TMI Blog1993 (1) TMI 243X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioning creditor agreed to give a discount on the price for the goods so that the total amount payable by the company to the petitioning creditor was U.S. dollars 87,503.37. The company, however, did not make any payment of any amount in respect of the goods to the petitioning creditor. Upon a demand being made on the company, the company sent a telex on January 7, 1988, stating that there had been discussions with the petitioning creditor that the bills would be paid by instalments upon receipt of permission from the Reserve Bank of India. It was also stated that the company had applied to the Reserve Bank of India for the required approval, but till the date of the sending of the telex no such permission had been given. It was further stated that the local laws did not permit the bank to credit a foreigner's account and as such the money could not be deposited in the bank to the credit of the petitioning creditor without the permission of the Reserve Bank of India. It was also stated that the bills were due for over 15 months, but that it was beyond the company's control. It was also proposed by the company that the petitioning creditor should accept payments by instalments a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in these proceedings. The clauses are clauses 6 and 7 and read as under : "That the undersigned will issue account payee cheque and/or bank draft on Bombay branch in favour of United Lubricants and Industrial Products of India, offices held both at Calcutta and Bombay, the third party known to both that is the said seller and the undersigned so far the first instalment payment on May 25, 1989, is concerned. Thereafter, for all the rest of the instalment payment, the undersigned will issue a cheque (account payee) and/or bank draft in favour of the said United Lubricants and Industrial Products on the Calcutta branch until the last instalment is paid : That the undersigned do hereby agree to be and shall at all times hereafter, until repayment of this debt of Rs. 14,17,554.50, remain responsible to the said seller for and guarantee payment of the said sum Rs. 14,17,554.50 as the price for the sawn timber balau sold and delivered to the undersigned in case of default together with interest at 18 per cent. per annum (Indian bank interest) such interest to be calculated with effect from the date as fixed as per laws of the land." The guarantee was supported by a verification o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eptember 19, 1986; October 1, 1986; October 2, 1986, and October 4, 1986, in support of this defence. The second defence of the company is that the petitioning creditor had failed to execute several contracts as a result of which the company has suffered losses and damages amounting to U.S. dollars 87,703.00. It is, therefore, stated that by reason of the claim of the company against the petitioning creditor, and upon taking of accounts, money was in fact payable by the petitioning creditor to the company. The third defence of the company is that the claim of the petitioning creditor is barred by limitation as the goods had admittedly been received in 1986. The fourth defence of the company is that the entire transaction between the company and the petitioning creditor was in violation of the Foreign Exchange Regulation Act, 1973, and that the agreement to make payment to United Lubricants was violative of section 9 of the Foreign Exchange Regulation Act. The fifth defence is an alternative to the fourth. It is contended that if United Lubricants was to receive the money on account of the petitioning creditor, there was a novation of the agreement between the petitioning cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he telex dated January 7, 1988, the memorandum of understanding dated June 23, 1988, and the document of guarantee dated May 24, 1989, would falsify both the first and the second defences raised by the company. Additionally, it is to be remembered, that the company had not chosen to give any reply to the statutory notice served by the petitioning creditor's advocate on it. There is no explanation as to why such reply was not forthcoming. If the company indeed had a defence as claimed on account of defective materials, discount and damages it is to be expected that the company would have raised the same in answer to the statutory notice. In the absence of such answer the court is entitled to presume that the company accepted the claim of the petitioning creditor in toto. There has been some argument on the question whether the company's claim against the petitioning creditor is barred by limitation. It is not necessary to go into this aspect of the matter as I am of the view that the claim is not worthy of any credence. The third defence of the company is equally without substance. Although the claim of the petitioning creditor arose in 1986 nevertheless by the telex dated Jan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granted as a matter of course. It is stated that under threat of a declaration of insolvency the company would be forced to pay and circumvent the provisions of the Foreign Exchange Regulation Act. It is finally submitted under this head of the company's defence, that even if the court came to the conclusion that the provisions of the Foreign Exchange Regulation Act did not bar the company from discharging its obligation to the petitioning creditor, the company itself was under such impression. This could not be held to be mala fide as such a stand on a legal issue cannot be considered to be perverse or unreasonable. As far as the first aspect of the company's argument is concerned, it is not that the prohibition of payment to a person not resident in India is an absolute bar under section 9(1) of the Act. The payment may be made subject to the permission of the Reserve Bank. This is clear from the wording of section 9(1) of the Foreign Exchange Regulation Act. Even if the agreement between the petitioning creditor and the company did not explicitly provide for the obtaining of the permission from the Reserve Bank, section 47(2) of the Foreign Exchange Regulation Act provides t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India. It has not done so. There is no doubt, therefore, that the principle enunciated by S.K. Roychowdhury J. in the case of Eurometal Ltd. v. Aluminium Cables and Conductors ( U.P. ) Pvt. Ltd. [1983] 53 Comp Cas 744 (Cal) is applicable to this case and cannot be distinguished on this ground. In the case of Eurometal Limited v. Aluminium Cables and Conductors ( U.P. ) Pvt. Ltd. [1983] 53 Comp Cas 744 (Cal) the company which was sought to be wound up had entered into an agreement with a foreign buyer through the agency of a foreign concern. Under that agreement, the company was to supply