TMI Blog2008 (12) TMI 408X X X X Extracts X X X X X X X X Extracts X X X X ..... d with sections 434(1)( a ) and 439(1)( b ), of the Companies Act, 1956. The petitioner traces its claim to a decree obtained before the High Court of Justice, Queen s Bench Division, Commercial Court, England and Wales. 2. Under an agreement dated 20-9-2000, the petitioner granted a finance facility to Pentafour International Singapore (P.) Ltd., which subsequently, came to be known as Pentasoft Singapore (P.) Ltd., in a sum of US $ 10 million for the acquisition of software and related products for onward sale to buyers. Under the terms of the agreement, the respondent herein furnished a corporate guarantee guaranteeing payment. The allegation of the petitioner is that Pentasoft Singapore (P.) Ltd., committed defaults in payment of a sum of US $ 9,464,562.40 with interest awarded as on 31-12-2003, to a sum of US $ 484,686.53, thus, aggregating to a sum of US $ 9,949,248.93. 3. It is alleged that Pentasoft Singapore (P.) Ltd., the respondent-company, incorporated Ruby Orifice Group Inc., under the laws of the Seychelles. This company entered into a settlement with the petitioner-company agreeing that Ruby Orifice Group Inc., would repay the amount due to the petitioner an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ately invoked this Court s jurisdiction seeking winding up of the company. 7. On notice, the respondent has filed its counter reiterating the contention taken in the reply to the notice. 8. Learned counsel appearing for the petitioner pointed out that the decree obtained from the English Court is binding on the respondent and executable as per section 13 of the Civil Procedure Code. He alleged that the respondent had full knowledge of the proceedings. The judgment being one on the merits, the respondent is a defaulter and the decree is executable, this Court has the jurisdiction, to declare the respondent as commercially insolvent. Learned counsel referred to the service of notice on the respondent and the affidavit filed before the English Court and submitted that the decree being one based on the judgment on the merits, it is a debt in terms of section 434(1)( a ) and ( b ) of the Act. He placed reliance on the decision in International Woollen Mills v. Standard Wool ( U.K. ) Ltd. [2001] 5 SCC 265 . As to the defence of the respondent that contrary to the FEMA and RBI provisions, the respondent cannot give any guarantee, learned counsel, appearing for the petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs as to the jurisdiction of the English Court to try the claim. He referred to the decision in R.N. Kumar v. R. K. Soral [1988] 2 SCC 508 and pointed out that the petitioner has not made out any case for exercising the jurisdiction of the Court under section 433( e ) and ( f ) of the Companies Act, 1956. 11. In reply, learned counsel appearing for the petitioner, pointed out that the respondent is guilty of committing corporate fraud in contending that Ruby Orifice Group Inc., is a different entity when the fact remains that the directors of the respondent-company are the beneficial directors of Ruby Orifice Group Inc. Hence, there is no novation of contract as alleged by the respondent. Placing reliance on section 434(1)( b ) of the Companies Act, 1956, learned counsel pleaded for ordering winding up of the company. 12. Heard learned counsel on ether side and perused the materials placed before this Court. 13. It is seen from the financial statement of Pentasoft Singapore (P.) Ltd., that it is a wholly-owned subsidiary of Esoft com (Mauritius) Ltd. The ultimate holding company is Pentasoft Technologies Ltd., incorporated in India, the respondent herein. The fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondent s inability to pay its debts as evident from the balance-sheet confirming that the respondent-company has reached a stage of commercial insolvency, the petitioner, as a creditor, can maintain its claim under section 434(1)( a ) of the Act and alternatively, as per section 434(1)( b ) of the Act, to invoke the jurisdiction of this Court under section 434(1)( e ) of the Act. The said submission assumes significance in the light of the respondent s contention that the decree obtained is not a decree on merits but an ex parte decree and, hence, not binding on this Court as per section 13( b ) of the Civil Procedure Code. 17. The question as to whether a creditor who obtained a decree against the company is compelled to confine his remedy under section 434(1)( b ) alone or could resort to section 434(1)( a ) of the Act also came up for consideration in the decision in Seethai Mills Ltd. v. N. Perumalsamy [1980] 50 Comp. Cas. 422 (Mad.) . While considering the issue as to whether a decree holder had to proceed under section 434(1)( b ) of the Companies Act and not under section 434(1)( a ) of the Act that he ceases to be a creditor, this Court pointed out that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent is on the merits or not lies with the person so alleging; that : ". . . amongst other things, the party must show that the decree does not show that it is on merits, if necessary the rules of that Court, the existence or lack of existence of material before the Court when the decree was passed and the manner in which the decree is passed. All this has been done in this case." (p. 277) 19. The Supreme Court pointed out to the facts of the case therein that after receiving some affidavit to which all documents were once again enclosed, no documents were tendered or any evidence led. However, the English Court judgment did not indicate whether the documents were looked into and/or the merits of the case considered. The Court had not referred to the objection of the defendant as contained in the reply to the notice. The Supreme Court further pointed out that at the stage of issuance of summons, the Court forms a prima facie opinion. Only thereafter, the Court has to consider the case on the merits by looking into the evidence led and documents proved before it, as per its rules. It is only if this is done, that the decree can be said to be on the merits. The Supreme Court p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence and materials produced but a summary judgment given after referring to the affidavit as to the service of notice alone. The order passed by the Court reads as follows : "Upon reading the claimant s application notice sealed on 12-3-2007. And upon reading the supporting witness statement of Robert Anthony Kerns dated 1-3-2007. And upon hearing leading counsel for the claimant. It is ordered that : (1) The claimant s application for permission to apply for summary judgment and the claimant s application for summary judgment be heard together ; (2) The claimant have permission to apply for summary judgment ; (3) Final judgment for the claimant against the defendant for the sum of US $ 12,504,045.62 ; (4) In addition, final judgment for the claimant against the defendant for the sum of US $ 858,708.42 profit from 24-8-2006, to the date hereof at a daily accrual of US $ 2,658.54 on account of liquidated and ascertained damages, giving a total judgment sum of US $ 13,362,754.05. (5) The defendant to pay the claimant s costs of the application and the action summarily assessed at 47,512.15." 