2017 (6) TMI 303 - HC - Companies Law

Winding up petition - respondent is unable to pay its debts - Held that - It is held that if the creditor s debt is bona fide disputed on substantial grounds, the court should dismiss the petition and leave the creditor first to establish his claim in an action, lest there is danger of abuse of winding up procedure. The Company Court always retains the discretion, but a party to a dispute should not be allowed to use the threat of winding up petition as a means of forcing the company to pay a bonafide disputed debt. If there is no dispute as to the company s liability, the solvency of the company might not constitute a stand alone ground for setting aside a notice under section 434(1)(a), meaning thereby, if a debt is undisputedly owing, then it has to be paid. If the company refuses to pay on no genuine and substantial grounds, it should not be able to avoid the statutory demand. The law should be allowed to proceed and if demand is not met and an application for liquidation is filed under section 439 in reliance of the presumption under section 434(1)(a) that the company is unable to pay it debts, the law should take its own course and the company of course will have an opportunity on the liquidation application to rebut that presumption. In view thereof, in this case the defence of the respondent is totally spurious, speculative, illusory or misconceived and moonshine and not bonafide dispute on specific ground. The respondent is not able to avoid statutory demand by raising any specific dispute and thus deserves to face consequence of winding up on the ground that the respondent is unable to pay its debts. A perusal of the record clearly indicates that the respondent is unable to pay its debts and deserves to be wound up.

Issues Involved:
1. Petition for winding up under sections 433(e) and (f) and 434 of the Companies Act, 1956.
2. Respondent’s inability to pay debts.
3. Just and equitable grounds for winding up.
4. Execution and performance of the Deal Memo.
5. Payment of commission to the petitioner.
6. Dishonoured cheque and statutory notice.
7. Pending suits and arbitration.
8. Alleged suppression of facts by the petitioner.
9. Frustration of contract under section 56 of the Indian Contract Act, 1872.
10. Financial condition of the respondent.
11. Legal precedents and their applicability.

Detailed Analysis:

1. Petition for Winding Up:
The petitioner filed a petition under sections 433(e) and (f) and 434 of the Companies Act, 1956, seeking the winding up of the respondent on the grounds of inability to pay its debts and just and equitable reasons for winding up.

2. Respondent’s Inability to Pay Debts:
The petitioner argued that the respondent was unable to pay its debts, citing a dishonoured cheque for ?19,99,600/- and the respondent’s failure to pay the commission due under the Deal Memo. The respondent admitted to receiving ?4,75,32,060/- from partners introduced by the petitioner but failed to pay the petitioner’s commission.

3. Just and Equitable Grounds for Winding Up:
The court considered the respondent’s poor financial condition, including negligible bank balance, continuous losses, and siphoning off of funds, as just and equitable grounds for winding up.

4. Execution and Performance of the Deal Memo:
The Deal Memo dated 21st May, 2010, appointed the petitioner as the respondent’s representative to negotiate with potential licensing and merchandising partners. The petitioner introduced nine clients, and the respondent executed agreements with eight of them, totaling ?14,47,50,000/-. The petitioner claimed a 20% commission on this amount.

5. Payment of Commission to the Petitioner:
The respondent agreed to pay the petitioner a 20% commission on the gross revenues due from each partner. The petitioner argued that its entitlement to the commission was not dependent on the successful execution or performance of the contracts by the respondent.

6. Dishonoured Cheque and Statutory Notice:
The respondent issued a cheque for ?19,99,600/- to the petitioner, which was dishonoured. The petitioner issued a legal notice demanding ?2,96,50,000/- along with interest. The respondent admitted the execution of the agreement but denied the petitioner’s claims.

7. Pending Suits and Arbitration:
The respondent filed suits and arbitration proceedings, including a suit for a declaration that the Deal Memo was frustrated. The petitioner also filed a suit for recovery of the commission amount. The court held that the pendency of these proceedings did not bar the petitioner from pursuing the winding up petition.

8. Alleged Suppression of Facts by the Petitioner:
The respondent alleged that the petitioner suppressed the fact of filing a suit while obtaining the order of admission for the company petition. The court found no merit in this submission, noting that the petitioner was entitled to pursue both the winding up petition and the civil suit simultaneously.

9. Frustration of Contract under Section 56 of the Indian Contract Act, 1872:
The respondent argued that the Deal Memo was frustrated due to the failure of the Commonwealth Games Committee to award rights. The court rejected this argument, stating that the petitioner’s entitlement to the commission was crystallized upon introducing the partners and the execution of agreements.

10. Financial Condition of the Respondent:
The court examined the respondent’s financial documents, noting continuous losses, negligible bank balance, and no revenue from operations. The respondent’s financial condition supported the petitioner’s claim for winding up.

11. Legal Precedents and Their Applicability:
The court distinguished the judgments cited by the respondent, finding them inapplicable to the facts of the case. The court relied on the principle that a party responsible for the frustration of a contract cannot benefit from it and must fulfill its obligations.

Conclusion:
The court found the respondent’s defences to be frivolous and moonshine, and ordered the winding up of the respondent company. The Official Liquidator was appointed to take charge and possession of the respondent’s property and assets. The court held that the petitioner was entitled to pursue both the winding up petition and the civil suit for recovery of the commission amount.

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