TMI Blog1997 (3) TMI 476X X X X Extracts X X X X X X X X Extracts X X X X ..... in his capacity as the karta of the Hindu undivided family, etc. It is further stated that in view of various claims which the petitioner had against the respondent-company a memorandum of settlement was drawn up on September 25, 1993, between the petitioner and Mr. K.S.S. Niranjan Rao representing the respondent-company and in terms of the said memorandum of understanding (hereinafter referred to as "the MOU") the respondent-company and Mr. K.S.S. Niranjan Rao had jointly and severally agreed to pay Rs. 4 lakhs in terms of para. 3(2) of the said MOU. It is further stated that the said Rs. 4 lakhs was payable in four (4) equal instalments of Rs. 1,00,000 each, on September 29, 1993, December 31, 1993, June 30, 1994, and December 31, 1994, and accordingly the respondent-company paid the first instalment of Rs. 1,00,000 to the petitioner. It is further stated in the petition that Sri K.S.S. Niranjan Rao addressed a letter dated January 19, 1994, to the petitioner and in that he stated with the mala fide intention that certain alleged permissions were required under the Companies Act for the purpose of making the said payment and the said payments could not be made by the respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1997, and he checked up the cause list, but missed to note the posting since the name of the petitioner was not printed and in the evening on February 6, 1997, he gave the vakalat to his clerk for filing the same in the court. But his clerk had to leave Hyderabad without informing him, he could not file the vakalat on February 7, 1997. On February 10, 1997, the petition was posted for printing the name of the respondent and his name was not printed. His clerk returned to Hyderabad on February 12, 1997, night and on February 13, 1997, he filed the vakalat for the respondent. But on enquiry it was learnt that the case was posted on February 10, 1997, and accordingly, it was admitted as there was no representation on the part of the respondent. He further submitted that his non-appearance on February 10, 1997, was neither willful nor wanton but purely accidental. There fore, this court may be pleased to set aside the order dated February 10, 1997. He also filed C.A. No. 221 of 1997, for staying the order of this court dated February 10, 1997, pending the disposal of the application in C.A. No. 103 of 1997. By filing the counter-affidavit, Sri G. Subba Rao has denied the allegations m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not the creditor of the company much less an unsecured creditor and no amounts were due to the petitioner from the respondent-company. The further allegation of the petitioner that the petitioner made unsecured advance to the company in his capacity as Hindu undivided family is denied. Even the allegation regarding the commission on the alleged guarantee executed on behalf of the company in favour of the financial institution is denied. It is further stated that both Sri G. Subba Rao and Sri K.S.S. Niranjan Rao signed an agreement dated May 2, 1996, entered into between the respondent-company and A.P. Industrial Development Corporation and these agreements prohibit payment of any commission for the guarantee. It is further stated that no amount was due to Neeth and Co., even as on October 10, 1991, from the respondent-company. The alleged MOU, dated September 25, 1993, was not between the petitioner and the respondent-company and Mr. K.S.S. Niranjan Rao did not represent the respondent-company. It is further stated that the entire claim put forth by the petitioner against Sri K.S.S. Niranjan Rao was in his individual status but not on behalf of the respondent-company. The managing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. In these circumstances it is not a case for winding up in terms of sections 433 and 434 of the Companies Act, 1956. The present petition is filed only to harass the respondent and bring down the reputation of the respondent-company. It is also filed to pressurise the company to extract the money which the company is not liable to pay and absolutely there are no bona fides on the part of the petitioner in filing the petition. Accordingly, the respondent-company prayed for the dismissal of the C.P. In the additional affidavit filed in C.A. No. 103 of 1997, the respondent-company stated that without prejudice to the contentions, to show the company's bona fides the respondent-company is prepared to deposit to the credit of the company petition the principal amount claimed to be due by the respondent to the petitioner and on such deposit this court may direct the petitioner to file a civil suit in a civil court to establish the claim within a particular time this court may prescribe. As I have already noted