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TMI Blog2014 (6) TMI 847X X X X Extracts X X X X X X X X Extracts X X X X ..... ndiabulls from Treasure World. This is the matter in issue. 2. The facts are largely undisputed. Indiabulls owns a substantial property of some 39,000 and odd sq mts in Lower Parel, now a significant business hub in Mumbai. This was once Jupiter Mills, one of Mumbai's many textile mill lands. Indiabulls has constructed two towers on this land. Tower 1 is ground and 18 floors; Tower 2 (with two wings 2A and 2B) is ground and 20 floors. Together, these towers are known as "One Indiabulls Center". 3. On 14th June 2011, Treasure World took premises on leave and license from Indiabulls. These are commercial premises on the 11th floor of wing 2B of One Indiabulls Center's Tower 2. The area of the premises is 6,209.89 sq ft. The leave and license agreement was dated 14th June 2011. It was registered. It provided for a monthly license fee of Rs.10,86,731/-, plus maintenance and electricity charges on actuals. The term of the leave and license agreement was five years (60 months), commencing 15th June 2011. The agreement had a 36-month (three year) lock-in period. It also provided that should Treasure World terminate the agreement before the end of that three-year lock-in period, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted, a demand under Sections 433 and 434 of the Companies Act, 1956. 8. Treasure World replied on 4th February 2013. It denied all liability. It said that there were mutual discussions and an oral agreement that superseded the written leave and license agreement, and that both parties had agreed to abandon the terms of the written contract. But Treasure World did not stop there. In its reply of 4th February 2013, it also said that the lock-in clause (not the liquidated damages clause) was illegal or voidable, and that it had not terminated the agreement at all: it had merely vacated the premises. 9. In its response of 28th February 2013, Indiabulls denied Treasure World's contentions and reiterated its demand. This letter was issued as a statutory notice under sections 433 and 434 of the Companies Act, 1956. The petition was thereafter filed and served. Treasure World filed an affidavit in reply, to which Indiabulls filed a rejoinder. 10. I have heard Mr. Jagtiani for Indiabulls, the petitioning-creditor, and Mr. Andhyarujina for Treasure World, the respondent-Company. They have each relied on the terms of the leave and license agreement. As some of these terms are materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpiry or sooner determination of the Agreement although the Licensor is ready and willing to refund the Security Deposits to the Licensee at the time the Licensee is unable to hand over possession of the Licensed Premises and the Licensee shall be liable and shall pay to the Licensor as and by way of liquidated damages double the amount of License Fee per day together with double the amount of maintenance charges and additional car parking charges per day for each day of delay in vacating the Licensed Premises. Such condition shall be without prejudice to any other legal rights/remedies available to the Licensor. During this period, the Licensee shall also be liable to make all other payments payable by the Licensee under this Agreement. In the event of the Licensor not refunding the Security Deposits upon the expiry or sooner determination of the License but not at the time of termination during the lock in period, the Licensee shall be entitled to use the Licensed Premises without payment of any License Fee, however other charges, i.e., maintenance charges and additional car parking charges shall be payable on actual under this Agreement till the refund of the Security Deposit, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case at different levels. To begin with, he reiterates the stand taken in Treasure World's correspondence. Its e-mail of 29th October 2012 was not, says Mr. Andhyarujina, a termination at all. It was simply information from Treasure World to Indiabulls that, following certain conversations, it was surrendering possession. Treasure World's liability, if there was one, to pay the license fees, etc., for the remainder of the lock-in period, was triggered only by a termination. Absent a termination, it incurred no liability at all. An agreement to surrender or take back possession is not, Mr. Andhyarujina says, equivalent to a termination. In any event, there is, according to him, material in the 29th October 2012 prima-facie indicative of an agreement or understanding to rescind the entire contract. 16. This is an argument singularly lacking in appeal. We are here concerned with a leave and license agreement. There are, as is well-established, two primary legal components to any such agreement: the permission or license to use and occupy without creating any rights in the licensee in the property in question, and the licensee's obligation to pay the licensor the stipula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding.1 What Treasure World therefore asks Indiabulls to prove is the negative - i.e., was there not an oral understanding to abandon the written contract? I do not see how Indiabulls can possibly do this, or even why it should be asked to, especially since Treasure World has been unable to produce anything to indicate that this state of affairs ever existed. It seems to me highly improbable that, had there been any such understanding, it would not have been recorded. Treasure World had multiple opportunities to do this. Received wisdom has it that such a recording of abandonment would and should have been done at the first such opportunity, and that the record must so show. What Treasure World's email of 29th October 2012 is merely interesting; what it does not say is crucial. 