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TMI Blog2012 (12) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... f service/use of site, a stipulation to pay an amount for the 'lock-in' period, is an admitted debt within the meaning of Section 433(e) of the Companies Act, 1956 or whether the same is in the nature of damages? The present reference has been made as this Court has some doubts with regard to the judgment rendered by another learned Single Judge of this Court in Manju Bagai v. Magpie Retail Ltd. 175 [2010] DLT 212. Accordingly, the present matter is referred to a Division Bench. Let the papers be placed before appropriate Division Bench on 1st December, 2011, subject to orders of Hon'ble the Acting Chief Justice." 2. As this issue came up subsequently in other two petitions, they have also been referred to the Division Bench. That is how we have heard these matters. It would be pertinent to point out that at the time of hearing, the counsel for all the parties in all these petitions agreed that it is not only the question which is formulated to be answered, but on the basis of answer given to the aforesaid question and applicability thereof in each case, the company petitions themselves be decided on merits as it would be reflected in our discussion, answer to the question canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er significant clause with which we are directly concerned was "lock-in period" clause in the said agreement as per which the minimum period for which the respondent was to pay for the aforesaid services was five years and even if the respondent were to terminate the agreement prematurely, it was liable to pay the charges for the aforesaid period termed as lock-in period. Relevant clause in this behalf is clause 11 which was amended vide addendum and the amended clause reads as under: "7. Clause 11.3 and 11.4 of the Agreement (Lock In Period) are hereby amended and are hereby replaced with the following clauses: 11.3 Anchor Sires: with Respondent to Anchor Sites a Lock In period of 10 (ten) years shall apply, however, the Operator shall be liable for payment of the IP Fees with respect to any specific Anchor Site as follows: 11.3.1 If the termination takes place during the initial 2 (two) years as of Commencement Date, then the Operator will pay 100% of the IP Fees for the balance of the initial 2 year period and 50% of the IP Fees for the remaining 8 years. 11.3.2 If the termination takes place after the initial 2 (two) years as of the commencement date then the Operator will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes 'debt' payable by the respondent to the petitioner. The petitioner served notices upon the respondent under Section 433 read with 434 of the Companies Act, 1956 calling upon the respondent to pay the same. The respondent, however, refused to pay the same. It is under these circumstances the petitioner filed aforesaid company petition seeking winding up of the respondent company. In this backdrop, question has arisen as to whether the claim for service charges for the lock-in period amounts to 'debt' or not. Co. Pet. 302/2009 7. By and under a Leave and License Agreement dated 18.2.2008 executed between the petitioner and the respondent, the petitioner granted to the respondent on leave and license basis, the use of premises bearing No. K-3, situated at the Food Court Premises of the Mega Mall at Oshiwara, Andheri (West), Mumbai on the terms and conditions specified therein. The petitioner stated that it has duly complied with all its obligations under the said license agreement. The said premises were to be utilized by the respondent for serving "North Indian/Mughlai" cuisines and non-alcoholic beverages under the brand name "Moti Mahal Deluxe Tandori Trial". 8. As per claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said commercial project was entered into between the parties which was followed by a rectification letter dated 12.5.2005 and an addendum to the collaboration agreement which was executed between the parties on 26.10.2005. As per these agreements, the share of the petitioners in the proposed commercial complex was to be 23% and that of respondent company 77% subject to minimum commitment of 80870 sq.ft. of FAR area to the petitioners. The entire commercial project was to be constructed by the respondent at its expense. In terms of clause 6(g), the respondent was to complete the construction of the building of Phase I of the project having an FAR of 125 within a period of 30 months with a reasonable extension up to six months as per the mutual discussions between the parties from the date of sanction of plans or handing over of the possession of the land to the respondent whichever is later. Phase II of the project to achieve an additional FAR of 50 was to be completed within a period of one year from the completion of Phase I in terms of clause 6(a) of the Collaboration Agreement. The project was deemed to have been completed when the respondent applied for completion certi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Agreement. The petitioners, thus, sent the notice dated 18.6.2010 under Section 434 of the Companies Act, 1956 calling upon the respondent to pay to the petitioners a sum of Rs. 2,04,00,000/- together with interest on the said outstanding amount calculated