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TMI Blog2007 (3) TMI 386X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent-company in violation of various statutory provisions. It was also held that the provisions of section 433( f ) of the Act were attracted in view of seizure of property by the Enforcement Directorate and as commercial operations of the respondent had come to a standstill. 3. Provisional Liquidator was also appointed to take into his possession, the assets and records of the respondent-company and file his report. 4. The provisional liquidator has filed his report giving names and addresses of the directors of the company and stated that the registered office was found to be locked. It was further stated that directors, Mr. Deepak Sipani and Mr. S. Malhotra, had resigned and had furnished a copy of Form 32 filed with the Registrar of Companies, Delhi and Haryana. 5. Subsequently, the respondent-company filed an application CA 895/2005 stating, inter alia , that respondent was not aware of the present petition and facts have been concealed. It was further stated that the petitioner is a business partner and not a customer and various communications exchanged between the parties had not been brought on record. Lastly, reliance was placed upon the orders passed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produce below the relevant clauses of the agreement dated 5-5-1999 : "AGREEMENT FOR CONTRACTS OF SALE ****** WHEREAS the seller is inter alia engaged in the business of sale and distribution of Canadian gold coins (Maple Leaf), which are hereinafter referred as the gold coins . AND WHEREAS the purchaser is desirous of entering into an agreement for sale of gold coins in accordance with and in terms of the Marketing Plan of the Seller. AND WHEREAS the seller and the purchaser have agreed to enter into this agreement for a minimum of four (4) contracts of sale of gold coins amounting to Rs. 49,300 each. 1.****** 2.The purchaser makes a down payment of Rs. 15,000 towards each contract of sale amounting to a total of Rs. 60,000. The balance of the purchased price is deemed to have been paid by the purchaser the moment fourteen (14) new contracts of sale have linked up with the contract of sale in question, as fully described in detail in the marketing plan of the seller, Phase I, which is Schedule I to this agreement. 3.****** 4.****** 5.The purchaser declares that he has read and understood the terms and conditions which are above and on the reverse of this ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise to attain the purchase price via commission or other income which third parties have held out the prospect to him. III.that the purchaser is aware of the fact that he is neither to be entitled to a repayment of the aforementioned down payment in Phase 1 of Rs. 15,000 per contract of sale referred to in article 1, nor to be applicable down payments that are entered as such in Phase II and Phase III and consequently irrevocably relinquishes these. IV.that the marketing plan was once again explained to him and that he has received a copy thereof. The marketing plan is an integral part of this agreement." 11. A bare perusal of the aforesaid contract and the terms and conditions mentioned therein show that the respondent-company had invited offers from public for purchase of gold coins as per the scheme floated by it. The heading and the nature of the scheme itself suggests that the respondent- company was engaged in the business of sale and distribution of gold coins and the petitioner like others who were desirous of entering into an agreement for purchase of said coins were invited to join on the terms and conditions of the respondent-company. The nature of scheme r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustomer stand to lose his advance. The agreements do not have any provision for the forfeiture of the advance payment, and nor is there any provision for return of the advance amount. Finally, there is no dependence on any contingency or chance, and there is no offer of any gift or prize. The advance payments are just that - advances for the purchase of products. They are not an investment. The company does not have any members and has not undertaken any responsibility for generating returns on advances received by it. There is no element of any speculation or risk, and customers earnings depend only on their sales performance." 14. It was on the basis of the statements made and the explanation given with regard to the safeguards that the Crl. M. (M) No. 2194/2003 was allowed and prosecution under the Prize Chits and Money Circulation Scheme (Banking) Act, 1978 quashed. 15. After the petitioner entered into these agreements news reports were published in the month of July 1999 stating that the directors of the respondent-company had been arrested for violation of the Foreign Exchange Regulation Act, 1973, etc. Pursuant to these news reports the petitioner wrote several l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... To project the bona fides and the absence of oblique motives in floating the scheme the petitioners have given the undertaking that they would even refund the money to those who are not able to either perform Phase-I of the marketing plan or Phase-II or Phase-III of the marketing plan, if any of them so desires and formally writes of the company. 