20. Treasure World's reply of 4th February 2013 to Indiabulls' letter of 14th January 2013, is, to my mind, precisely the kind of illegitimate defence that no court should countenance. It is one thing to say, as Treasure World also did, that the amount demanded is not a 'debt' within the meaning of the Companies Act, 1956, either because it is indistinguishable from damages or otherwise. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 as liquidated damages for the period 1st November 2012 to 11th December 2012. Claim 3 is for Rs.2,33,30,970.73 as the license fee and maintenance charges for the unexpired term of the lock-in period from 1st November 2012 to 14th June 2014. 23. Claim 1 is soon despatched. It was undoubtedly payable by Treasure World. It is, however, in the aggregate amount of Rs.61,16,648.25, lower than the security deposit of Rs.73,12,145/-. Once the latter is adjusted, Claim 1 is fully paid. If the other two claims are also not legally due, then there is no debt at all; indeed, it is Indiabulls that would be indebted to Treasure World, as it would have to refund the balance security deposit after adjusting the security deposit. Claim 2, for liquidated damages, is also not a debt. By its nature, it must be first adjudicated. That, as we shall see, is now well settled. E-City Media P. Ltd. vs Sadhrta Retail Ltd., [2010] 153 Com Cas 326; Union of India v Raman Iron Foundry, AIR 1974 SC 1265 24. That leaves Claim 3, for the unexpired term of the lock-in-period. It is this claim that tilts the balance. For, if that, too, is not a debt, as Mr. Andhyarujina contends, then there is no debt at all and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erstood to say that this is the only interpretation possible of clause 7. The other interpretation accepted by the learned Single Judge may also be possible. However, in our opinion, as the other interpretation is also possible and this was not a case where winding up petition can be admitted. In our opinion, when there is bonafide dispute on the interpretation of the terms or the words in the agreement, it would have been appropriate for the learned Single Judge not to entertain the company petition and leave the parties to their remedy under the Civil Law. In our opinion, remedy of filing winding up petition cannot be allowed to be used in a case where it is possible to take different view than the one propounded by the petitioner. In our opinion, the learned Single Judge, therefore, was not justified in entertaining the petition." 26. Mr. Jagtiani submits that his case is on even firmer ground. The lock-in period had commenced, and that is indisputable. The termination was before the expiry of that lock-in period. The claim is for the remainder of that term. All the elements contemplated by the Division Bench to accord with its interpretation exist. It is not, he says, possible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding up. The clause in question in Manju Bagai specifically said that "liquidated damages from tenant at the rate of rent for the balance period of 3 years' lock-in period" were recoverable by the landlord/licensor. Khanna, J said that he was not inclined to accept the petitioner's contention that this clause imposed liquidated damages and was not a penalty clause as there was nothing to show that it was a genuine pre-estimate of damages. 30. On 31st October 2011, another learned single Judge of the Delhi High Court expressed his reservations about the correctness of Manju Bagai. He made a reference to the Division Bench for an authoritative pronouncement, in these terms: (i) Whether in a contract for rendering of service/use of a 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? 31. Tower Vision thus took up the issue, clubbing the matter in which the reference was made with three others, including the one in which there was, expressly, a claim for license fees for the unexpired term of the license period. 32. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... breach of contract only by way of compensation for loss suffered and not by way of punishment." 34. Section 74 provides for a genuine pre-estimate of damages. If this sum be reasonable, this is the maximum to which the aggrieved party may be entitled, provided it is not penal in nature. This merely dispenses with proof of actual loss or damage. It does not, however, justify the award of compensation when, consequent on such breach, no legal injury at all has resulted. 35. The Division Bench then considered the law enunciated in Raman Iron Foundry. AIR 1974 SC 1265. Four decades after it was delivered, that decision is still a locus classicus. In Indian law, Raman Iron Foundry (supra) says, there is no qualitative difference between liquidated damages and unliquidated damages. All that Section 74 does is to eliminate the nice distinctions between contractual provisions for liquidated damages and those in the nature of a penalty, or in terrorem clauses. The latter are not enforced. The amount of liquidated damages is only the outer limit of what is recoverable. It is not automatically guaranteed as the claimant's entitlement. It does not, eo instanti, create any pecuniary liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y now or in future. The following passage from the judgment of the Supreme Court of California in People v. Arguello [1869] 37 Cal 524 which was approved by this Court in Kesoram Industries v. Commissioner of Wealth Tax : [1966] 59 ITR 767 (SC) clearly brings out the essential characteristics of a debt: Standing alone, the word 'debt' is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is debt due." (Emphasis supplied) 37. The Division Bench of the Delhi High Court then considered the Supreme Court decision in Oil & Natural Gas Corpn. Ltd. (ONGC) v. Saw Pipes Ltd. AIR 2003 SC 2629. In particular, it cited paragraph 65: "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. Bur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and