Tax Management India. Com
Law and Practice  :  Digital eBook
Research is most exciting & rewarding


  TMI - Tax Management India. Com
Follow us:
  Facebook   Twitter   Linkedin   Telegram

TMI Blog

Home

2012 (8) TMI 1096

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ter to recover the debt, even in part. - Company Petition Nos. 70, 71, 72, 117, 171, 172, 213, 214, 173 of 2010; and 104, 169 and 199 of 2011 and C.A. Nos. 48, 68 and 290 of 2012 in C.P. No. 172 of 2010 - - - Dated:- 21-8-2012 - Ramesh Ranganathan, J. For the Appellant : Prabhakara Sripada For the Respondent : S. Niranjan Reddy ORDER Ramesh Ranganathan, J. 1. C.P. Nos. 172 of 2010 and batch are filed, under Section 433 (e) read with Section 434 and 439 of the Companies Act, 1956, seeking winding up of the respondent company. The petitioners are all individuals who had sought allotment of flats in an apartment complex known as Hill County situated at Bachupally village, Qutubullapur Mandal, Rangareddy District. Agreements of sale were entered into, between the petitioners and the respondent, during the years 2006 to 2008. All the petitioners herein have admittedly paid a substantial part of the sale consideration running into several lakhs each. All of them also claim to have terminated the agreements of sale in accordance with the conditions stipulated therein. 2. The respondent is a company incorporated under the Companies Act with its registered of .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... Krishnam Raju from acting as Directors of the respondent company. The CLB, by its order dated 05.03.2009, appointed its nominee on the Board of Directors of the respondent company. The petitioners would contend that the respondent had collected ₹ 654 Crores from the prospective apartment owners and had diverted a major portion thereof for other purposes such as buying of lands in the name of other front and surrogate companies; all the petitioners issued legal notices on different dates terminating the agreement of sale in terms of clause 9(e) thereof. They also requested the respondent to return the sale consideration paid by them, after deducting ₹ 5000/- towards documentation charges. In reply thereto the respondent issued legal notice dated 13.07.2010 contending that the project could not be completed on account of force majeure events. The petitioners sent another legal notice dated 16.07.2010 by registered post pointing out the discrepancies in the reply legal notice dated 13.07.2010. Thereafter a statutory notice under Section 434(1)(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 th .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... itioners in seeking winding up of the respondent. 8. Sri Prabhakar Sripada learned counsel for the petitioners, would rely on Severen Water Purification Inc. v. Chlora Control (India) Private Limited 2008 (4) SCC 380, wherein the Supreme Court held that Section 439(4) of the Companies Act was a self-contained code, to submit that intervention by third parties is permissible only after admission of the winding up petition, and not prior thereto; and, as such, neither IL FS nor the so-called Hill Country Owners Welfare Association had locus standi to be heard at this stage. On the other hand Sri D. Prakash Reddy, Learned Senior Counsel appearing on behalf of M/s. IL FS, would submit that the scope of Section 557 is wide requiring the Court to take into consideration the interest of stakeholders even at the stage of admission. 9. Having due regard to the provisions of Section 557(1) of the Companies Act, 1956, the principle which has been laid down in National Textile Workers' Union v. P.R. Ramakrishnan (1983) 1 SCC 228, in the case of the workers, must necessarily apply to the creditors also. There is an express statutory recognition of the position that the Court must have .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ner had merely filed a photocopy of the agreement which cannot be impounded, and its contents cannot be looked into at all; the said agreement of sale is also inadmissible as it is not registered as required under Section 17(1)(g) of the Registration Act; the said document cannot, therefore, be relied upon in view of Section 49 of the Registration Act; and, even if the both parties rely on a document which is not duly stamped, the Court cannot look into such a document for any purpose. 