9911796707
TMI Blog2012 (8) TMI 1096X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreements of sale in accordance with the conditions stipulated therein. 2. The respondent is a company incorporated under the Companies Act with its registered office at Hyderabad. Its authorized share capital is Rs. 75 Crores divided into 75 lakh equity shares of Rs. 100/- each. Its paid up capital is said to be Rupees Five lakhs consisting of 5000 shares of Rs. 100/- each. The respondent claims to have entered into a development agreement-cum-GPA dated 30.12.2005 with 14 other companies, (which later became its subsidiaries), for construction of independent houses and multi-storeyed buildings consisting of residential apartments along with certain common utilities and facilities forming part of the township. These apartment buildings were to come up in different extent of lands earmarked for construction of the apartment complex from out of the total extent of Ac. 85-36 gts situated in the Hill County lay out. Brochures were released and wide publicity was given, in both the print and electronic media, for the proposed venture which the petitioners herein claim to have been influenced by, and to have been induced thereby, to purchase an apartment which the respondent had prom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) of the Companies Act was issued, (in the case of the petitioner in C.P. No. 172 of 2010 on 25.07.2010), and was delivered at the registered office of the respondent company. In reply to the statutory notice the respondent, vide legal notice dated 16.08.2010, admitted receipt of the sale consideration. They, however, contended that the delay in completion of the project was because several private investors and financial institutions had withdrawn from the Hill County project. 5. Sri Prabhakar Sripada, Learned Counsel for the petitioners, made elaborate submissions both oral and written. Sri S.R. Ashok, Learned Senior Counsel and Sri S. Niranjan Reddy, Learned Counsel appearing on behalf of the respondent company in these company petitions, and Sri D. Prakash Reddy, Learned Senior Counsel appearing on behalf of ILFS, have also put forth extensive oral and written submissions. Ms. G. Sudha, Learned Counsel appearing on behalf of the Hill County Home Owners Association, and Sri V. Mohan Srinivas, Learned Counsel appearing on behalf of the MAYTAS Hill County apartment Buyers Association also made submissions. Several judgments were cited by Counsel on either side which shall be ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rily apply to the creditors also. There is an express statutory recognition of the position that the Court must have regard to the wishes of creditors and contributories in all matters relating to the winding up of a company. (Bharat Petroleum Corporation Ltd. v. National Organic Chemical Industries Ltd. (2004) 120 CC 333 (Bom. H.C.); National Textile Workers' Union (1983) 1 SCC 228). Neither the petitioner nor the court would be under any obligation to give notice of such application to the workers (or creditors). It would be for them to apply for being heard and, if they do so, they would be entitled to appear and be heard. (National Textile Workers' Union (1983) 1 SCC 228). It is, therefore, evident that, while the Court would not give notice of the filing of the company petition to the creditors and shareholders, it is open for any one of them to file an application before this Court requesting that they be heard in the matter. 10. As IL&FS has been inducted into the management, and has invested in the share capital, of the respondent company and as the applicants, in the other applications, are all persons who have advance money to the respondent for construction and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o need to prove its contents; the respondent cannot be permitted to resile from its admission made in the initial counter affidavit; without filing a petition for amending the pleadings, merely filing an additional counter does not meet the requirements of law; the respondent has received payments in accordance with the payment schedule contained in the agreement of sale, and has referred the matter for arbitration in terms of clause No. 14 thereof; as such the respondent is not entitled to take the plea of insufficiency of stamp duty or non-registration, more so as it had acted upon the agreement of sale much prior to the filing of these winding up petitions; and the original copy of the agreement of sale has been handed over to State Bank of India from whom the petitioner availed a housing loan. 14. I find considerable force in the submission of Sri S. Niranjan Reddy, Learned Counsel, that an agreement of sale is required to be stamped with the amount specified in Article 6B of Schedule 1A of the Indian Stamp Act, 1899 i.e., at 1%; the agreement of sale, in the present case, is stamped only with Rs. 100/-which is insufficient; and it requires registration in terms of Section 17( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . yards; and the petitioner, by entering into the said agreement of sale with the respondent along with land owners, had accepted the terms and conditions mentioned therein. Again in its reply notice dated 16.8.2010 the respondent reiterated the aforesaid admission. 