not to claim any "debt". A claim for damages becomes a "debt due", not when the loss is quantified by the party complaining of breach, but when a competent court holds on enquiry, that the person against whom the claim for damages is made, has committed breach and incurred a pecuniary liability towards the party complaining of breach and assesses the quantum of loss and awards damages. Damages are payable on account of a fiat of the court and not on account of quantification by the person alleging breach. (iii) When the contract does not stipulate the quantum of damages, the court will assess and award compensation in accordance with the principles laid down in Section 73. Where the contract stipulates the quantum of damages or amounts to be recovered as damages, then the party complaining of breach can recover reasonable compensation, the stipulated amount being merely the outside limit. (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. Liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P.) Ltd., Greenhills Exports (P.) Ltd., Saw Pipes Ltd., Raman Iron Foundry, and Firm Shamlal & Bros. (supra). 44. Are the decisions of E-City Media (P.) Ltd. and Tower Vision India (P.) Ltd. (supra)(to the extent it affirms Manju Bagai) in any way distinguishable to make them inapplicable to the present case? The relevant contractual in E-City Media was clause 8(a)(A): "8(a)(A) In case Sadhrta Retail (P.) Ltd. fails to make payment or if the cheque is dishonoured for any reason whatsoever of the Royalty/MG amount for a period of any one month during the term of this Agreement then E City Media shall be at liberty to terminate this Agreement after giving 7 days' notice and dispose of the rights herein granted to Sadhrta Retail Pvt. Ltd in any manner as E City Media may deem fit and proper and in such an event Sadhrta Retail Pvt. Ltd. shall make good the losses and damages which may be suffered by E City Media. On occurrence of such an event, Sadhrta Retail Pvt. Ltd. shall be liable to pay to E City Media on demand the entire Royalty/ MG amount mentioned in this Agreement with interest at 18% per annum." ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present contingent liability payable in futuro. A company petition can always be brought on such a liability, provided the contingency has happened. This aspect - whether such a claim is in the nature of a contingent debt - was not considered in Tower Vision. 49. As both Mr. Jagtiani and Mr. Andhyarujina cited Kesoram Industries & Cotton Mills Ltd. (supra) but commended contesting readings of it, it is perhaps best that I extract the relevant passages to which they referred. The paragraph numbers in the following extract do not appear in the ITR but in the report on Manupatra. I have used this report for convenience. The text in all reports is identical. Emphasis, wherever it is shown, is mine. '22. The problem presented can satisfactorily be solved by answering two questions, namely, (1) what does the expression "debt owed" mean? and (2) when does the liability to pay income-tax and super-tax under the Income-tax Act become a debt owed within the meaning of that expression? 23. If we ascertain the meaning of the word "debt", the expression "owed" does not cause any difficulty. The verb "owe" means "to be under an obligation to pay". It does not really add to the meaning of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim is one about which there is no certainty; it may turn out that there is nothing due to the plaintiff." 38. The decision of a Full Bench of the Calcutta High Court in Banchharam Majumdar v. Adyanath Bhattacharjee [1909] I.L.R. 36 Cal. 936 throws considerable light on the connotation of the word "debt". Jenkins C.J. defined that word thus: "... I take it to be well established that a debt is a sum of money which is now payable or will become payable in future by reason of a present obligation." 39. Mookerjee, J., quoted the following passage with approval from the judgment of the Supreme Court of California in People v. Arguello [1869] 37 Cal 524 "Standing alone, the word 'debt' is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is a debt due. In other words, debts are of two kinds: solvendum in praesenti and solvendum in future. ... A sum of money w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice. It cannot be a debt yet to become due. This, for the purposes of winding up, is the confluence of Kesoram Industries & Cotton Mills Ltd. and Raman Iron Foundry (supra). 51. What Mr. Jagtiani says is that the claim for license fees for the three-year lock-in period is in no sense one for damages. It is a claim for unpaid consideration. But for that agreement, the leave and license agreement would never have been executed. It is also consideration for Indiabulls agreeing not to increase the license fee during the entirety of that three-year term. It is, therefore, indistinguishable from a situation in which, say, the licensor insisted on an up-front and immediate payment on or before execution of the agreement of the license fee for 36 months as a non-refundable consideration. The deferral of that consideration was, Mr. Jagtiani submits, only a matter of commercial expediency. It does not alter the nature of the claim. 52. Manju Bagai, Mr. Jagtiani says, did not consider whether every such claim for license fees for the remainder of a lock-in period is, of necessity and ipso facto, in the nature of liquidated damages. There can be no such a priori assumption. The Manju Baga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o on. The termination is not under the second part or component of Clause 13.2. It is only under the first, the no-fault/no-cause termination option given exclusively to Treasure World. There is, therefore, no question of any evidence being required. 