above, in view of the submission made on both the sides the main C.P. No. 125 of 1996, itself is taken up for disposal. Learned counsel, Sri S. Ravi, appearing for the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further directing the respondent-company that Rs. 1,00,000 paid by the respondent-company by way of a cheque dated September 29, 1993, could be apportioned against his claim in clause (1)( f ) of the MOU. He further submitted that when the MOU itself has been cancelled by the petitioner he cannot base his claim on the same MOU. Moreover, vide his another letter dated June 3, 1996, the petitioner invoked clause 8 of the MOU requesting Sri K.S.S. Niranjan Rao to come forward for the settlement of the dues through the arbitrators by requesting him to appoint any one of the arbitrators mentioned therein in the said letter and from this it is clear that there is a dispute regarding the claim based on the MOU and as such the liability in question is not an admitted liability and on the basis of such MOU the respondent-company cannot be wound up. At any rate the alleged claim of the petitioner is barred by limitation. He submitted that having regard to the assets of the respondent-company it cannot be said that a case for winding up is made out in terms of sections 433 and 434 of the Companies Act, 1956, and accordingly the C.P. is liable to be dismissed. He also relied upon some of the j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the company is unable to pay its debt. Thus, the proceedings under these sections are not proceedings to recover debts due from any particular company. Therefore, for the limited purpose to find out whether the respondent-company is liable to be wound up for being unable to pay its debts, I think this petition can be entertained. Learned counsel for the petitioner submitted that the claim of the petitioner-company is based on the MOU, dated September 25, 1993. He further contended that this MOU is entered into between Sri G. Subba Rao on the one hand and Sri K.S.S. Niranjan Rao representing the company on the other. On the other hand, learned counsel for the respondent contended that from the contents of the MOU it is clear that the same has been agreed to between Sri G. Subba Rao in his individual capacity and Sri K.S.S. Niranjan Rao in his individual capacity. He further submitted that from the contents of the entire MOU it cannot be gathered that the said MOU was agreed to, for and on behalf of the respondent-company. Therefore, on the basis of the MOU the present petition itself cannot be maintained. From the contentions on both the sides it is clear that the existence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t agreeable for the settlement arrived at. But, according to me on the basis of the said letter it can also be said that Sri G. Subba Rao and Sri K.S.S. Niranjan Rao, taking the problem on themselves, tried to settle the matter between the respondent-company and some other creditors and also to see that the same is ratified and approved by the respondent-company. From the said letter it is further clear that the MOU arrived at between Sri G. Subba Rao and Sri K.S.S. Niranjan Rao, ultimately has not been approved by the respondent-company. But on a further probe into the matter another incidental issue also arises as to whether the respondent-company is or is not bound by the actions of Sri K.S.S. Niranjan Rao, who was the managing director of the respondent-company. It is in this context, learned counsel for the petitioner contended that, being a managing director, Sri K.S.S. Niranjan Rao had "the ostensible authority" so far as third parties are concerned, to enter into a contract for and on behalf of the respondent-company. For this proposition of law he relied upon the judgment of the Court of Appeal in Freeman and Lockyer ( A Firm ) v. Buckhurst Park Properties ( Mangal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in general meeting or by its board of directors or by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called : Provided that the power to do administrative acts of a routine nature when so authorised by the board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management : Provided further that a managing director of a company shall exercise his powers subject to the superintendence, control and direction of its board of directors." From this definition of managing director given by the Companies Act, 1956, it is clear that the managing director may derive his "substantial powers of management" to act for and on behalf of the company on the basis of an agreement or by virtue of resolutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o buttress this point he relied upon the letter written by Sri G. Subba Rao, dated February 9, 1994. From the reading of the two letters