up to 22.5.2010. The respondent refuted this liability vide reply dated 15.7.2010 and blamed the petitioners for the delay. According to the petitioners, this stand taken in the reply is contrary to the respondent's admission in its earlier letter dated 9.2.2010. According to the petitioners, the amount of damages payable under the aforesaid clauses is pre-estimated liquidated damages and is, therefore, 'debt' for the purpose of petition under Sections 433 and 434 of the Act. On this basis, winding up of the respondent company is prayed for by filing the instant petition. What is 'debt' : The legal position 12. We have already extracted the order dated 31.10.2011 vide which reference was made to the Division Bench in Co.Pet. 458/2010. That order takes note of the judgment of another learned Single Judge in Manju Bagai v. Magpie Retail Ltd. [2011] 105 SCL 55 (Delhi) and reason for referring the matter to Division Bench was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and decide whether the amount specified in the agreement is towards 'liquidated' damages or 'un-liquidated' damages. Amount specified in an agreement is liquidated damages; if the sum specified by the parties is a proper estimate of damages to be anticipated in the event of breach. It represents genuine covenanted pre-estimate of damages. On the other hand 'un-liquidated' damages or penalty is the amount stipulated in terrorem. The expression 'penalty' is an elastic term but means a sum of money which is promised to be paid but is manifestly intended to be in excess of the amount which would fully compensate the other party for the loss sustained in consequence of the breach. Whether a clause is a penalty clause or a clause for payment of liquidated damages has to be judged in the facts of the each case and in the background of the relevant factors which are case specific. Looking at the nature of the Clause and even the pleadings made by the petitioner, I am not inclined to accept the contention of the petitioner that Clause 5 imposes liquidated damages and is not a penalty clause. No facts and circumstances have been pleaded to show that Clause 5 relating to lock-in-period was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts genuine covenanted pre-estimate of damages or it is in the nature of penalty has to be judged in the facts of each case and in the background of relevant factors which are case specific. In that case, no facts and circumstances were pleaded to show that clause relating to lock-in period was a genuine pre-estimate of damages which the petitioner would have suffered in case the respondent company vacated the premises before the expiry of lock-in period. (ii) In order to prove that amount mentioned as payable for the lock-in period is genuine pre-estimate of damages, proper evidence is required of specific nature, namely, the landlord had altered its position by making the premises available to the tenant keeping in view the tenants' requirements and spending thereupon. Certain expenditure was incurred on infrastructure specifically provided to the tenant as per tenant's requirements; certain other expenditure incurred on whitewashing, fixtures and fittings and the landlord was forced to incur such expenditure again before giving the premises to new tenant and, therefore, lock-in period was treated as reasonable period to avoid duplication of such expenditure, etc. (iii) The doct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e right to sue for damages. No pecuniary liability thus arises till the Court has determined that the party complaining of the breach is entitled to damages. The Court in the first place must decide that the defendant is liable and then it should proceed to assess what the liability is. But, till that determination, there is no liability at all upon the defendant. Courts will give damages for breach of contract only by way of compensation for loss suffered and not by way of punishment. The rule applicable for determining the amount of damages for the breach of contract to perform a specified work is that the damages are to be assessed at the pecuniary amount of difference between the state of the plaintiff upon the breach of the contract and what it would have been if the contract had been performed and not the sum which it would cost to perform the contract, though in particular cases the result of either mode of calculation may be the same. The measure of compensation depends upon the circumstances of the case. The complained loss or claimed damage must be fairly attributed to the breach as a natural result or consequence of the same. The loss must be a real loss or actual damage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rarium. This action, therefore, merely dispenses with proof of "actual loss or damage". However, it does not justify the award of compensation when in consequence of breach, no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach. 19. The Supreme Court in the case of Union of India v. Raman Iron Foundry AIR 1974 SC 1265, expounded this very principle in the following words: "9. Having discussed the proper interpretation of Clause 18, we may now turn to consider what is the real nature of the claim for recovery of which the appellant is seeking to appropriate the sums due to the respondent under other contracts. The