22. Learned counsel for the petitioner, however, pointed out that con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aragraph, that the application to apply for permission to apply for summary judgment had been ordered granting a final judgment. This is self-explanatory to reject the plea of the petitioner that the judgment is one on merits. 24. Learned counsel referred to the claim petition, wherein the petitioner had extracted the reply of the respondent to the petitioner s letter dated 25-7-2005, wherein, the respondent had taken the plea that the guarantee executed in India would be governed by the laws applicable in India. Apart from that, the respondent had also pointed out to the agreement entered into by the petitioner herein with Ruby Orifice Group Inc. In the circumstances, by the subsequent agreement, there was novation of the contract, in which there was a plea of limitation too. Hence, going by these facts given in the claim petition, it cannot be said that the English Court has granted the summary judgment without adverting to the merits of the claim and the materials supporting the claim. I do not agree with the said submission. 25. The answer to the said contention can be found in the very same decision of the Apex Court referred to above, wherein, the Apex Court approved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 1-3-2007, upon hearing the leading counsel for the claimant and on the application for permission to apply for summary judgment, the final judgment was passed on 13-7-2007, granting a decree to the petitioner. The order sheet, thus, referring to the judgment delivered as summary judg- ment clearly goes against the petitioner s contention that the judgment of the English Court has to be taken as one on the merits. The evidence of the attorney referring to the service of the notice along with the covering letter on the respondents, by no means, can be taken as a piece of evidence to prove the claim of the petitioner to have a judgment on the merits. It must be noted herein that although the petitioner had stated in the claim petition in paragraph 8 that they would refer to the relevant documents in full at trial, admittedly, no documents were marked at the time of trial. Although learned counsel for the petitioner refuted the service of the notice on the proceedings before the English Court for the purpose of the present proceedings, it is not necessary to consider the same. 28. Going by the very terms of the decree passed by the English Court, I have no hesitation in rejecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el for the respondent pointed out that except for placing the claim on the judgment of the foreign Court, the petition had not stated the grounds demanding the winding up of the company. 31. In the decision in Madhusudan Gordhandas Co. v. Madhu Woollen Industries ( P. ) Ltd. [1972] 42 Comp. Cas. 125 , the Apex Court considered the parameters to be considered while dealing with the petition on winding up of a company. Interpreting the phrase "unable to pay its creditor" found in section 433( e ) of the Companies Act, the Supreme Court, in the decision reported in and pointed out : "Two rules are well-settled. First, if the debt is bona fide disputed and the defence is a substantial one, the Court will not wind up the company . . . 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 that particular debt [ see A Company, In re [1894] 94 S. J. 369 : [1894] 2 Ch. 349 (Ch. D)]. Where, however, there is no doubt that the company owes the creditor a debt entitling him to a winding up order but the exact amount of the debt is disputed the Court will make a winding up o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stensibly for a winding up order but really to exercise pressure will be dismissed, and under circumstances may be stigmatized as a scandalous abuse of the process of the Court." (p. 463) 33. As already noted that the grounds alleged in the petition seeking winding up under section 433( e ) and ( f ) are that the decree passed by the reciprocating country is executable against the respondent under section 44A of the CPC and that the decree amount is a debt due to the petitioner; that the respondent had failed to liquidate the outstanding amount despite several correspondences calling upon them to make the payment; that this disclosed the inability of the respondent to pay the debt; secondly, it had come to the knowledge of the petitioner that there are several claims from various creditors which had not been honoured by the respondent and that there are winding up petitions; that from the abovesaid facts, it is clear that the respondent has become commercially insolvent unable to pay debts of a sum exceeding Rs. 1,00,000 as and when they fell due. The claim of the petitioner is contested by the respondent as follows : that the English Court has no jurisdiction to pass a decree, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the inability to pay the debt is also shown, it is not a launching pad, in all cases, for a successful winding up order. Inability may arise for a variety of reasons and the Court is obliged to consider whether the inability is the outcome of any deliberate or designed action or mere temporary shock and effect of economy and market. In a given case, it may happen that a party may become unable to pay its debts for a while, but that by itself is not a criterion for exercise of the power to wind up, ipso facto . (4) It is necessary for the company court to consider the financial status, strength and substratum of the company, in the overall context. It is possible, at times, that there may be a cash crunch. It may be also, possible, at times, that there is temporary cash crisis despite high