TMI Blog2005 (7) TMI 380X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 433( f ) read with section 439 of the Act on the ground that it is just and equitable, in the facts of this case, to wind up the company. He is a shareholder and director of the company and the case sought to be made out in this petition is that there is a complete deadlock in the functioning of the company which would justify its winding up. 3. A brief narration of the background facts leading to filing of the two petitions (which have large amount of commonality) as distilled from the petitions would be necessary to understand the controversy involved. 4. M/s. TCG Developments (India) Pvt. Ltd. (arrayed as respondent No. 2 in C.P. No. 110 of 2004) (hereinafter referred to as "TCG") entered into a Joint Venture Agreement (JVA) with Mr. Manmohan Singh. The object was to incorporate the company for running a hotel business. In fact Mr. Manmohan Singh is the owner of the property bearing No. 77, Friends Colony, New Delhi and the aspiration behind incorporation of the company was to run a hotel in the aforesaid premises of Mr. Manmohan Singh. The JVA also envisaged development of apartments on Plot bearing No. 76, Friends Colony, New Delhi, another property owned by Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olled by MMS shall provide consultancy services to the company, in respect of renovation, refurbishment, and its effective management. For providing the said consultancy services International Caterers (P.) Ltd. will be paid a sum of Rs. 5.4 lakhs per month, which sum shall be increased at 5 per cent every year in terms of Schedule VI hereof. It is hereby agreed that the payments in terms hereof shall commence on April 1, 1998, or after the possession of premises A has been handed over to the company, whichever is later. The possession in respect of the residential house currently occupied by MMS which shall be handed over at a later date. ( c )MMS shall be entitled to retain, free of cost, one unit in premises B for his personal use, as further described in Schedule V attached hereto, upon completion of construction of the apartments. 9.2 TCG ( a )TCG shall act as a co-developer and the renovation and refurbishment manager with respect to the venture and shall be responsible for all designs, construction and marketing with respect to the joint venture, in consultation with MMS. ( b )TCG will take steps to arrange necessary financing, either by way of its own contributio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( i )TCG shall be entitled to retain, free of cost, one unit in premises B, as further described in Schedule V attached hereto upon completion of construction of the apartments." 10. The JVA also provided that Mr. Manmohan Singh through its company M/s. International Caterers Pvt. Ltd. (IPCL) (petitioner in C.P. No. 107 of 2004) would provide consultancy services to the company in respect of the renovation, refurbishment and its effective management and in consideration thereof IPCL was to get remuneration of Rs. 5.4 lakhs per month with an increase at the rate of 5 per cent every year in terms of Schedule VI to the JVA. These payments were to commence from March 1, 1998 or after handing over the possession in respect of 77, Friends Colony, New Delhi, whichever is later. On the other hand, TCG was to act as co-developer and the renovation and refurbishment manager with respect to the venture. It was responsible for all designs, construction and marketing with respect to venture in consultation with Mr. Manmohan Singh. In lieu of the development and management services provided by TCG, it was to be paid a fee equal to sum of 5 per cent of the total venture cost. In addition, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he name M/s. Manor Hotels Private Limited. In the articles of association of this company, the arrangement provided in the JVA was taken care of by inserting necessary provisions to give effect thereto. The renovation and refurbishment of property at 77, Friends Colony, New Delhi was undertaken and the company started running a hotel therein. Likewise, property at 76, Friends Colony, New Delhi was also developed. Possession of these properties was given by Mr. Manmohan Singh to the company. However, it appears that the company could not run the hotel venture with any success. ICPL was paid its consultancy fee sporadically, in tits and bits, and full amount on regular basis in accordance with the JVA could not be paid to it. This became a sour point in the relationship between the parties and ICPL demanded the payment of consultancy fee which, as per its version, had become due to it. Sometime in the year 2003, the company entered into a contract with Guardian International Pvt. Ltd. (hereinafter referred to as "Guardian") under which it allowed Guardian to run and manage the hotel at 77, Friends Colony, New Delhi and also allowed to occupy the said premises. This also offended Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be able to make up the shortfall. However, that turned out to be an empty assurance. Accordingly, the petitioner was forced to send a statutory notice dated 4-6-2003 under section 434 of the Act calling upon the company to pay to the petitioner a sum of Rs. 2,43,69,510 and interest at the rate of 16 per cent per annum thereon for delayed payments within three weeks of the service of the notice. Instead of making the payments, the company sent reply dated July 7, 2003 denying the right of the petitioner to claim the amount. According to the petitioner, the denial is mala fide and malicious and further events leading to deadlock (which although stated in this petition as well, would be taken note of in C.P. No. 110 of 2004) would amply demonstrate the inability of the company to pay this debt. 16. On the aforesaid premise, the petitioner avers that the company is unable to pay the debt and it does not have any financial prowess to do so. It is also stated that perusal of the balance sheet would reveal that it is running into enormous cumulative losses of Rs. 8,00,35,517.48. Winding up of the company is prayed for on this ground. 