claim is admittedly one for damages for breach of the contract between the parties. Now, it is true that the damages which are claimed are liquidated damages under Clause 14, but so far as the law in India is concerned, there is no qualitative difference in the nature of the claim whether it be for liquidated damages or for unliquidated damages. Section 74 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... returned a verdict in favour of the plaintiff till the judgment is actually delivered. So also in O'Driscoll v. Manchester Insurance Committee [1915] 3 K. B. 499, Swinfen Eady, L.J., said in reference to cases where the claim was for unliquidated damages : "... in such cases there is no debt at all until the verdict of the jury is pronounced assessing the damages and judgment is given". The same view has also been taken consistently by different High Courts in India. We may mention only a few of the decisions, namely, Jabed Sheikh v. Taher Mallik 45 Cal. Weekly Notes, 519, S. Malkha Singh v. N.K. Gopala Krishna Mudaliar 1956 A.I.R. Pun. 174 and Iron & Hardware (India) Co. v. Firm Shamlal & Bros. 1954 A.I.R. Bom. 423. Chagla, C.J. in the last mentioned case, stated the law in these terms: In my opinion it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party. As already stated, the only right which he has is the right to go to a Court of law and recover damages. Now, damages are the compens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause 14 of the contract. As is seen from the aforesaid extracted portion, the Court held that a claim for liquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority. When there is such a clause, the only right which the plaintiff has is the right to go to Court and recover damages. 21. The Supreme Court also explained that damages are the compensation which a Court of Law gives to a party for the injury which he has sustained and the plaintiff does not get damages or compensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation as a result of fiat of the Court. Therefore, it has to be decided by the Court, in the first instance, that the defendant is liable and then it proceeds to assess what liability is. Till that determination, there is no liability at all upon the defendant. The Court further went to the extent of holding that there would not be any debt payable unless the Court determines the liability. In this process, the Court also explained the concept of 'debt' in the following manner: "6. The fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n case of such breach, the party complaining of breach is entitled, whether or not actual loss is proved to have been caused, thereby to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named. Section 74 emphasizes that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether or not actual loss is proved to have been caused by such breach. therefore, the emphasis is on reasonable compensation. If the compensation named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if the compensation named in the contract for such breach is genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him. Burden is on the other party to lead evidence for proving that no loss is likely to occur by such breach..." 23. In the matter of Kesoram Industries & Cotton Mills Ltd. v. CWT [1966] 59 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and upon ticket jackets. The contract was to commence on 22.5.2008 and was to conclude on 31.7.2009. This term was extended by a formal amendment till September, 2009. The agreement also provided that in the event respondent fail to make payment for a period of one month, during the term of the agreement, the petitioner would be at liberty to terminate the agreement with notice of seven days. In that event, respondent was obliged to make good losses and damages which may be suffered by the petitioner. The respondent was liable to pay entire royalty/minimum guaranteed amount mentioned in the agreement with interest @ 18% per annum on alleged breach committed by the respondent. The petitioner terminated the contract and demanded the entire amount of royalty/minimum guaranteed amount. On the respondents failure to pay, winding up petition was filed. The Court dismissed the said petition holding that it was not maintainable upon a claim for damages which could not be treated as debt. It was held that damages become payable only when they are crystallized upon adjudication. Until and unless an adjudication takes place with a resultant decree for damages, there is no debt due and payab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; (iv) ** ** ** (v) Even if the loss is ascertainable and the amount claimed as damages has been calculated and ascertained in the manner stipulated in the contract, by the party claiming damages, that will not convert a claim for damages into a claim for an ascertained sum due. Liability to pay damages arises only when a party is found to have committed breach. Ascertainment of the amount awardable as damages is only consequential." 