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TMI Blog2016 (7) TMI 1191X X X X Extracts X X X X X X X X Extracts X X X X ..... the Petitioner Bank is an authorised dealer in foreign exchange and is in fact listed as an authorised dealer in Category - I as per the Reserve Bank of India Guidelines. 2. Before dealing with the facts of this case, it would be necessary to mention here that this Company Petition was originally heard by another Judge of this Court ( S. C. Gupte J. ), who by his order dated 7 September, 2015 dismissed this Company Petition. Being aggrieved by this order, the Petitioner Bank preferred an Appeal before the Division Bench of this Court, who by its order dated 4 February, 2016 set aside the order dated 7 September, 2015 and remanded the matter back to this Court for a fresh hearing. It is in these circumstances that the present Company Petition has come up for admission before me once again. 3. The brief facts giving rise to the controversy in the present Petition are as follows:- (a) It is the case of the Petitioner that the Respondent Company during the course of its business, export large quantities of products and have a large annual turnover. Apart from this, the Respondent Company also has a substantial amount of imports. By virtue of this business (Import and Export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as the Risk Disclosure Statement were signed on behalf of the Respondent Company by persons who were authorized in that regard as per the board resolution dated 14 November, 2007. (f) As mentioned earlier, on 23 May, 2008 CBOP merged with the Petitioner Bank under a Scheme of Amalgamation duly sanctioned by the Reserve Bank of India vide its letter dated 20 May, 2008. Under the said scheme, the Petitioner took over all the rights and liabilities of CBOP and stepped into the shoes of CBOP in respect of all pending transactions entered into by CBOP, one of which was under the ISDA Agreement and all derivative transactions entered into by the parties thereunder. (g) After the aforesaid merger of CBOP with the Petitioner Bank, on 26 June, 2008 a deal confirmation was entered into between the Petitioner Bank and the Respondent Company for the purposes of entering into USD/INR options transaction comprising of a series of options, the expiry / maturity of which, were spread over a period of one year from 27 June, 2012 to 29 May, 2013. This deal confirmation was entered into for modifying and hedging certain other derivative transactions entered into by CBOP with the Respondent C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FEB-13 28FEB-13 43.1500 86246HM 25JUN- 08 COUNTER PARTY INR 21,575,000 USD 500,000 27MAR-13 29MAR-13 43.1500 86247HM 25JUN- 08 HDFC BANK LTD USD 800,000 INR 34,520,000 27MAR-13 29MAR-13 43.1500 86248HM 25JUN- 08 COUNTER PARTY INR 21,575,000 USD 500,000 26APR-13 30APR-13 43.1500 86249HM 25JUN- 08 HDFC BANK LTD USD 800,000 INR 34,520,000 26APR-13 30APR-13 43.1500 86250HM 25JUN- 08 COUNTER PARTY INR 21,575,000 USD 500,000 29MAY-13 31MAY-13 43.1500 86251HM 25JUN- 08 HDFC BANK LTD USD 800,000 INR 34,520,000 29MAY-13 31MAY-13 43.1500 (h) The counter party referred to above is the Respondent Company and HDFC Bank Ltd is the Petitioner before me. The strike price agreed to was Rs. 43.150000. To put it simply, as per this deal confirmation, on the relevant expiry dates, if the USD traded below Rs. 43.15 per US Dollar then the Respondent Company would sell US$500,000/- to the Petitioner Bank @ Rs. 43.15 per US Dollar. Similarly, on the relevant expiry dates, if the USD traded above Rs. 43.15 per US Dollar, then it was agreed that the Respondent Company would sell US$800,000/- to the Petitioner @ Rs. 43.15 per US Dol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commitments, it was unable to cater to the margin call made by the Petitioner Bank. However, what is important to note is that in this very letter the Respondent Company expressed its intention to continue with the options transaction entered into with the Petitioner Bank and expressed its commitment to clear all dues and outstanding at the relevant expiry - settlement dates under the deal confirmation. I must mention here that the Respondent Company has raised a dispute with reference to this letter dated 20 May, 2009 inter alia contending that the same has not been issued by the Respondent Company and the same is not signed by its authorized signatory. I will deal with this contention later in the judgment. (l) Be that as it may, the Petitioner once again, by its letter dated 15 July, 2009 called upon the Respondent Company to comply with the margin call made by the Petitioner, which at that point of time was Rs. 4.03 Crores. In reply thereto, the Respondent Company once again vide its letter dated 22 July, 2009 reiterated their earlier request not to insist on any margin call and reiterated that they intend to continue with the transaction entered into between the Petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any when the Petitioner exercised their second option which expired on 27 July, 2012. Similar replies have been given by the