19. In the counter affidavit filed to the company petition the respondent stated that the petitioner was misinterpreting and misunderstanding the agreed terms and conditions of the agreement of sale, and had purported to unilaterally and arbitrarily cancel/terminate it by a request for cancellation; they were seeking refund of money, by their notices; the respondent had replied thereto stating that all claims, disputes and all issues pertaining to the agreement were referred to arbitration; and the agreement of sale provided for the disputes between the parties to be referred to arbitration. The respondent further stated that the relationship between the petitioner and the respondent was governed by the agreement of sale, and the crux of the dispute between the parties was whether the petitioners were entitled to terminate and rescind the agreement of sale. 20. It is evident, therefore, that the respondent has not onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of his claim by seeking to get the two documents admitted in evidence. In other words the plaintiff will be entitled to a decree on the failure of the defendant to make out the plea set up by him in defence. The contention of the petitioner is supported by the observations of Ananthakrishna Aiyar J. in 63 MLJ 303 at p. 308 with which I respectfully agree. The learned Judge therein points out after referring to the provisions of S. 58, Evidence Act, that when the fact of an execution of a document is admitted it need not be proved and this would be so even when the document in question is not admissible on account of any provision of the Stamp Act........." (emphasis supplied) 23. Both the judgments of the Madras High Court in Alimane Sahiba AIR 1932 Mad 693 : (1932) 36 LW 470, and Ponnusami Chettiar AIR 1947 MAD 422 are binding on this Court, as has been laid down by the Full bench of this Court in M. Subbarayudu v. State of A.P AIR 1955 AP 87. 24. The respondent has admitted having received large sums of money from the petitioners. (that the petitioner in C.P. No. 172 of 2010 had paid Rs. 76,47,122/-to the respondent is evident from the petitioner's account in the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2001) 5 SCC 407). 27. It is left to the discretion of the Court whether a petition for winding up should be entertained or not despite the fact that an alternative remedy is available, and has been availed by the petitioner. (UTI Bank Ltd. v. Shree Rama Multitech Ltd. (2005) 126 CC 15 (Guj)). Existence of an alternate remedy, in terms of the arbitration clause, does not necessitate refusal by this Court to exercise its discretionary jurisdiction under Section 433(e) of the Companies Act. Proceedings under Section 433/434 read with Section 439 of the Companies Act are in a completely different jurisdiction than the one under which the remedy or relief can be sought by way of arbitration. It does not appear to be the intention of the Legislature that the power of winding up, available to the High Court, can be conferred on an arbitrator. The petition for winding-up cannot be treated as one for recovery of debt from the Company. (William Jacks & Company (India) Limited v. Saraswati Industrial Syndicate Limited 1986 (59) CC 876 (P&H HC); Hind Mercantile Corporation P. Ltd. v. J.H. Rayner & Co. Ltd. 1971 (41) CC 548, (Mad. HC); Tirlok Chand Jain v. Swastika Strips (p.) Ltd. 1991 (70) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of a winding up petition. (ICDS Limited v. Kamar Trading Co. (P) Ltd., (2005) 125 CC 849 (MP)). In appropriate cases the Company Judge may, before a petition is admitted and advertised, hold a summary enquiry to ascertain whether a prima facie case is made out by the petitioning creditor. At the stage of summary enquiry the Court is called upon to satisfy itself that it is a case for admission and advertisement and nothing more. Before admitting and advertising a petition for winding-up the Company Court, in a summary enquiry, after hearing the petitioning-creditor and the Company, should record its prima facie findings on (i) Whether the petitioning-creditor is a creditor to whom the Company owes an ascertained sum of money or substantially ascertained sum of money; (ii) Whether the said debt is within limitation; (iii) Whether the defence of the Company is valid and bonafide or whether it is a mere moonshine; (iv) whether, from the material on record, a presumption arises that the Company is unable to pay its debts as contemplated under S. 434 (1) (a) or (b) as the case may be; or (v) Whether, from the material on record, the Court is prima facie satisfied that the Company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t us now examine the merits of the case. The petitioner in C.P. No. 172 of 2010 was allotted a flat by the respondent in an apartment known as "Nainital" Type 4, Apartment No. 12G, with a built up area of 1889 square feet plus one car parking plus garden deck area of 394 square feet; the sale consideration was Rs. 77,75,836/-; the agreement required Rs. 73,87,043/- to be paid by November, 2008; the balance amount of Rs. 3,88,793/- was to be paid on the date of handing over of the apartment; the petitioner paid Rs. 76,47,122/-; and, thereafter, by December, 2008 the entire construction activity came to a stand still. The petitioner, in C.P. No. 172 of 2010, terminated the agreement by notice dated 27.06.2010, and had called upon the respondent to repay the advance amount of Rs. 76,47,122/-. Subsequently, by way of the notice dated 25.07.2010, the petitioner called upon the respondent to pay Rs. 76,47,122/- failing which he would initiate action for winding up. As such the requirement of making a demand, under Section 434(1)(a), has been complied with. However it is only if the petitioner is held to be a creditor, to whom the respondent is indebted for a sum exceeding Rs. 500/-, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depends on the facts and circumstances of the case. (American Express Bank Ltd. (1999) 96 Comp Cas 841 (Guj)). 