26. Reading of the aforesaid judgments and the ratio laid down therein would amply demonstrate that the legal position propounded by learned Single Judge in Manju Bagai (supra) is the correct legal position of law and we agree with the same. We now proceed to apply this legal principle to each of the cases before us. Co. Pet. 458/2010 27. In this case, as already noted above, the petitioner is claiming payment on the basis of lock-in period mentioned in the MSA with respect to the sites procured by the respondent from the petitioner. Winding up petition is filed on that basis. The defence of the respondent is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: "It is a matter of common knowledge that the project of such magnitude as of ours, are usually financed from funds provided by the builder from their own sources, funds made available by the Banks/Financial Institutions as loans and money collected/realized from the intending Purchasers on the booking/sale of spaces/areas in the proposed project." 30. From para 3 onwards, the respondent stressed the fact that such projects are usually financed not only from the funds provided by the builder from its own sources but also made available by the banks/ financial institutions due to non-availability of title deeds of the project lands to be deposited with the bank for creating equitable mortgage on the said property etc. It was also mentioned that respondent had spent a sum of approximately Rs.30 Crores on the project. Further, there were no sufficient bookings/sale of spaces/areas of the project as there were no willing buyers in the market. As against saleable area of approximately 3,25,000 sq.ft., only an area of 5175 sq.ft. had been sold which was of the value of Rs.2.95 Crores and out of this, only a sum of Rs.2.80 Crores had been received. As per the respondent, therefore, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , but the expression does not include liability to pay unliquidated damages nor obligations which are inchoate or contingent. Lord Justice Lindley in Webb v. Stenton [1883] 11 Q.B.D. 518 observed that "a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation". That definition for the purpose of the Wealth Tax Act correctly describes the concept of debt. A debt, therefore, involves a present obligation incurred by the debtor and a liability to pay a sum of money in present or in future. The liability must however be to pay a sum of money, i.e., to pay an amount which is determined or determinable in the light of factors existing at the date when the nature of the liability has to be ascertained." 31. Learned counsel also relied upon Division Bench judgment of Karnataka High Court in the case of Kudremukh Iron Ore Co. Ltd. v. Kooky Roadways (P.) Ltd. [1990] 60 Comp. Cas. 178. That was a case where there was short delivery of goods entrusted to the respondent company for carriage which fact was acknowledged by the respondent company and it took time to make good the short delivery. However, it could deliver miniscule of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red goods cannot become a debt unless the amount of such liability is ascertained in a suit to be filed by the petitioner in that regard. Re. Point (ii).- An application to the court for winding up of a company shall be by a petition presented under sub-section (1) of section 439 of the Act, among others, by any creditor as is specified in clause (e) thereof. According to the learned single judge, the petitioner could not have filed the petition for winding up of the respondent-company since it could not be a creditor within the meaning of the word "creditor" in section 439 of the Act. But, we find it difficult to agree with the view expressed by the learned single judge in the matter. The general meaning of the word "creditor" is, as found in the third edition of Stroud's Judicial Dictionary, volume I, at page 680, a person to whom a debt is payable. The word "creditor" in clause (b) of sub-section (1) of section 439of the Act, could, therefore, be understood as a person to whom a debt is payable inasmuch as there is nothing in the context of the word "creditor" used in clause (b) of sub-section (1) of section 439 of the Act which requires the word "creditor" to be understood dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of this Court in BSNL v. BWL Ltd. [FAO (OS) 457/2010 decided on 19.04.2011], it is imperative on the part of the petitioners to prove "some loss" even if breach is to be attributed to the respondent and this exercise of proving some loss requires trial. Following observations from the said judgment are relied upon: "9. We are, therefore, unable to affirm, in toto, the decision in Union of India v. Daulat Ram 2009 (2) Arb. L.R. 327 (Del) wherein the learned Single Judge may have been right in coming to a particular conclusion which cannot ubiquitously apply to all situations. This very question came up for consideration in ONGC v. Saw Pipes [2003] 5 SCC 705 and their Lordships formulated the controversy to be-"Whether the claim of refund of the amount deducted by the Appellant from the bills is disputed or undisputed claim?" The discussion is perspicuous and is available in paragraphs 70-72. The conclusion was that the "arbitrators were required to decide by considering the facts and the law applicable whether the deduction was justified or not". These decisions are an enunciation of the legal position that (a) liquidated damages cannot be punitive in nature and (b) that the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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