Respondent Company for all the options exercised by the Petitioner Bank on their respective expiry dates as more particularly set out in the deal confirmation. (p) It is not in dispute that all the options have been duly exercised by the Petitioner in view of the fact that the US Dollar rate on the date of exercising the options was higher than Rs. 43.15. It is the Petitioner's case that since the Company refused to honour its obligations under the options transaction as envisaged by the deal confirmation, the Petitioner was forced to procure US$800,000 from the open market on 29 June, 2012 (in relation to the first option) and crystallized the said options transaction thereby incurring a loss of Rs. 1,07,68,000/-. Similarly, it is pleaded in the Petition that for all the other options also the Petitioner had to procure US$800,000 from the open market to crystallize the said options transactions which resulted in a loss that was attributable to the Respondent Company. These details and averments can be found from paragraphs 21 to 31 of the Company Petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 012, within a period of 21 days from the date of receipt of the notice failing which the Petitioner would be constrained to initiate legal proceedings against the Respondent Company including initiating winding up proceedings contemplated under Section 433 read with Section 434 of the Companies Act, 1956. Despite receipt of this notice, no reply was given to the said notice and hence the present Company Petition. It would be pertinent to mention that the amount claimed in this notice was for a lesser amount than what is claimed in the Company Petition, because options 8 and 9 (expiring in January, 2013 and February, 2013 respectively) had not yet expired when the said notice was issued. Since the Petition is filed after the expiry of even options 8 & 9 and payments thereunder have not been made by the Respondent Company, the same are included in the claim made in the present Company Petition. I must also mention here that by the time I heard this Petition, all the options have expired (namely options 10, 11 & 12) and no payments thereunder have been made by the Respondent Company to the Petitioner - Bank. (t) For the sake of completeness, I must also mention here that to recover i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifference between the Dollar rate on the date of the expiry of the respective option and the strike price agreed to between the parties, namely Rs. 43.15. According to Mr. Kamdin this is also further borne out by the Master Circular No./6/2007-08 dated 2 July, 2007 issued by the Reserve Bank of India, and more particularly Annexure VII thereof which stipulates that option contracts could be settled on maturity either by delivery on spot basis or by net cash settlement in Rupees on spot basis as specified in the contract. 6. On the other hand, despite several contentions being raised in the Affidavit in Reply, Mr Cama, learned Counsel appearing on behalf of the Respondent Company, resisted this Petition only on the following grounds:- (i) the aforesaid Deal Confirmation was entered into to square off the old contracts/deals dated 20 November, 2007; 23 November, 2007; 19 December, 2007; 19 December, 2007 and 22 January 2008 entered into by the Respondent Company with CBOP. The purpose of entering into this Deal Confirmation was to square off all the earlier deals which were unenforceable in law. This Deal Confirmation which was entered into with the Petitioner Bank was merely a pap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the Debt Recovery Tribunal. 8. I have heard the learned counsel for the parties at length and perused the papers and proceedings in the Company Petition as well as the annexures thereto. The first defence raised by Mr Cama was that the Deal Confirmation dated 26 June, 2008 entered into with the Petitioner Bank, was only for the purpose of squaring off the old transactions entered into by the Respondent Company with CBOP which were unenforceable in law. According to Mr Cama, it was the understanding between the Petitioner Bank and the Respondent Company that this Deal Confirmation was entered into only to accommodate the Petitioner Bank and allow it to square off old transactions that were entered into with CBOP and who was subsequently taken over by the Petitioner Bank. 9. After carefully considering the argument canvassed by Mr Cama, I am unable to agree with the aforesaid submissions. As noted earlier, under the Deal Confirmation, it was agreed between the parties that any time after six months from the trade date (25 June, 2008) till the expiry / maturity of the deal, if negative MTM of the options transaction exceeded Rs. 5 Crores, the Petitioner Bank would be entitled t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orized Mr. Radheshyam Agarwal and/or Mr. Rohan Agarwal to transact in spot and forward any foreign exchange and enter into interest rate and foreign currency swap options and any other derivative transactions that may from time to time be used to hedge the Company's interest and foreign exchange exposure risk. He submitted that admittedly these letters have not been signed by either Mr. Radheshyam Agarwal or Mr. Rohan Agarwal, and therefore, the same are not binding on the Respondent Company. 