35. While the petitioners have raised a demand by issuing the statutory notice under Section 434(1)(a) and as their claim for being paid the money due, consequent upon termination of the agreement, has not been satisfied by the respondent, it is necessary to examine whether failure on the part of the respondent to pay the sum claimed would amount to "neglect to pay", and the disputes raised by them, regarding non-payment of the amounts claimed by the petitioner, are bonafide or not, for it is only if the respondent is held to have neglected to pay the debt due, and their defence is held to be a mere moonshine, can the ingredients of Section 433(e) read with Section 434(1)(a) be said to have been satisfied. It is convenient to classify the rival contentions, elaborately urged by Counsel on either side, into different sub-heads. (i). BREACH OF CONTRACT: WOULD A WINDING UP PETITION LIE? 36. Sri S. Niranjan Reddy, Learned Counsel, would submit that, in order to maintain a winding up petition, crystallization of the debt/liability is an essential ingredient for which there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer of Property Act provides that a mere right to sue for damages cannot be transferred. A claim for damages for breach of contract is not a claim for a sum presently due and payable, and does not become a debt even after a verdict is returned in favour of the plaintiff till the judgment is actually delivered. (Union of India v. Raman Iron Foundry (1974) 2 SCC 231; Jabed Sheikh v. Taher Mallik AIR 1941 Cal. 629; S. Milkha Singh v. N.K. Gopala Krishna Mudaliar AIR 1956 Punj. 174; Iron and Hardware (India) Co. AIR 1954 Bom. 423; Jones v. Thompson (1858) 27 LJQB 234; O'Driscoll v. Manchester Insurance Committee (1915) 3 KB 499). Adjudication upon the issue relating to a breach of a condition of the contract, and adjudication of assessing damages arising out of the breach, are two different and distinct concepts and the right to assess damages arising out of a breach would not include a right to adjudicate upon as to whether there was any breach at all. (State of Karnataka v. Shree Rameshwara Rice Mills (1987) 2 SCC 160; J.G. Engineers Private Limited v. Union of India (2011) 5 SCC 758). While there may be a difference in regard to ascertainment of loss or the quantum of damage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Section 75 stipulates that the person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract. 41. Black's Law Dictionary Sixth Edition defines "Breach of contract" as failure, without legal excuse, to perform any promise which forms the whole or a part of a contract; prevention or hindrance by a party to the contract of any occurrence or performance requisite under the contract for the creation or continuance of a right in favour of the other party or the discharge of a duty by him; and unequivocal, distinct and absolute refusal to perform the agreement. 42. While a claim for damages, arising out of a breach of contract, must be adjudicated by a competent civil court or an arbitrator before it crystallizes into a "debt", the submission that a few High Court have held that the remedy for breach of contract is only by way of a civil suit, and a winding up petition does not lie in such cases, does not merit acceptance. Stray observations, to that effect, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es where no third party can seek any indulgence or impleadment. In winding up proceedings, the lis is not merely between the petitioning party and the company sought to be wound up. Once the petition is admitted the creditors, contributories, shareholders, etc., seek redress in the proceedings, and even oppose the winding up. Sometimes the relief for winding up is denied when it is against public interest. (Coromandel International Ltd. v. Chemcel Biotech Ltd., (2011) 4 Comp. Law. J 279 (AP)). Section 433 of the Companies Act is not intended to supplant the jurisdiction of a Civil Court to adjudicate a money suit. (Viral Filaments Ltd. v. Indusind Bank Limited 2003 (113) CC 85 (Bom)). 45. In Indo Alusys Industries Ltd v. Assotech Contracts (India) Ltd., 2009 (11) DRJ 384 the Delhi High Court, following its earlier judgment in Rishi Pal Gupta v. S.J. Knitting and Finishing Mills Private Limited 1998 (45) DRJ 522, and in Karam Chand Thapar & Bros (Coal) Sales Ltd., v. Acme Paper Ltd., AIR 1994 DELHI 1 the Delhi Court, following the judgment of the Patna High Court in Central Bank of India v. Sukhani Mining And Engineering Industries Pvt. Ltd., (1987) (47) Company Cases 1, held that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld mean that, despite a breach of contract by the borrower -company in not adhering to the repayment schedule under the loan agreement, and even if the amount due to the bank/financial institution is shown by the company to be a liability in its Balance Sheet, the bank/financial institution cannot file a petition for winding up. To so hold would render Section 433(e) and Section 434 of the Companies Act redundant, and inapposite surplusage, for there can hardly be a case where a "debt due" does not result from a breach of contract. Any interpretation which results either in addition or deletion of words, or as rendering any statutory provision redundant, must be avoided. (Banarsi Debi v. ITO (1964) 7 SCR 539; Attorney-General v. Carlton Bank (1899)2 QB 158; V. Narasimha Rao v. The Government of Andhra Pradesh Judgment in W.P. No. 25583 of 2010 dated: 31.01.2012). If there is no bonafide dispute with regards the sum payable towards the principal, it is open to the creditor to resort to both the remedies of filing a civil suit as well as filing a petition for winding up of the company. (Mediquip Systems (P) Ltd. (2005) 