22. In order to be fair to the petitioners as well as investors a letter of this intention shall be sent to all such subscribers besides being published at least in five Daily National Newspapers. The payment of the money to the said purchasers who entered into the agreement for sale shall be made through the frozen account as the amount which was frozen was towards the bank account in which the money received from the purchasers was deposited. However, at the first instance the petitioners shall make written request for making the refunds from the frozen account. The modus operandi of such payment will be as under : Whosoever responds to the letters sent through registered post/AD and to the advertisement to be published in at least five national dailies information of such person shall be given to the Government Agency and cuts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make supply gold after one year, therefore, the respondent-company agreed to refund the money paid. 22. A perusal of the advertisement and the letters as quoted above shows that the payment of the amount was sought to be postponed till the time the accounts of the respondent-company were de-frozen. This is also clear from the statement made on behalf of the respondent-company by its directors as noticed and recorded in Crl. M(M) No. 2149/03. 23. The question is whether this condition that the refund shall be paid after accounts are de-frozen, legal and binding on the petitioner. Under clause 15, gold worth the value of the contract was to be delivered to the petitioner on payment of balance amount of the contract and payment of administrative charges. This option vested with the petitioner and could be exercised after one year. The respondent-company could have certainly given concession and relaxed the obligation of the petitioner and other investors under clause 15 to make balance payment and refund the amount paid but the respondent-company could not have unilaterally imposed the condition that payment to the petitioner and others would be refunded after its accounts ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the future date. When a money is payable at a future date it is debt owed but when the obligation is to pay a sum in praesenti it is debt due . Therefore, the respondent has admitted the debt and the said debt became due one year after the date of the agreement. Under section 433( e ) of the Act winding up of a company can be directed when the said company is unable to pay its debt. Section 434 of the Act further explains and also incorporates deeming provisions when a company can be deemed to be unable to pay its debt. Under clause ( a ) of sub-section (1) a company is unable to pay its debt when it neglects to pay the debt due within the stipulated period after service of notice. 26. I need not dwell further on this aspect as in view of section 56 read with section 65 of the Contract Act, a debt is due and payable by the respondent-company to the petitioner. Arguments in the present case were heard on 18th July, 2006. Thereafter, the counsel for the respondent-company had appeared in court and stated that they were interested in settling the matter. Accordingly, the matter was listed on 22nd August, 2006. On the said date the learned counsel for the parties were called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 1968 SC 522, observed that courts cannot shut their eyes to harshness of the situation in cases where performance becomes impossible by causes which could not have been foreseen and which were beyond the control of the parties. The court noticed distinction between section 32 and section 56 of the Contract Act. Section 32 of the Contract Act relates to implied or express terms of the contract but section 56 of the Contract Act. Applies when due to subsequent impossibility the court finds that the whole purpose and basis of the contract stands frustrated by intrusion or occurrence of an unexpected event or change in circumstances which were not contemplated by the parties on the date of the contract. It may be emphasized here that section 56 of the Contract Act applies when performance of a contract becomes impracticable or useless having regard to the object and purpose the parties had in mind. In Industrial Finance Corporation of India Ltd. v. Cannanore Spg. Wvg. Mills Ltd. [2002] 5 SCC 54, the Supreme Court held that three conditions are required to trigger off doctrine of frustration under section 56 of the Contract Act. Firstly, there should be a subsisting contract, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed to exist due to intervening events which has led to a radically different situation. The intervening circumstances should change the basis on which the parties had rested their bargain. When the circumstances change drastically and the altered circumstances were never visualized or contemplated, the contract becomes ex facie unenforceable. The doctrine non haec in foedera veni (it was not this that I had promised to do) is applicable. The courts accept that a contract which is impossible of performance in practical sense need not be performed. 32. The facts of the present case show that section 56 of the Contract Act is applicable. The petitioner had entered into contract in 1999 with the respondent. Immediately thereafter in 1999 itself after raids by the Enforcement Directorate and criminal prosecution initiated against the directors, respondent-company s, accounts were frozen and the money lying in the bank accounts was seized. The contract envisaged recruiting and duplication of new members by existing members like the petitioner, which was impossible because of search, seizure and commercial activities of the respondent-company coming to a stand still. Neither was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Contract Act. 35. The petitioner like several other investors has waited for eight long years. The petitioner cannot wait indefinitely. Her rights ought to be protected and the money paid restituted and paid back. 36. In view of the above it is held that conditions of section 433( e ) of the Act are satisfied in the present case and the respondent-company is unable to pay its admitted debt due to