11. I am unable to accept this submission of Mr Cama for multiple reasons. Firstly, the board resolution, and on which reliance was placed by Mr. Cama, only authorized Mr. Radheshyam Agarwal and/or Mr. Rohan Agarwal to enter into derivative contracts. This does not mean that all correspondence that is subsequently exchanged between the Respondent Company and the Petitioner has to be only signed by Mr Radheshyam Agarwal and/or Mr Rohan Agarwal. It is one thing to contend that the transaction itself was not entered into by an authorized person and it is wholly another to say that the correspondence exchanged with reference to that very transaction, was not signed by a person authorized to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respondent Company was called upon to honour its commitments under the first option that expired on 27 June, 2012. Looking to all these facts, I am clearly of the view that this defence has been put up only as an afterthought to somehow wriggle out of the liability that the Respondent Company had incurred under the said Deal Confirmation. For all the aforesaid reasons, I have no hesitation in rejecting the argument of Mr Cama that the Deal Confirmation dated 26 June, 2008 entered into between the Petitioner Bank and the Respondent Company was not a real transaction that could be enforced against the Respondent Company. 13. The next argument canvassed by Mr Cama was that the Deal Confirmation dated 26 June, 2008 does not cast any obligation on the Respondent Company to make any payment. He submitted that the Deal Confirmation itself contemplated that on the date of the expiry of the relevant option, if the US Dollar traded above Rs. 43.15, then the Respondent Company was to sell US$800,000 to the Petitioner @ Rs. 43.15 per US Dollar. If the Respondent Company failed to sell/ deliver US$800,000 as contemplated in the Deal Confirmation, then the remedy of the Petitioner was to seek ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount." (emphasis supplied) 17. Looking to all these facts, I am unable to accept the submission of Mr Cama that on expiry of the relevant option, if the Respondent failed to sell/ deliver US$800,000 to the Petitioner, then the only remedy available to the Petitioner was to sue for specific performance. The Master Circular issued by the Reserve Bank of India as well as other documents (as more particularly set out above) clearly establish that the options transactions were to be settled either by delivery of the US Dollars or by a nett cash settlement. This being the position, I have no hesitation in rejecting this argument. 18. As far as the argument of Mr Cama on this contract being a "wagering contract" is concerned, I find this argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nged this claim and contended that the contract was still alive and that the Bank was prepared to work out suitable risk mitigation structures. Not satisfied with the stand taken by the Bank, the Plaintiff filed a suit before the Madras High Court inter alia seeking a declaration that the Deal Confirmation in Contract No. OPT 727 purportedly made by the Plaintiff was void ab-initio, illegal, violative of RBI Guidelines, opposed to public policy and unenforceable and not binding on the Plaintiff. One of the issues raised before the Madras High Court for challenging the said Contract No.OPT 727 was that the same amounted to a wagering contract and therefore hit by Section 30 of the Indian Contract Act, 1872. Dealing with this contention as to what is a contract of wagering, the observations of the Madras High Court (at paragraph 53 to 59) are very instructive in this regard and read thus:- 53. As we have seen in the first part of this order, the plaintiff challenges the contract in question as being void, violative of the law of the land, opposed to public policy and as a wagering contract. It is the stand of the plaintiff in the suit that the contract is violative of the Master cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lose upon the determination of the event. Each party must stand either to win or lose under the terms of the contract. It will not be a Wagering Contract if one party may win but cannot lose or if he may lose but cannot win or if he can neither win or lose. (3) The parties have no actual interest in the occurrence or non- occurrence of the event, but have an interest only on the stake. 56. Applying the above essential features, contracts for differences in stock exchange or commodity market transactions were once treated as wagers Grizewood v. Blane, 1851 (11) CB 526 and Richards v. Starck, 1911 (1) K.B. 296. They were held to be wagers because of the understanding of the parties that the subject matter should neither be transferred nor paid for, on the settlement day, but that on that day, one party should pay to the other, the difference between the market price on that day and the price on the day of the contract. Thus where a series of contracts for the sale and purchase of shares gave the buyer an option to demand delivery on payment of an extra sum, it was held that they were wagers, since it was only if the option was exercised that they would become genuine transactions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1975 (2) SCC 208. 