7 SCC 42; Tube Investments of India Ltd. v. Rim and Accessories ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lier committed to funding the project and had later resiled and withdrawn therefrom, were mentioned in the notice; while blame was sought to be laid on various attachments and court orders for the delay in completion of the project, no details of such Court orders or attachment orders were specified; the names of the erstwhile Chairman of the respondent company Sri B. Ramaraju, S/o Sri B. Ramalingaraju and his brother Sri B. Tejaraju, (who are also the shareholders of the respondent company), were shown in the provisional attachment order dated 18.08.2009 passed by the Director of Enforcement in terms of the provisions of the Prevention of Money Laundering Act, as persons who had received "proceeds of the crime" of Rs. 28,02,750/- and Rs. 28,52,750/- respectively; the said provisional attachment order was upheld by this Court by its order dated 04.03.2011 (B. Ramaraju v. Union of India 2011(4) ALD 383); it is not even the case of the respondent that they had notified the petitioner of the 'force majeure' events as stipulated under clause 6(ix); no document to this effect has been placed on record; the Balance Sheet of the respondent showed Rs. 3,25,86,426/- as having been s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor finds it impossible to do the act which he promised to do. (Ganga Retreat & Towers Ltd. v. State of Rajasthan (2003) 12 SCC 91; Satyabrata Ghose AIR 1954 SC 44). 53. The agreement of sale, in C.P. No. 172 of 2010, was made and executed on 05.09.2007 between fourteen land owning companies and the respondent company-developer on the one hand, and the petitioner on the other. Clause 3 of the said agreement prescribes the payment terms. Clause 6(ix) stipulates that the land owners and the developer shall complete construction within the stipulated time mentioned in the agreement unless suffered by reasons of "force majeure", and any event of "force majeure" shall be notified by the land owners and the developers to the purchasers. Clause 7 of the agreement of sale relates to construction and, under sub-clause (a) thereof, the developer and land owners assured that they would complete construction of the schedule apartment within twenty months from the date of execution of the agreement subject to the av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agreement by any party to the other, to be in writing, in English language and delivered in person or by registered post addressed to the concerned party at the address set out in the said clause. The address of both the land owners and the developer is the address of the respondent company. Clause 14(a) provides that, in the event of any dispute between the parties in connection with the validity, interpretation, implementation or breach of any provision of the agreement or any other disputes including the question whether there was a proper termination of the agreement, the dispute should be resolved through arbitration. Schedule 2 of the agreement stipulates the payment schedule, and Schedule 4 the properties specifications. 54. As the agreement was entered into on 05.09.2007, the twenty month period stipulated in Clause 7(a) expired on 05.05.2009. The grace period of three months, as stipulated in Clause 7(b), expired by 5th August, 2009. The eight month penalty period, as stipulated in clause 7(d) of the agreement, also expired by 5th April, 2010, as it is not in dispute that the respondent did not give a revised schedule of construction completion to the petitioners befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom continuing construction. Even otherwise it is not in dispute that the construction activity was stopped in the month of December, 2008 itself, much prior to the status quo order of 09.11.2009 and this order cannot, therefore, be pleaded as a "force majeure" event. No judgment has been placed before this Court wherein an attachment order passed by the Income tax department has been held to fall within the ambit of "force majeure" events. The then Chairman of the respondent company Sri B. Rama Raju, and the then director Sri B. Teja Raju, (who were both also the shareholders of the respondent), are the sons of Sri B. Ramalinga Raju, and are said to have been shown in the provisional attachment order dated 18.08.2009 as persons who received "proceeds of the crime". In any event the plea that investigations and proceedings were incorrectly instituted against the respondent on the basis of their perceived association with Satyam Computer Services Ltd is not supported by any evidence on record, and does not merit acceptance in the absence of any Court recording a finding that the investigation and other proceedings were incorrectly instituted. Courts have no power to absolve a party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchaser to adhere to the payment schedule contained in Schedule 2 of the agreement, or the purchaser's default to pay interest and the principal within the grace period; and violation of the terms and conditions of the agreement. Clause 9(b) relates to termination of the agreement by the purchaser. Sub-clauses (a) and (b) of Clause 9 confer power on the developer and land owners on the one hand, and on the purchaser on the other respectively, to unilaterally terminate the agreement. Prima facie, on a reading of Clause 9, it is evident that cancellation of the agreement is not required to be consented to by all the parties to the agreement. 