13. Sri Prabhakar Sripada, Learned counsel, would submit that the total amount paid by the petitioners in these batch of Company Petitions, as consideration for construction of the apartments, was nearly ₹ 7.75 crores; the respondent, having admitted the existence of the agreements of sale in their counter-affidavit, cannot now turn around and contend that the said agreement of sale is inadmissible in evidence as it is not properly stamped or registered; this objection is an afterthought and a mere wrangle to avoid payment of the debt due; as execution of the agreements of sale is admitted, there is no need to prove its contents; the respondent cannot be permitted to resile from its admissio .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ment can, however, be used as an evidence of collateral purpose as provided in the proviso to Section 49 of the Registration Act. (K.B. Saha and Sons Private Ltd. v. Development Consultant Ltd., (2008) 8 SCC 564). A purpose would be collateral if it is other than the one which the document itself serves. (G. Udayakiran Reddy v. G. Ramakrishna Reddy 2011(3) ALD 54; S. Kaladevi v. V.R. Somasundaram (2010) 5 SCC 401). If an objection is taken to the admissibility of a document on the ground that it is not stamped and registered, the Court must first decide both the questions. (Nori Srirama Sastri v. Nori Lakshmidevamma AIR 1957 AP 60; Shyamal Kumar Roy v. Sushil Kumar Agarwal (2006) 11 SCC 331). 18. It cannot, however, be lost sight of that the respondent - company has not only admitted existence of the agreement of sale but has also relied on, and has acted in terms of, certain clauses thereof. In its reply notice dated 13.7.2010 the respondent stated that, along with land owners, they had entered into an agreement of sale with the petitioner with respect of the undivided share of land admeasuring 105 sq. yards; and the petitioner, by entering into the said agreement of sale with .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ions of Section 58 of the Evidence Act, facts admitted need not be proved and, therefore, the circumstance that the promissory note was not admissible in evidence was immaterial; and the whole discussion, turning on the inadmissibility of the promissory note, on the ground that it was not duly stamped, was quite irrelevant in the circumstances having regard to the defendant's admission regarding execution of the promissory note. 22. In Ponnusami Chettiar v. Kailasam Chettiar AIR 1947 MAD 422 the Madras High Court held:- ...........It is not necessary for me to decide as to the exact nature of these two documents to determine whether they are admissible in evidence. Assuming that these two documents should not have been legally admitted in evidence, nevertheless it is contended for the petitioner by Mr. M.S. Vidhyanatha Aiyar, and I agree with his contention, that as the defendant had admitted the execution of the documents and had only pleaded a substitution of liability by the execution of another promissory note and a partial discharge towards it there was no necessity for the plaintiff to adduce proof of his claim by seeking to get the two documents admitted in evide .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... the one hand, and clause (f) thereof on the other, makes it abundantly clear that the Statute itself created a bar under Section 443(2) of the Act from entertaining a winding-up petition on 'just and equitable' grounds when an alternative remedy is available. (K. Mohan Babu v. Heritage Foods India Ltd., Hyd. (2001) 5 ALD 80; P Sridevi W/o P Murali Krishna v. Cherishma Housing Private Ltd. 2008 LAP 340). The legislature has consciously chosen not to extend the requirement of compliance with Section 443(2) to any of the other circumstances in clause (a) to (e) of Section 433. Extending the requirement of Section 443(2) also to a petition under Section 433(e) of the Companies Act would either require deletion of the words just and equitable or adding the words unable to pay its debts in Section 443(2) of the Act. It is not a sound principle of construction to brush aside words in a statute, as being inapposite surplussage, if they can have a proper application in circumstances conceivable within the contemplation of the statute. (Gurudevdatta VKSSS Maryadit v. State of Maharashtra 2001(4) SCC 534, Manohar Lal v. Vinesh Anand (2001) 5 SCC 407). 