59. The mere fact that the parties never intended to take delivery at the end would not also make a transaction a wager. In Ismail Lebbe Marikar Ebrahim Lebbe Marikar v. Bartleet and Company, AIR (29) 1942 Privy Council 19, a firm of share and produce brokers entered into an arrangement with the grower of rubber in Ceylon. Under the arrangement, the broker was to buy rubber for the defendant in the London market, but there was to be no delivery. The arrangement was that the defendant should pay the differences when the market was against him and that he should be paid the differences, when the market was in his favour. Holding such a contract not to be a wager, the Privy Council held as follows: "The essence of a bet is that both parties agree that they will pay and receive respectively on the happening of an event in which they have no material interest. The transaction may be cloaked behind the forms of genuine commercial transactions; but to establish the bet, it is necessary to prove that the documents are but a cloak and that neither party intended them to have any effective legal operation. Where the documents show an ordinary commercial transaction, and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent Company did not honour its commitments under the options transactions, the Respondent Company had suffered a "loss". In this regard, Mr Cama placed reliance on a decision of the Supreme Court in the case of Union of India v/s Raman Iron Foundry AIR 1974 SC 1265, as well as a decision of a Single Judge of this Court (Dr D.Y. Chandrachud J. as he then was) in the case of E-Citty Media P.Lttd. v/s Sadhrtta Rettail Lttd. [2010] 153 Comp Cas 326 (Bom) 22. On carefully considering the arguments of Mr Cama, I am unable to accept the submission that the claim made in the present Company Petition is nothing but a claim in damages. As mentioned earlier, the amounts claimed in the present Petition arise directly under the Deal Confirmation dated 26 June, 2008. The options mentioned in this Deal Confirmation could be settled by two methods. The first method was the actual delivery of US$800,000 on the date of expiry of the relevant option. If this was not done, then the same had to be settled on a nett cash settlement basis. Since admittedly the Respondent Company did not fulfill its obligations under the relevant options by delivering US$800,000 to the Petitioner, the present claim in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the word "debt" in Section 2(g). 25. Transactions in derivatives, fall within the category of "business activity undertaken by the Bank" as they are covered by Section 6(1) of the Banking Regulation Act, 1949. Therefore I have no difficulty in coming to the conclusion that if the transaction in question gives rise to a claim by the Bank, of any liability, on the part of the plaintiff, the defendant-Bank may certainly be able to invoke the provisions of Act 51 of 1993. Since the word "debt" is defined to include any claim arising out of the business activity of the bank, it is not necessary that only in those cases where there is an act of lending and borrowing that the provisions of Act 51 of 1993 could be invoked by the Bank. Therefore I have no difficulty in accepting the first limb of the argument of Mr. V. Ramachandran, learned Senior Counsel appearing for the respondent-Bank, that if the transaction in question gives rise to a claim by the Bank, the Bank has to go before the Debts Recovery Tribunal." 23. This being the position, I am unable to accept the submission of Mr Cama that the present claim is in the nature of damages and therefore the present Company Petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te on the date of the expiry / settlement of the respective options. To counter to this argument, Mr Kamdin, and in my view correctly so, submitted that as far as the US Dollar rate is concerned, it is determined at the end of the closing business day of the expiry of the option. In fact, under the Master ISDA Agreement, the calculation agent is the Petitioner Bank, unless otherwise specified in the Deal Confirmation in relation to a particular transaction (See page 64 of the paper-book). In fact, even the Deal Confirmation dated 26 June, 2008 specifically states that the calculation agent shall be as per the signed Master ISDA Agreement which in term makes the Petitioner Bank the calculation agent. In each of the e-mails that have been sent by the Petitioner Bank to the Respondent Company on the expiry of the relevant options, a specific US Dollar rate has been mentioned by the Petitioner Bank. It is therefore incorrect to contend that there was nothing on record to show or indicate as to what was the US Dollar rate on the date of the expiry of each of the options. In