60. It is not in dispute that the entire payment made by the petitioners herein was only to the respondent, and not directly to the 14 land owning companies. The submission that the respondent had shared the amount, received from the petitioners, with the land owning companies, (which are all subsidiaries of the respondent company), is an internal arrangement between the respondent and those companies and, since the petitioners are not parties to such a mutual arrangement, the amount repayable, in terms of Clause 9(e) of the agreement, is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated time. It must, however, be borne in mind that the agreement must be read as a whole and, as clause 9(d) and (e) provide for repayment of the amounts (received earlier) to the purchaser within 30 days of cancellation of the agreement, prima facie clause 7(d) would apply only during the eight months grace period beyond the time stipulated under Clause 7(a), 7(b) and 7(c), and as long as the agreement is in force. While clause 7(d) requires penalty at Rs. 5/- per square feet of the contractual built up area to be paid for every month of delay, upto a maximum of eight months, by the respondent company to the petitioners herein, and though the Balance Sheet of the respondent company as at 30.03.2010 contains a provision for penalty of Rs. 5,51,82,730/- to be paid to the customers for the delay in completion of construction and delivery of flats, neither has such amounts been paid by the respondent to the petitioners nor have the petitioners claimed that the penal amount was a "debt due". Prima facie clause 7(d) would have not application after the agreement has been terminated. In view of the unambiguous language used in clauses 9(d) and (e), the mere prescription of a penal clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the minimum prescribed sum under Section 434(1)(a), failure to make payment would amount to "neglect to pay"; the defence put forth by the respondent is frivolous, not substantial and is a mere moonshine; the respondent is unable to pay its debts; they did not even file their annual returns before the Registrar of Companies for the financial years 2008-09 and 2009-10; the Registrar of Companies issued a show cause notice to the respondent for their failure to do so; and, despite 15 days time being granted, the respondent did not file their returns resulting in the Registrar of Companies filing three criminal complaints before the Special Judge for Economic Offences which were later registered as C.C. Nos. 191 to 193 of 2010; the Income Tax attachment orders against the respondent and its 14 subsidiary companies are still in force; as the respondent failed to pay the amount demanded, within three weeks of receipt of the statutory notice, the petitioners have invoked the jurisdiction of this Court under Section 433 (e) read with Section 434 of the Companies Act for winding up on the ground of the respondent's inability to pay its debts; the Company Court is not only a Court of la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antial grounds, it should not be able to avoid the statutory demand. (IBA Health (India) Private Limited (2010) 10 SCC 553). 69. The petitioner is not entitled ex debito justitiae to an order of winding-up on the mere plea that the debt was not paid. A petition presented ostensibly for a winding-up order but really to exert pressure will be dismissed. (Amalgamated Commercial Traders (P) Ltd. (1965) 35 Comp Cas. 456 (SC); Buckley on the Companies Act, 13th edition, page 451; Reliance Infocomm Ltd. (2008) 142 Comp. Cas. 170). Where there are serious disputes between the parties on each essential fact which necessitates a trial in appropriate civil proceedings, and the defence raised by the company is genuine and bonafide, a petition for winding-up is not the remedy. (Ram Kishan v. Kanwar Papers Private Ltd. (1990) 69 Comp Cas 209 (HP)). 70. A dispute would be substantial and genuine if it is bona fide and not spurious, speculative, illusory or misconceived. The Company Court, at the stage of admission, is not expected to hold a full trial of the matter. It must decide whether the grounds appear to be substantial. The Company Court is expected to go into the causes of the refusal by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Infocomm Ltd. (2008) 142 Comp. Cas. 170). Winding up jurisdiction should not be allowed to deteriorate into an instrument of arm-twisting of a corporate body to compel it to meet a claim, which it would not otherwise pay for legitimate reasons, even though the reasons may not eventually be able to survive a close judicial scrutiny. (Agrob Anlagewbau Gmbh v. Orient Ceramics and Industries Ltd., (1986) 60 Comp Cas 691). 72. No hard and fast rule can be laid down in inquiring into the question of a bonafide dispute with regard to any debt. Whether there is a bona fide dispute or not will necessarily depend on the facts and circumstances of each particular case. (P.G. Bhatia & Co. (1977) 47 Comp Cas 438). The controversy must be bonafide in both the subjective and objective sense. This means that it must be honestly believed to exist and must be based on substantial or reasonable grounds. "Substantial" means having substance and not frivolous or vexatious and which the court should ignore. There must be so much doubt and question about the liability to pay the debt that the Court sees that there is a question to be decided. The onus is on the company to bring forward a prima facie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest exists, and whether such interest or right ever will exist depends upon a future uncertain event. "Contingent debt" has been defined therein to mean one which is not presently fixed, but may become so in the future with the occurrence of some uncertain events. As even a debt which is not