17. C.P. No. 110 of 2004 : The ground m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the joint venture dated 1-3-1998 as per its salient features including articles 2, 4 and 9 of the JVA. Con-firmation of the minutes of the board meeting held on 26-11-2002; ( b )Detailing in clear and explicit terms of the obligations of TCG with respect to MHPL as per the joint venture agreement; ( c )Discussion on the illegality of the management agreement executed between M/s. Manor Hotel and M/s. Guardian International Private Limited dated 16-4-2003 without the consent and approval of Mr. Manmohan Singh; ( d )Discussion on the legality of allowing Guardian International Private Limited, the use and occupation of 77, Friends Colony, New Delhi which was leased only to MHPL and to discuss the steps required to be taken to rectify the illegalities; ( e )Discussion on the Note of Demand under section 433 of the Companies Act, 1956 dated 4-6-2003 issued by International Caterers Private Limited seeking winding up of MHPL in the event of default and to discuss the response of M/s. K.V. Balakrishnana, advocates, issued on behalf of M/s. MHPL; ( f )Discussion on the formulation of a scheme to settle all the dues of International Caterers Private Limited inter alia under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioner did not provide any consultancy services was totally sham. Its plea that the hotel could not perform well in the absence of liquor licence was a subterfuge and in any case would tantamount to admitting that the company is facing problems in running the hotel. Furthermore, entering into an agreement with Guardian to run the hotel clearly shows incapacity of the JVA to run the said hotel which was the entire basis of the JVA as would be clear from article 1.1 thereof and it can be safely concluded that the company had lost the substratum. He further submitted that since Mr. Manmohan Singh had not given his consent for entering into agreement with Guardian, to cover this illegality, fabricated board meeting was shown to have been held on 16-4-2003 wherein purported decision was taken to enter into agreement with Guardian for running the hotel. As per the minutes of the alleged meeting, Mr. Manmohan Singh had attended the meeting while on that date he was not even in India. Even, the minutes of the board meeting dated 12-9-2003, which Mr. Manmohan Singh attended, were distorted and did not truly reflect the proceedings. Mr. Manmohan Singh pointed out the same immediately vid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account" is introduced. No such running account was maintained and the payments were made on the basis of bills raised. Otherwise, most of the claims were time-barred and not payable even on this ground. He also submitted that all the allegations in C. P. No. 107 of 2004 were against the TCG but no averments are made that services were provided, bills raised and, consequently the amount became payable. It is also submitted that in any case whether consultancy services were provided and if provided, the same were to the satisfaction of the company where the disputes between the parties and these disputes had to be settled first before IPCL could lay claim for the purported balance payment of consultancy services as demanded in the petitions. He also pointed out that article 11.1 of the JVA contained an arbitration clause and disputes could be resolved through arbitration as this was an alternate remedy provided which should be availed of first before resorting to winding up of the company as required by sub-section (2) of section 443 of the Act. 22. Insofar as the second petition is concerned, he submitted that since non-payment of consultancy fee was the reason for alleged dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e lease agreement dated 26-5-1998 property at 77, Friends Colony, New Delhi was demised to the company at a monthly rent of Rs. 9,999. This property comprised a total area of 3317 sq. yrds. with structure thereon. Obviously, the rent agreed was not the true repository of the market rental value of the property in question. Presumably, for this reason it was agreed that the company would pay a sum of Rs. 5,40,000 per month to ICPL, a company nominated and controlled by Mr. Manmohan Singh. It was also to be increased by 5 per cent every year. Of course, this payment was in consideration of consultancy services to be provided by ICPL to the company in respect of renovation, refurbishment and its effective management. Renovation and refurbishment of the hotel had been done. TCG was also to provide consultancy services and it was to get Rs. 8,25,000 per month as consultancy fee. The obvious understanding, in respect of this feature in the form of quasi-partnership was that the petitioner should be able to get Rs. 5,40,000 per month with progressive increase at the rate of 5 per cent every year and TCG s share was fixed at Rs. 8,25,000 per month. Both were to take part in the effective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e this payment at lesser rate is not denied. On the contrary, Mr. Vinay Kapoor of TCG had written a letter dated 29-3-2001 making the following request : "As per our discussions I appreciate your accepting my request to defer a part of the monthly payments due to you. As agreed, international caterers will invoice Manor Hotel at a lower rate of Rs. 2.62 lakhs per month which would be in line with the payment coming in from Piaggio. I can assure you that we are confident of improving our cash flows, once the liquor licence issues are fully resolved, at which point we will be in a position to make up the balance and resume payments as per JVA." 27. In this letter, there is a request to defer part of the monthly payments due to the petitioner. Request is also made to raise the bills at the rate of Rs. 2.62 lakhs per month for the time being and assurance is given that on the improvement of cash flow, once the liquor licence is issued, the shortfall would be made up by making balance payment. Assurance is also given that at that time payments of consultancy fee to the petitioner shall be resumed as per JVA. This letter lends credence to the argument of the petitioner that all inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 433( e ) of the Act, the conditions which are to be kept in mind while dealing with such cases are culled