any event, Mr Cama tendered the US Dollar rates as downloaded from the internet on the dates when each of these op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xceeds the limit of Rs. 500/- indicated in section 434. Shri Tulzapurkar submitted that the position is not res integra being concluded by the decisions both of the English Courts and of the Calcutta High Court, which decisions have taken view contrary to the view which found favour with the learned Company Judge. Our attention was invited to these decisions and it becomes necessary therefore to refer to them. 7. In point of time, the first of the decisions in the decision given by Plowman J. in In re Tweeds Garages Ltd., [(1962) 1 Chancery 406.] The relevant observations are to be found at pages 413 and 414 of the report. An opinion has been expressed in the said judgment that it would be quite unjust to refuse a winding-up order to a petitioner who is admittedly owed moneys which have not been paid merely because there is a dispute as to the precise amount owing. 8. Almost to the same effect are the observations in Cardiff Preserved Coal and Coke Company v. Norton, [(1866-1867) 2 Law Reports Chancery Appeals 405.]. A contention had been advanced before the appellate Court that the winding-up order which was being considered was bad because the creditor had demanded a sum of GBP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e so, the impugned order will be required to be set aside and the petition will now go back to the Company Judge for reconsideration of the position and to decide whether it is required to be admitted and whether further directions after admission are required to be given." (emphasis supplied) 28. The second decision is in the case of Tatta Finance Lttd v/s Kanoria Sugar and General Manufactturing Company Lttd., Mumbai. (2002) 1 Mh. L. J. 617 The relevant portion reads thus:- "8. It is well settled that a winding up petition should not be allowed to be taken as a means to recover debt from the company. It is not a legitimate way to enforce payment of debts which are bona fide disputed by the company and cannot be used as a weapon to pressurise and coerce the company to make payments. But it is also equally well settled that when the debt is undisputed and the defence is not bona fideand genuine, the Court will not act upon a defence that the company has liability to pay but chooses not to pay and the creditors will, in such case, be entitled to a winding-up order. This is clear from the following observations of the Supreme Court in Madhusudan Gordhandas and Co. v. Madhu Woollen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e debt of company is bona fide disputed. In the instant case, the Company's case is that the total amount of more than Rupees Two crores is payable by the company. It is true that there is some dispute about the claim of enhanced lease rentals on account of disallowance of claim of depreciation by the Income Tax department. There is, however, absolutely no dispute for the outstanding lease rentals which are in the range of nearly Rupees Thirty Lakhs. The terms of agreement are also very clear and in case of default, the company is liable to pay the service charges. When a part of claim made by the creditor is seriously disputed but the remaining portion is prima facie appear to exceed the limit of Rs. 500/- indicated in section 434 of the Act, it would be unjust to refuse wind up order on the ground that there is dispute as to precise amount owned.In re Tweeds Garages Ltd., (1962) 1 Ch. 406: it was clearly held that it would be unjust to refuse a winding up order to the petitioner who has admittedly owned moneys which have not been paid merely because there is a dispute as to the precise amount owning. Almost "I, therefore, hold that a notice under section 434 of the Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his defence is taken for the first time in this Company Petition and was never raised by the Respondent Company at the time when it disputed its liability on the expiry of the relevant options under the Deal Confirmation dated 26 June, 2008. I therefore find that this defence is neither in good faith nor bonafide which would persuade me to dismiss this Company Petition on this ground. If in fact, it was the case of the Respondent Company that it was not a signatory to the Deal Confirmation which in turn did not give rise to any liability, such a fundamental defence would have been taken up by the Respondent Company at the very first instance and would not find place for the first time only in the affidavit in reply filed to contest the contentions raised by the petitioner Bank. This being the position, I unhesitatingly reject this argument. 32. For all the aforesaid reasons, I find that there is no bonafide defence that has been raised by the Respondent Company. The liability incurred by the Respondent Company to the Petitioner - Bank is on the basis of a written contract (the Deal Confirmation) entered into between them which the Respondent Company has, without sufficient cause, ..... 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