presently fixed, but may become so on the occurrence of an uncertain event, is a "contingent debt", a person to whom such a contingent debt may have to be paid in future would be a "contingent creditor". Even if the respondent's contention that the petitioners are not their creditors is presumed to have some basis, the petitioners may well be entitled to file winding up petitions as "contingent creditors" as the amounts paid by them to the respondent, (which is liable to be refunded consequent upon termination of the agreement), can be realized by way of a suit, and the contingency would crystallize on a decree being passed by a competent Civil Court. Rule 96 of the Companies Court Rules, 1959 stipulates that admission is contemplated for every winding-up petition whether it be by a prospective or contingent creditor or by any one else eligible to apply for winding up. In the case of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 9 of the Arbitration and Conciliation Act, and obtained an order of injunction against the respondent restraining them from alienating various properties; while the Balance Sheet showed advances from customers, for purchase of apartments, was more than Rs. 4.88 crores as on 31.03.2006, the said amount increased to Rs. 110.50 crores as on 31.03.2007; not even a single apartment has been completely constructed; the entire advance amount is a liability; and, in order to suppress their precarious financial position from being revealed, the respondent had deliberately chosen not to file its annual returns with the Registrar of Companies for the financial years 2008-09 and 2009-10. Reference is made by the Learned Counsel to the arbitration fees claimed by the arbitrator of Rs. 15,000/- to contend that failure even to make payment of the said fee reflects the respondent's inability to pay. 76. Sri S. Niranjan Reddy, Learned Counsel, would submit that the accounts of the respondent, for the financial year 2008-2009, could not be audited because of various investigations which are still pending; as a result documents and records were not available for audit; subsequently, for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as to make it reasonably certain-as to make the court feel satisfied-that the existing and probable assets would be insufficient to meet the existing liabilities. The question is not whether, at the given time, the company can pay all its debts whether presently due or only in the future, and still continue to function. The question is whether it is able to meet its current demands-it would, of course, be insolvent if it cannot do that even if it has assets not presently available but more than ample to pay its debts and is in that sense rich-and whether its existing and probable assets would suffice to meet future demands. (V.V. Krishna Iyer Sons v. New Era Manufacturing Co. Ltd., (1965) Comp. L.J. 179 = (1965) 35 Comp Cas 410 (Ker); In re, European Life Assurance Society (1869) L R 9 Eq 122). Section 434(1)(c) expressly authorizes a winding up if the existing and probable assets are insufficient to meet the liabilities, taking into account not only liabilities presently due but also those which are "contingent and prospective", (Registrar of Companies v. S. Sohanmull Gotcha P. Ltd., (1972) 42 Comp Cas 386; In re European Life Assurance Society (1869) L R 9 Eq 122; Buckley on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany is unable to pay its debts to its creditors on account of the fact that it has become commercially insolvent, (National Research Development Corporation v. Electro Flux (P) Ltd., 2005(2) ALD 531), and keeping in view the facts of each case. There is no reason why discretion should be exercised in favour of the respondent-company when there is sufficient material on record to show that it is not in a position to meet its current liabilities. (Ranbaxy Lab Ltd., (1998) 93 Comp. Cas. 296). 79. The Company Court ought to examine the material placed before it by the petitioning-creditor and further evidence, if any, which the Company Court may require the petitioning-Creditor to furnish. The Company Court must also examine the evidence placed before it by the respondent-Company at the stage of admission. The Balance Sheet of the company is one such document which may be kept in view. On assessment of the evidence, let in by the petitioning-creditor and the contesting Company, if the Company Court comes to the conclusion that the Company, prima facie, appears to be commercially insolvent, a rebuttable presumption would arise under S. 434 (1) (c) that the Company is unable to pay it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a going concern. 82. In their audit report, annexed to the Balance Sheet as at 31.3.2010, S.R. Batliboi & Associates (auditors of the respondent) stated that the respondent had incurred a loss of Rs. 41,35,16,269/- during the year; and its accumulated losses were Rs. 559,39,98,656/- resulting in complete erosion of its net worth. The auditors reiterated what they had stated in their earlier report for the year ending 31.03.2009. 