out by this Court in the case of NEPC India Ltd. v. Indian Airlines Ltd. [2002] 100 DLT 14 3 in the following manner : ( i )If there is a bona fide dispute and the defence is a substantial one, the court will not wind up the company. ( ii )Where the debt is undisputed the court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay it. ( iii )Where the defence of the company is in good faith and one of substance, and the defence is likely to succeed in point of law, and the company adduces prima facie proof of the facts on which the defence depends, the petition should be rejected. ( iv )The court may consider the wishes of creditors so long as these appear to be justified. ( v )The machinery of winding up should not be allowed to be utilised merely as a means of realising its debts. [For the above propositions see Pradeshiya Industrial Investment Corpn. of U.P. v. North India Petro Chemical Ltd. [1994] 79 Comp. Cas. 835 (SC), in which the observation in Amalgamated Commercial Traders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iveness, nay incapacity to undertake this venture. The wedge between the parties grew deeper. Mr. Sundaram would be right in his submission that if the hotel was to be given to a third party, his client could have done so directly and there was no necessity to form a joint venture company for this purpose. 33. At this stage, let me deal with the resolution passed in the board meeting held on 16-4-2003. It may be mentioned that when during arguments it was pointed out by the petitioner that minutes of the board meeting held on 16-4-2003 are fabricated as Mr. Manmohan Singh, whose attendance is shown in the said meeting was not even in India and the passport in original with copy thereof was produced in support of this plea, Mr. Sawhney had conceded that if that was true it may amount to a serious act of impropriety on the part of the company to file such minutes. He wanted to probe into the matter and, therefore, asked for some time to take instructions. After taking few adjournments, additional affidavit is filed. The company has accepted that Mr. Manmohan Singh did not attend the meeting on 16-4-2003. In fact the company had no choice in this matter but to accept this position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objected to the same but sought to requisition the board meeting to resolve these issues. However, the parties failed to come to any amicable settlement and this resulted in deadlock. In the given scenario, it cannot be said that the petitioner is responsible for this deadlock. 34. It would be of interest to note that as per the agreement with Guardian, Guardian has to make the payment of Rs. 60 lakhs per annum to the company and that would not be sufficient to pay up even the consultancy fee of the petitioner, what to talk of fee payable to TCG. This would also show that the substratum of the company has gone. It also cannot be denied that the constituents of the JVA have lost faith in each other. The company has also, in reply to legal notice as well as in reply to the petitions, made tacit admission of deadlock situation. The differences do not show any signs of detente. Therefore, the conditions stated in clause ( f ) of section 433 are prima facie satisfied. 35. In the case of Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp. Cas. 543 , the Supreme Court laid down the parameters which are to be borne in mind while making an order under this provision. It hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... morous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The just and equitable provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way .... The superimposition of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P.) Ltd., In re [1985] 58 Comp. Cas. 858 carried the aforesaid principle further while holding that in case of deadlock it would not be of use to invoke the provisions under sections 397 and 398 of the Act before filing the winding up petition. The following observations made in the process are very pertinent : "If there is a genuine and irreconcilable difference of opinion between petitioner No. 1 and petitioner No. 2 on the one hand and respondent Nos. 2 and 4 on the other, over the management of the company, then the classic position of a deadlock in management has arisen as the shareholding of the two groups are equal. Proceedings under sections 397 and 398 of the Companies Act cannot be resorted to for solving a genuine deadlock in the absence of any established misfeasance or malfeasance by one group to the prejudice of the other. If the parties have lost all confidence amongst them and it is not possible for them to carry on business jointly or provide for an acceptable management, the only way out seems to be to wind up the company and if necessary in the instant case to dissolve the existing partnership. The assets, if any left, will be available to the parties for dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04 shall be treated as the lead petition. The petitioner in the said petition shall get the citations published in The Statesman (English) and Jansatta (Hindi) for 16-9-2005. C.A. No. 508 of 2004 in C.P. No. 110 of 2004 : C.A. Nos. 488, 489 and 490 of 2004 in C.P. No. 107 of 2004 : 44. The Official Liquidator attached to this court is appointed as the provisional liquidator who shall take charge of the assets and records of the company. Since Guardian is managing the hotel, it shall be allowed to do so, for the time being and till further orders, but shall manage the affairs of the hotel under the supervision of the provisional liquidator. In case of difficulty, the provisional liquidator shall be entitled to approach the court for necessary directions. Guardian shall also deposit the arrears of assured annual amount of Rs. 60 lakhs with the provisional liquidator and continue to deposit the same with him for future period as well. Since the properties belong to Mr. Manmohan Singh and are leased out to the company, it would be open for Mr. Manmohan Singh to file appropriate application seeking possession of these properties and as and when such applications are file ..... X X X X Extracts X X X X X X X X Extracts X X X X
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