55. Mr. Andhyarujina invites attention to the relevant clause in Manju Bagai. It is, he submits, for all intents and purposes indistinguishable from the present clause. Both are compensatory; they are provisions that seek to contain loss or damage likely to be suffered by the licensor on the happening of a defined event or contingency. That contingency itself requires adjudication and judicial determination, and therefore the claim cannot be otherwise than in liquidated damages. Indeed, every such claim, no matter how worded, is only in damages. It is therefore not debt, nor even a contingent debt. The contingency, Mr. Andhyarujina says, attaches to the time of payment of the debt, not to the liability to pay itself. Further, he submits, E-City Media binds me. Indeed it does; provided it applies. That was a case where the claim was expressly said to be one in damages: "shall make good the losses and damages which may be suffered". The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . No facts and circumstances have been pleaded to show that Clause 5 relating to lock-in-period was a genuine pre-estimate of damages which by the petitioner would have suffered in case the respondent company had vacated the premises. No such special circumstances have been highlighted and pointed out." 57. This, then, is not a discussion of whether such a claim is always a claim for liquidated damages but rather of whether, even when such a claim is said to be for liquidated damages, it is to be automatically so construed, or whether the court can examine if it is in the nature of a penalty, a genuine pre-estimate of damages or otherwise. Now, in our case, Mr. Jagtiani does not once say that Claim 3 is for liquidated damages, or damages of any kind. There is no such pleading. This claim is carefully separated from a wholly distinct claim for liquidated damages, one that is based on its own separate contractual provision, clause 9.9. He is not pressing this claim for liquidated damages at all. 58. Tower Vision affirmed Manju Bagai. That affirmation could only have been of what Manju Bagai (supra) decided. It is now far too well settled to merit repetition that a decision is a pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it might or might not be able to do following a termination by Treasure World. The side-effects or fall out of the termination cannot determine the nature of the claim. 61. Once it is held that there was a termination, the rest must follow. Mr. Andhyarujina's argument that there was no termination but rather a supervening oral agreement of abandonment of the prior written contract is one that I have already held to be unsustainable. The contract itself militates against the acceptance of this submission. Treasure World's correspondence with Indiabulls indicates that it was not wanting for legal resources of some considerable, if not justifiable, ingenuity. The document itself is unambiguous. It was for Treasure World to show by some cogent material, and not in this inferential and circuitous manner, to merely suggest that there is some possibility, however caliginous, to indicate that the parties had mutually agreed to rescind this agreement. No such possibility exists. Without any material of any kind, leave alone evidence of any real heft, the so-called possibility is too chimerical to constitute a substantial or bona fide defence. 62. The learned single Judge's de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these passages for an authoritative pronouncement of law. Rather, I see them as a reminder that a commercial court cannot blind itself to the realities of the world of commerce, to the ordinary and usual manner in which parties do business, to the common considerations that weigh when they transact. Mr. Jagtiani is, I believe, correct in saying that if contracts are to be read in the manner Mr. Andhyarujina suggests be done in this case, the result can only be of manifest inequity, driving a stake through the heart of quotidian commerce. A party solemnly binds itself to a three-year license term for premises. The licensor agrees, in exchange, not to increase the license fee for that duration. The agreement is, clearly, that the licensee will pay the licensor the agreed monthly license fee for three years. To allow the licensee not only the option of a premature exit, but also to allow it to slither out of its financial liability, and, correspondingly, to drive the licensor to a protracted civil proceeding in which it needs prove nothing is clearly unjust. A defence that attempts this is not one that is bona fide or substantial. Defences of this stripe evidence commercial and corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In a given case, it may be in the nature of either, or in the nature of a penalty, or it may simply be a component of the contractual consideration and therefore a debt properly so-called when the contingency in contemplation comes to pass. This will depend on an interpretation of the contract in question and an assessment of the conduct of the parties. 66. There is, I find, no valid defence to Claims 1 and 3 taken together. The amounts of Rs.61,16,648.25 and Rs.2,33,30,970.73, less the amount of the security deposit, Rs.73,12,145.00, i.e., Rs.2,21,35,473.98 is due and payable by Treasure World to Indiabulls. Treasure World has, without valid justification, neglected to pay this amount to Indiabulls. An order of admission and advertisement is justified. However, given the discussion, I am inclined to afford Treasure World a final opportunity to make payment. 67. There will, therefore, be an order in the following terms: (a) The respondent-Company, Treasure World Developers Pvt. Ltd., shall, on or before 9th May 2014, pay to the petitioner, Indiabulls Properties Pvt. Ltd., the sum of Rs.2,21,35,473.98. (b) Should the respondent-Company fail to do so, then- (i) The petition sha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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