83. Section 227(4A) of the Companies Act, 1956 enables the Central Government, by general or special order, to direct that, in case of such class or description of companies as may be specified in the order, the auditor's report shall also include a statement on such matters as may be specified. Section 2(29-A) of the Companies Act defines the term "net worth" as "sum total of the paid-up capital and free reserves after deducting the provisions or expenses as may be prescribed". Explanation to Section 2(29A) stipulates that, for the purpose of this definition, "free reserves" means "all reserves created out of profits and share premium account but does not include reserves created out of revaluation of assets, write back of depreciation provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as at 31.3.2008 was Rs. 602,21,55,062/-, it stood reduced to Rs. 141,58,67,798/- for the year ending 31.3.2009. As against its net current assets of Rs. 141,58,67,798/-, the respondent suffered a loss of Rs. 518,04,82,387/- for the year ending 31.03.2009. The respondent suffered negative earnings per share of Rs. 10,77,815/- for the said year i.e., as against the share value of one share of Rs. 100/-, the loss per share was Rs. 10,77,815/-. As against its liabilities (Secured loans plus unsecured loans) of Rs. 777,51,67,157/-, the assets of the respondent company (fixed assets plus investments plus net current assets) was merely Rs. 259,51,84,770/- i.e., the total outstanding dues were nearly three times its available assets. The Balance sheet as at 31.3.2010 reflects an even more dismal financial picture of the respondent company. As against the loss of Rs. 518,04, 82, 387/- for the year ending 31.3.2009, the total accumulated loss for the year ending 31.3.2010 increased to Rs. 559,39,98,656/-. The value of the net current assets of the respondent, as at 31.03.2010, fell down to Rs. 122,07,89,930/- which is less than 1/4th of its accumulated losses of Rs. 559,39,98,656/-. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insolvent", as required to attract Section 434(1)(c) of the Companies Act, mean that the assets of the company and its existing liabilities are such as to satisfy the Court that the existing and probable assets are insufficient to meet the existing liabilities. The Balance Sheets of the respondent company, as at 31.3.2009 and 31.3.2010, show that its total existing assets are wholly insufficient to meet its total existing liabilities, both short term and long term. As noted hereinabove, Section 433(e) read with Section 434(1)(c) enables the Court to wind up the company if its existing and probable assets are insufficient to meet its liabilities taking into account not only its existing liabilities but also those which are contingent and prospective. Even in cases where the company is unable to pay its debts when they become due, although its assets including its capital exceed its liabilities, such a company must also be held to be "commercially insolvent", and as being unable to pay its debts. In the case on hand, the Balance Sheet of the respondent company reflects that, even without taking into account its contingent and prospective liabilities, the total assets of the responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t delivery could be made to them; since a part of the construction activity was stopped for quite some time, the site needed to be prepared; IL&FS then commenced conducting soil testing and structural stability tests for the semi-completed apartments and, after all clearances were obtained, it recommenced construction; tremendous progress has been achieved as the work has been taken up on a war footing with approximately 1700 labourers working everyday; construction of 100 independent houses has already been completed and possession thereof delivered; construction of 172 independent houses is at the final stage, and is expected to be handed over within a short time; the respondent is committed to completing the Hill County Project, and to hand over the completed apartments and houses; the temporary delay in completing the project would be overcome, and the project would be completed at the earliest; the anticipated delivery schedule of various apartments has been sent to the customers vide letter dated 08.09.2011; the respondent company intends to fully adhere to the delivery schedule; this Court ought to calibrate its discretion having regard to the jurisdiction exercised by anoth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th from the date of cancellation of the agreement of sale; at this rate, the petitioners would never get back their money in the near future; the apprehension expressed by the respondent, that an order of publication of admission may affect its creditworthiness or its financial standing, was not warranted on the facts of the present case; and, as the net worth of the respondent-company has already eroded, the question of any further damage to its reputation would not arise. (a). EXERCISE OF POWER BY THE COURT UNDER SECTION 433 OF THE COMPANIES ACT IS DISCRETIONARY: 92. Once a Company is held to be unable to pay its debts, and the statutory fiction under Section 434 has come into play, it is open to the Company Court to entertain the petition under Section 433(e) of the Companies Act. 1956. (Viral Filaments Limited91). While a creditor is entitled to bring a winding-up petition on any of the grounds mentioned in Clauses (a) to (f) of Section 433 of the Act, (V.V. Krishna Iyer Sons (1965) Comp. L.J. 179 = (1965) 35 Comp Cas 410 (Ker)), an order under Section 433(e) of the Companies Act is discretionary. (Mediquip Systems (P) Ltd. (2005) 7 SCC 42). The words "may", used in Section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2011) 162 Comp Cas 298 (Guj)). It should be the policy of the court to attempt to revive though, at the moment, the company may not be solvent and may not be able to meet its obligations to its creditors; but this should be only if it is shown that there is a reasonable prospect for resurrection and survival. It is the duty of the Court to welcome revival rather than affirm the death of a company. (New Swadeshi Mills of Ahmedabad Ltd. v. Dye-Chem Corporation (1986) 59 CC 183 (Guj); In Re: Rishi Enterprises [1992] 73 Comp Cas 271 (Guj); New Swadeshi Mills of Ahmedabad Ltd. (1986) 59 CC 183 (Guj); Registrar of Companies v. Navjivan Trading Finance P. Ltd., [1978] 48 Comp Cas 402 (Guj); American Express Bank Ltd. (1999) 96 Comp Cas 841 (Guj)). 