dated January 19, 1994, and the letter dated February 9, 1994, which are admitted by both the parties it is clear that there is substance in the argument of learned counsel for the respondent-company. For, vide letter dated January 19, 1994, K.S.S. Niranjan Rao recorded his inability to implement the MOU on certain legal issues. Sri G. Subba Rao, being himself a chartered accountant, perhaps understanding the correct legal position, wrote the letter dated February 9, 1994, by invoking his power or right reserved in clause 3.3 of the MOU by restoring "all rights and claims inclusive of resignation to the board of directors". In the same letter he issued a further direction that an amount of Rs. 1,00,000 paid by the respondent-company by way of cheque dated September 29, 1993, may be appropriated against his claim in clause (1)( f ) of the MOU dated September 25, 1993. In order to fully appreciate the legal consequences of this letter I am extracting clauses 3.2, 3.3 and 4.0 of the MOU as under : "3.2. It was agreed that the amount of Rs. 4 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hdrawn and are not binding. (5)That the amount of Rs. 1,08,000 invested as equity by Sri G. Subba Rao will be adjusted against the last instalment of Rs. 1,00,000 payable in the month of December, 1994, and Sri G. Subba Rao will exe cute and hand over a blank transfer deed and deposit with Sri V.S. Rao, Secretary, Godavari Fertilizers and Chemicals Limited, Secunderabad, on September 25, 1993. (6)That on settlement of the share amount Sri G. Subba Rao will not be entitled to continue as shareholder or he will not hold any shares in future so far as the company remains unlisted. (7)That so far as the equity of Rs. 1,08,000 remains in the name of Sri G. Subba Rao, Rasmi Die-Castings Limited has agreed to pay dividend to him as declared from time to time. (8)In the case of any dispute or difference arising regarding operation of these terms and conditions both the parties have also agreed to refer the matters to a mutually agreed mediator/arbitrator and his decision shall be final and binding on both the parties." From a reading of these clauses the fact that emerges is that as per the MOU the respondent-company is permitted to pay the amount of Rs. 4,00,000 settled in four ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be entertained because it is not based on any admitted and crystallised debt. Both counsel did not dispute the proposition of law that in terms of clause ( e ) of section 433 for the purpose of ordering a winding up, the "debt" which the company is "unable to pay" must be a determined or definite sum. In other words such a debt should not be a disputed or doubtful amount. Moreover, this proposition of law, learned counsel on both the sides, rightly, did not dispute in view of the ruling of the Supreme Court in Pradeshiya Industrial and Investment Corporation of U. P. v. North India Petrochemicals Ltd. [1994] 79 Comp. Cas. 835 . Therefore, now what I have to find out in this case is whether the respondent-company in question is unable to pay a definite determined debt. To show that the C.P. is based on a definite determined debt learned counsel for the petitioner relies upon the MOU in which all the claims were settled at Rs. 4,00,000. If the MOU were to be in existence definitely there would be a determinate sum in order to find out whether the respondent-company is unable to pay the same. But, as I have already stated above, the said MOU has been cancelled by Sri G. Subba R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance sum is awaiting release to the respondent company. I submit this third party creditor bank submitted as above has considerable stake in the respondent-company against which the petitioner filed the application for winding up. I submit the purported claim of the petitioner against the respondent-company is not a crystallised debt and is meagre when compared to the credit facilities sanctioned by the creditors to the company amongst which this third party bank has already sanctioned limits for Rs. 3,90,00,000 and sanctioned enhancement to an aggregate limit of Rs. 6,20,00,000 and any impediment in the functioning of the respondent-company without a just cause would expose this third party creditor bank and other secured creditors to the risk of the lending of the creditors in the respondent-company." From this affidavit also it is clear that the State Bank of India is one of the creditors of the respondent-company by lending a huge sum of Rs. 6,20,00,000. The affidavit further states that the winding up of the respondent-company only for the sake of Rs. 3,00,000 claimed by the petitioner would not be reasonable. It also states that the said amount of Rs. 3,00,000 is a dispute ..... 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