sales and heavy turnover and, therefore, in such a situation, mere disability or only on the ground of inability to pay would not constitute a ground empowering the Court to wind up the company. (5) If the company is an ongoing concern having regular business and employment of employees, the Court cannot remain oblivious to this aspect. The effect of winding up would be of putting an end to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pass an order for winding up where it is satisfied that it would not be in the larger interest of justice to wind up the company. (13) It is also well-settled that a winding up order shall not be made on a creditor s petition, if it would not benefit him or the company s creditors in general. (14) The Court is also obliged to consider that it would be in the interest of justice to give the company sometime to come out of the momentary financial crisis or any other temporary difficulty as winding up is a measure of last resort. (15) Winding up course cannot be adopted as a recourse to recovery of the debt. (16) The Court must bear in mind one more celebrated principle and consider whether the company has reached a stage where it is obviously and plainly and commercially insolvent, that is to say, that its assets are such and its existing liabilities are such as to make the Court feel clearly satisfied that current assets would be insufficient to meet the current liabilities, along with other principles. (17) It is also necessary to consider whether the respondent-company has become defunct or has closed its business, for quite sometime, whether it is commercially insolvent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is nothing but misuse and abuse of the process of the Court. (23) A winding up petition is not an alternative form for resolving the debt dispute. In certain cases disputes are such that they are fit for resolving through the civil court rather than through the Company Court. (24) What is bona fide and what is not is a question of fact. The expression bona fide would mean genuine, in good faith and when a dispute is based on substantial grounds or when a defence is probable and with some substance, it is a bona fide dispute. It must be strictly noted that a winding up petition is not an alternative to a civil suit." (pp. 540 to 543) 35. Keeping these parameters in mind, it may be seen from the facts herein that the respondents had not denied the guarantee given under the board s resolution. The petitioner has pointed out that Ruby Orifice Group Inc., is a group concern of the respondent herein, which has not been denied by the respondent in any manner. The petitioner has also produced necessary evidence that the directors of the company Ruby Orifice Group Inc., are the directors in the respondent-company. No materials are placed before this Court to show that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nite, the Courts in England for long have developed a rule derived from the history and extent of the equity jurisdiction itself and also borne out of recognition of equitable considerations generally. This is particularly so as section 35(6) of the English Partnership Act, 1890, also contains, inter alia , an analogous provision for the dissolution of partnership by the Court. Section 44( g ) of the Indian Partnership Act also contains the words just and equitable . Section 433( f ) under which this application has been made has to be read with section 443(2) of the Act. Under the latter provision, where the petition is presented on the ground that it is just and equitable that the company should be wound up, the Court may refuse to make an order of winding up if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy." (p. 105) 38. It may be noted that even though the reported case is with reference to a closely held company, yet, the decision has relevance on the scope of section 433( f ) when the Supreme Court held that a prima facie case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the English Court, the petition does not disclose the materials justifying a winding up on just and equitable grounds. The allegation as to several of the claims of the creditors remaining outstanding is not borne out by records that the respondent has reached a stage of commercial insolvency. However, learned counsel for the petitioner pointed out that in paragraph 11 of the petition, it is pointed out that there are several winding up petitions pending against the respondent and that the respondent is commercially insolvent and unable to pay its debts of a sum exceeding Rs. 1 lakh. He also referred to the balance-sheet of the respondent-company as to the secured loans and unsecured loans to show that all is not well with the company. Hence, learned counsel for the petitioner pointed out that the petition merited to be admitted. 43. It may be seen, as already pointed out, that the jurisdiction of this Court is a summary jurisdiction that unless there are materials before this Court to show that the company has reached the stages of commercial insolvency, this Court will not order a winding up. No doubt there is a corporate guarantee to support the claim of the petitioner as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f association to see as to whether the company has lost its substratum to order winding up. From the materials placed and from the averments in the petition, I do not find any material good enough to establish as a fact that the respondent-company is commercially insolvent, that it is unable to pay its debts and that its substratum is gone. As the Apex Court pointed out in Madhusudan Gordhandas Co. s case ( supra ), the mere fact that the company has suffered losses will not destroy its substratum unless there is no reasonable prospect of it making a profit in the future. Consequently, I have no hesitation in rejecting the plea of the petitioner. Even if the claim is substantiated, so long as the inability to pay is not established and when there are no grounds to order winding up under the just and equitable clause, I do not find any justifiable reason to order winding up. Even if the balance-sheet filed by the petitioner may show liabilities, so long as the respondent is able to meet its current liabilities and there being no evidence to the contrary, except for a general assertion that the respondent is not in a position to meet the liabilities and that there are several pet ..... X X X X Extracts X X X X X X X X Extracts X X X X
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