95. The power of winding up, conferred by Section 433 of the Act, is drastic. (Satish Chandra v. Union of India (1994) 5 SCC 495). A winding up petition, praying for the economic death of a running and live commercial organization, is an extreme remedy to be resorted to sparingly. (Kesar Enterprises Ltd v. IDI Ltd., (2002) 112 Comp Cas 174 (Bom)). In the case of a running concern, and considering the larger interest of the employees and workme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lic advertisement would have very serious repercussions. (Indian Overseas Bank Judgment of A.P. High Court in C.P. No. 24 of 2008 dated 26.04.2010). (d): SHOULD THE COMPANY PETITIONS IN THIS BATCH BE ADMITTED: 98. The Union of India moved an application before the Company Law Board, Delhi (CLB) pursuant to which the CLB, by its order dated 5.3.2009, directed the Central Government to appoint a nominee Director on its behalf who should have an affirmative vote on any decision, and be present at all board meetings. Pursuant thereto Sri Ved Kumar Jain, who was appointed as the CLB's nominee director by the Central Government, conducted board meetings wherein it was decided that a strategic investor should be brought in who would takeover the company, and complete the sole project undertaken by the Company. The Board of the respondent company, under the supervision of Sri Ved Jain, appointed SBI Market Capital Private Limited as the transaction advisor to identify a strategic investor. Dr. Justice A.R. Lakshmanan was requested to oversee the process of the selection of the strategic investor. After an elaborate process, SBI Market Caps identified International Leasing & Financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied their reliability factor to be very high in the global financial market. 100. In the light of the order of the CLB, and M/s IL & FS being inducted into the management of the respondent company and, as they are said to have 80% of the share capital and are said to have invested more than Rs. 150 in the respondent company, it might be inappropriate to exercise discretion at this stage to admit the company petitions filed for winding up of the respondent company. On the other hand this Court cannot also ignore the fact that the net worth of the respondent company has completely eroded, and its exercise of discretion not to entertain the company petitions may well result in further increase of the total debt due to banks and financial institutions, and their inability later to recover the debt, even in part. VIII. SECTION 443(1) OF THE COMPANIES ACT: ITS SCOPE: 101. Section 443(1) enables the Company Court, on the hearing of a winding up petition, to (a) dismiss it, with or without cost; or (b) adjourn the hearing conditionally or unconditionally; or (c) make any interim order that it thinks fit; or (d) make an order for winding up the company with or without costs or any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing up order is to be made is within the discretion of the Court. Therefore, the Court is not bound to make an order of winding up under Section 433, although a ground for winding up under Section 433(a) to (e) is made out. In the present case, I am of the opinion that it will be just and fair to give a chance to the respondent-company which has an authorized share capital of Rs. 2,00,00,000 (rupees two crores), for maintaining commercial morality, to settle with the petitioner-firm, that is to say, to pay what the company owes to the petitioner-firm, within three (3) months from today, if the respondent-company is so inclined. I do so accordingly. The winding up petition would remain unclosed. The matter to appear in the cause list on September 5, 1991, for further orders...........". (emphasis supplied) IX: CONCLUSION: 103. In this context it is necessary to refer to the order of the CLB in C.P. No. 4 of 2009 dated 13.1.2011 wherein, at para 7(v), the IL&FS group was directed to complete the Maytas Hill County Residential Project Phase I within 18 months of its induction as a promoter in Maytas Properties Limited, and to arrange the required finances to complete the project. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountant, based on an examination of the books of accounts of the respondent, shall be filed before this Court on or before 31.10.2012. Since audit of the respondent's books of accounts, for financial year 2011-12, would have been completed by then, the audited financial statements, including its Balance Sheet and profit and loss account for the year 2011-12 along with the audit report, shall also be filed before this Court along with an application to receive the said documents. Likewise, for the half year period from 1st October 2012 to 31st March, 2013, the half-yearly financial statements of the respondent company, certified by a Chartered Accountant, shall be filed before April, 30th 2013, and the audited financial statements for the year ending 31.3.2013, along with a copy of the auditors report shall be placed before this Court by June, 21st, 2013 on which date these company petitions shall be listed for hearing. 105. As a case of admission has already been made out by the petitioners under Section 433(e) read with both 434(1)(a) and 434(1)(c) of the Companies Act, there shall be no further hearing on merits including on the maintainability of these company petitions and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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