the petitioner and is liable to be wound up. 37. The second question is whether the respondent-company is also liable to be wound up under the just and equitable clause. It is well settled that the words just and equitable are not to be read as ejusdem generis with the other grounds available for winding up of a company. The said clause gives wide discretion to the courts. The term just and equitable , it has been held, is not capable of precise definition and can be invoked in a variety of circumstances. An order of winding up can be passed when subject matter of the company has disappeared or the object for which it was incorporated has substantially failed or when it is impossible to carry on business except at a loss. Suspension of business for a substantial perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the third phase. Again, on new recruitment by the subsequent members, the original member became entitled to gold of value of Rs. 2,35,000. It is apparent that the key to the scheme was unlimited recruitment of members. The original member was required to recruit new members and the new members recruit further members. At the initial stage even after recruitment (or 14 new contracts) the original member was entitled to gold of value of Rs. 11,800 as against down payment of Rs. 15,000 made by him. In addition he was also liable to pay certain administrative charges. It was only on further recruitment by the new members down the line as stipulated in the scheme that the original member recoups and earns over and above his original investment in Phase II and Phase III. 39. A noteworthy fact mentioned in the petition which has not been denied by the respondent-company in the reply is that the method employed by the company in the trading and distribution of the gold coins is multi-level marketing or network marketing. This method of trading offers its members an opportunity to earn commission in form of gold of the value specified. The basis of such earning being recruitment of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts bank accounts are frozen and its goodwill has evaporated pursuant to actions taken by statutory authorities. Lack of confidence and inability of the respondent-company to protect investor s interest is apparent. 42. The investment made by the public must be protected. The assets of the respondent-company consist of the investment made by public. It is apparent that the respondent-company does not have any substantial asset other than the investments made by the general public which now stands seized and is in custody of the Enforcement authorities. During the last nearly eight years the company has stopped functioning and doing any business. Its accounts have not been audited. It is apparent that the substratum of the company and the object and purpose for which it was established stands frustrated. The agony, pain and endless wait suffered by hundreds of investors, who had on the basis of representations made by the respondent-company deposited their money, must be brought to an end and should not be prolonged. Therefore, I feel it is just and equitable to pass a final winding up order in the present case. The investors have some hope as the amount seized by the enforceme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company has the ability to pay the debt but the company chooses not to pay it. ( iii )Where the defence of the company is in good faith and one of substance, and the defence is likely to succeed in point of law, and the company adduces prima facie proof of the facts on which the defence depends, the petition should be rejected. ( iv )The court may consider the wishes of creditors so long as these appear to be justified. ( v )The machinery of winding-up should not be allowed to be utilised merely as a means of realising its debts. ( vi )If the stance of the adversaries hangs in balance it is always open to the company court to order the respondent-company to deposit the disputed amount. This amount may be retained by the court and be held to the credit of the suit, if any. ( vii )Generally speaking, an admission of debt should be available and/or the defence that has been adopted should appear to the court to be dishonest and/or moonshine for proceedings to continue. There is insufficient material in favour of the petitioners. The disputes appear to be essentially between the petitioners and respondents Nos. 2 and 3, and such disputes can be properly adjudicated in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a claim for compensation or damages which requires assessment by a court before it becomes due and payable. The word debt does not include a claim for payment of damages. The court noted with approval judgment of Bombay High Court in Iron Hardware (India) Co. v. Firm Shamlal Bros. AIR 1954 Bom. 423 wherein the terms debt and damages were distinguished. The word debt , it was held by the Bombay High Court, signifies existing liability which may be due immediately or may be due in future but obligation to pay the debt due must be there. The obligation to pay will also arise even if the debt requires ascertainment by a mechanical process or by taking of accounts. But what is necessary is that the obligation to pay must exist. In the said case it was held that it is not correct to say that a person who commits breach of contract incurs pecuniary liability. No pecuniary liability arises till the claim for damages is adjudicated and ascertained. Reference was made to Raman Iron Foundry s case ( supra ) wherein it has been held that a claim for unliquidated damages does not give rise to a debt unless liability is adjudicated and a decree or order is passed. Breach of co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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