goods to the foreign buyer. The company was also to pay commission to the foreign concern for negotiating the contract with the foreign buyer. The company supplied the goods to the foreign buyers and was paid the price, but did not pay any commission to the foreign concern. The foreign concern filed an application for winding up the company. One of the contentions raised was that the payment of commission could not be made by reason of the prohibition under the Foreign Exchange Regulation Act. In dealing with this submission, S.K. Roychowdhury J. said (at pages 757-761) : "This i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve Bank of India's permission which has been refused. It also appears that the company has not given any reply to the statutory notice served on the company by the petitioning creditor's advocate-on-record. . . At this stage, the question of permission of the Reserve Bank of India for the payment of the debt due to the petitioning creditor cannot and does not arise. That will only arise if the company is wound up and the assets of the company are realised by the liquidator in the administration of the company in winding up." Even without going into the controversy as to whether or not the application was to have been or had been made by the company for approval from the Reserve Bank of India, the relevant period, in my view, is the period subsequent to the notice under section 434. Assuming that the company could not pay by reason of the embargo placed under section 9(1)( a ) of the Foreign Exchange Regulation Act and assuming that the company had duly applied for permission which had not been granted by the Reserve Bank of India, nevertheless, there was no prohibition on the company securing or compounding the claim of the petitioning creditor under section 434 of the Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the petitioner company and on behalf of the petitioner company and the dues of the petitioner would be totally discharged by payments to the United Lubricants and Industrial Products. No permission or exemption general or special from the provision of section 9 of the Foreign Exchange Regulation Act, 1973, from the Reserve Bank of India was obtained in connection with the said document dated May 24, 1989. The said document and/or the agreement purported to be recorded therein is forbidden by section 9 of the Foreign Exchange Regulation Act, 1973, and is illegal." (emphasis supplied). There was no doubt in the company's mind, therefore, that the debt was due to the petitioning creditor and there was no novation of the agreement to pay the petitioning creditor its dues. Furthermore, the document itself makes it clear that it was the debt of the petitioning creditor which was to be paid by instalments. Clause 5 of the document reads as follows : "At the request of the undersigned, the buyer of the goods, the said seller has agreed to accept to receive the reduced price US dollars 87,503.37 equivalent to Rs. 14,17,554.50 in ten instalments for the sake of promotion of furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny judgment or order for payment. The prayer is to declare the company insolvent. The description of a winding up proceeding as an equitable mode of execution does not mean that a winding up petition culminates in an order for payment of money. It may be that in order to avoid a declaration of insolvency the company may voluntarily agree to pay or secure or compound the debt of the petitioning creditor. But such a voluntary submission would not be a judgment or order for payment. In the case of Dhanrajamal Gobindram v. Shamji Kalidas and Co., AIR 1961 SC 1285, the Supreme Court was called upon to consider whether an application under section 20 of the Arbitration Act, 1940 (by which a foreign seller sought to have a dispute in respect of its claim on account of contract by a Indian buyer referred to arbitration), was violative of section 5 of the Foreign Exchange Regulation Act, 1947 (equivalent to section 9 of the Foreign Exchange Regulation Act, 1973). It was contended by the Indian buyer that the application under section 20 could not be made as it would involve a violation of section 5 of the Foreign Exchange Regulation Act, 1947. The Supreme Court, after considering th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Saraf in the application for summary judgment filed by the petitioning creditor. The court on a consideration of all the defences felt that there was a triable issue. Although the court has noted the defence of Pradip Saraf that the agreement to make payment to the petitioning creditor was violative of the Foreign Exchange Regulation Act, 1973, there was no discussion by the learned judge of this issue. Even assuming that the issue raised in the suit filed by the petitioning creditor against Pradip Saraf and the issue raised in the winding up proceeding relating to the applicability of the Foreign Exchange Regulation Act to the transaction in question were the same, the nature of the consideration of a court in deciding whether a triable issue exists in summary proceedings under Order 37 is very different from the nature of the consideration of a company court in assessing the actual bona fide s of the defence. In the first case, the court is merely called upon to see whether the defence raised was not "moonshine". In the second case, the court is called upon to determine the defence itself. A similar case came up for consideration before the Court of Appeal in Welsh Brick I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the petitioning creditor was forbidden under the Foreign Exchange Regulation Act is found to be wrong, nevertheless it was a possible view, and was, therefore, bona fide is not acceptable to this court. Even if the company bona fide held the view that no payment could be made because of the Foreign Exchange Regulation Act why did it not secure the claim or even bother to reply to the statutory notice ? No argument whatsoever, has been advanced by the company as to why it did not at least even attempt to secure or compound the claim of the petitioning creditor even if it thought that no payment could be made. It may be noted that even at the hearing the company did not offer to secure the claim of the petitioner in any manner at all. In my view, the company has displayed a singular lack of bona fide s in its conduct and its defence to the winding up proceedings. The presumption of insolvency raised by virtue of its failure to secure or compound the claim of the petitioning creditor pursuant to the notice under section 434 of the Act has not been rebutted. In that view of the matter the winding up petition is admitted subject to the amount of Rs. 13,17,554.50 together with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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