverse Factoring Facility to the Respondent, which led to disputes and dishonored cheques. The restructuring terms were communicated, including conversion of debt into Optionally Convertible Redeemable Bonds (OCRBs) and creation of a mortgage. However, the Respondent failed to comply with these terms, leading to the Appellant recalling the entire debt.

The Court analyzed the terms of restructuring and the Respondent's failure to convert bonds into equity shares or create the required mortgage. The Respondent's defense of replacing the debt with a contractual settlement was rejected, as the restructuring did not discharge the debt but imposed conditions for compliance. The Court found the Respondent in breach of the restructuring terms, justifying the Appellant's decision to recall the debt and file a winding up petition.

The judgment also scrutinized the interpretation of a handwritten endorsement regarding the withdrawal of legal proceedings. The Court clarified that the withdrawal was subject to strict compliance with the restructuring terms, highlighting the Respondent's failure to fulfill obligations. The Court disagreed with the Single Judge's finding of substantial compliance, noting discrepancies in the Respondent's actions and misleading information provided.

Ultimately, the Court concluded that there was a debt due and payable, justifying the admission of the winding up petition. The appeal was allowed, setting aside the previous order and directing the admission of the petition with consequential orders for publication. The Appellant was instructed to deposit necessary costs, charges, and expenses. The judgment highlighted errors in the dismissal of the petition and granted liberty to the Appellant for further reliefs, with no order as to costs.

In summary, the judgment emphasized the importance of compliance with restructuring terms, the consequences of default, and the justification for initiating a winding up petition based on non-compliance. The Court's detailed analysis clarified the legal obligations of the parties and upheld the Appellant's right to seek winding up due to the Respondent's breaches.