27. It is left to the disc .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... company judge would have the power to pass appropriate orders. (G.B. Springs (P) Ltd., 2003 (117) CC 327; Everest Holding Limited (2008) 16 SCC 774). 29. Reliance placed, on behalf of the respondent, on the judgment of the Bombay High Court in Manipal Finance Corporation Ltd. v. CRC Carrier Ltd., (2001) 107 Comp Cas 288 (Bom), and on the judgment of the Madras High Court in Chettinadu Constructions v. Muthukumarasamy Textiles Ltd., (2010) 156 Comp Cas 203 (Mad), is therefore misplaced. Both the preliminary objections, raised on behalf of the respondent, necessitate rejection. III. ADMISSION OF THE PETITION FOR WINDING UP - SCOPE OF ENQUIRY: 30. While elaborate submissions have been made, and several contentions urged on the merits of the case by Counsel on either side, it must be borne in mind that the winding up petitions, in this batch, have not even been admitted. It is, therefore, necessary at the outset to examine the scope of an enquiry by a Company Court in deciding whether or not these company petitions should be admitted. 31. It is for the Court to decide as to whether a strong prima facie case on facts is made out for admission of a winding up petition. (IC .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... (Del); German Homeopathic Distributors Pvt. Ltd. v. Deutsche Homeopathic Union DHU (2009) 161 DLT 703; S.M. Patel Iron Traders Private Limited v. Sugam Construction Private Ltd (2011) 162 Comp Cas 298 (Guj)). If the defendant raises a triable issue indicating that he has a fair or bonafide or reasonable defence, although not a possibly good defence, the defendant is entitled to unconditional leave to defend. If the defendant has no defence, or if the defence is a sham or is illusory or is practically a moonshine, the defendant is not entitled to leave to defend. (Sunil Enterprises v. SBI Commercial International Bank Ltd., (1998) 5 SCC 354; Santosh Kumar v. Bhai Mool Singh AIR 1958 SC 321 Milkhiram (India) (P) Ltd. v. Chamanlal Bros. AIR 1965 SC 1698 and Mechelec Engineers Manufacturers v. Basic Equipment Corpn AIR 1977 SC 577). Summary judgments under Order 37 should not be granted where there is a serious conflict as to a matter of fact or where any difficulty on issues as to law arises. (Raj Duggal v. Ramesh Kumar Bansal 1991 Supp (1) SCC 191). IV. AGREEMENT OF SALE: ITS TERMS AND CONDITIONS: 33. Bearing in mind the aforesaid principles, let us now examine the merit .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... se exits. (In re Federal Chemical Works Ltd., 1964 (34) CC 963 (All), Kanchanaganga Chemical Industries v. Mysore Chip Boards Ltd (1998) 91 Comp Cas 646; Harinagar Sugar Mills Co. Ltd. v. M.W. Pradhan Court Receiver (2006) 1 SCC 509). If the demand is not met, and an application for liquidation is filed in reliance of the presumption under Section 434(1)(a) that the company is unable to pay it debts, the law should take its own course and the company, will have an opportunity on the liquidation application to rebut that presumption. (IBA Health (India) Private Limited (2010) 10 SCC 553). What is envisaged under Section 433(e) is not inability to pay a particular debt, but inability of the company to pay its debts. Section 434 only provides a rule of evidence by providing circumstances in which it can be presumed that the company is unable to pay its debts. With the aid of the presumption the court may be satisfied that the company is unable to meet the current liabilities in the commercial sense which includes the debt due to the petitioner as well as other debts. But the presumption is a rebuttable one. The presumption may be rebutted on existing material. What evidence is suffici .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... to a claim for damages, (whether liquidated or unliquidated), there is no 'existing obligation' to pay any amount. A claim for damages becomes a 'debt due', not when the loss is quantified by the party complaining of the breach, but when a competent Court holds, on enquiry, that the person, against whom the claim for damages is made, has committed breach and has incurred a pecuniary liability towards the party complaining of the breach and assesses the quantum of loss and awards damages. Damages are payable on account of a fiat of the Court. Liability to pay damages arises only when a party is found to have committed breach. Ascertainment of the amount awardable as damages is only consequential. (Greenhills Exports (Private) Limited, Mangalore v. Coffee Board, Bangalore (2001) 106 CC 391 (Kar) (DB); Iron and Hardware (India) Co. v. Firm Shamlal and Bros AIR 1954 Bom. 423; Mirza Javed Murtaza v. Uttar Pradesh Financial Corporation, Kanpur AIR 1983 ALL. 234; SMS Tea Estates Pvt. Ltd. (2011) 3 Comp. LJ 666 (SC)). 38. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages. That is not an actionable claim, and Secti .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... a contract, it is not a 'debt' due and therefore a company petition will not be maintainable. Claims for damages or compensation has to be assessed by a Court before it becomes due and payable, (Greenhills Exports (Private) Limited, Mangalore (2001) 106 CC 391 (Kar) (DB); M/s. Jyothi Limited (2001) 106 Comp Cas. 380 (Kar)), and damages become payable only when they are crystallized upon adjudication. Until and unless an adjudication takes place with a resultant decree for damages, there is no debt due and payable. (E-City Media Private Ltd. v. Sadhrta Retail Limited (2010) 153 Comp. Cas 326 (Bom); SMS Tea Estates Pvt. Ltd.5; Nagarjuna Constructions Co. Ltd. v. Sharat Industries Ltd., (2001) 104 CC 602) 40. Section 2(e) of the Indian Contract Act defines every set of promises forming the consideration for each of the agreements to be an agreement . Clause 2(h) defines Contract to be an agreement enforceable by law. Section 73 of the Contract Act stipulates that, when a contract has been broken, the party who suffers such breach is entitled to receive, from the party who was broken the contract, compensation for any loss or damage caused to him thereby, which naturally .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... that the respondent company is unable to pay its debts. Proceedings for winding up are not proceedings for recovery of any amount. (Tirlok Chand Jain 1991 (70) CC 197 (P H); William Jacks Company (India) Limited 1986 (59) CC 876 (P H); Salig Ram v. New Suraj Financiers Chit Fund Company Judgment of P H High Court in C.A. No. 8 of 1979 in C.P. No. 147 of 1978 dt. 18.7.1979). It is not an invariable rule of law that, where a suit for the recovery of a debt on the same cause of action is pending in a civil court, a petition for winding up does not lie. (Fibex Inc. v. A.B.K. Publications Ltd., (1999) 97 Company Cases 947 (A.P)). Mere pendency of a suit by itself cannot be put up as a defence for winding up. (Goetze India Ltd., (1994) 80 Comp Cas 340). It is evident that the Legislature contemplated the simultaneous existence and continuance of a winding-up petition as well as a suit for the recovery of money on the same cause of action. No provision in the Companies Act has been shown mandating that, on the filing of a suit for recovery of moneys due, the winding up petition must be dismissed. (G.B. Springs (P) Ltd. 2003(117) CC 327). 44. A suit for recovery of money is essentia .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... tely or at a future date. The word 'debt' is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. The former is a debt owing, and the latter is a debt due. A sum due would, therefore, mean a sum for which there is an existing obligation to pay in praesenti or, in other words, which is presently payable. (Kesoram Industries and Cotton Mills Ltd. v. CWT AIR 1966 SC 1370; People v. Arguello [1869] 37 Calif 524; Raman Iron Foundry (1974) 2 SCC 231; Mediquip Systems (P) Ltd., (2005) 7 SCC 42). The concept of a debt for a sum due is the same thing as a debt due. There must be debitum in praesenti; solvendum may be in praesenti or in futuro -- that is immaterial. (Raman Iron Foundry (1974) 2 SCC 231; Web v. Stenton [1988] 11 QBD 518). A debt is property, and is treated as property under the Transfer of Property Act which calls it an actionable claim . (Delhi Cloth and General Mills Co. Ltd. v. Harnam Singh (1955) 2 SCR 402). 47. If failure to pay the loan instalment by a company to a bank/financial institution is required to be adjudicated only in a civil suit or before the arbitrator, and as not to be examined by this Cour .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... igations and proceedings were incorrectly instituted against it; various attachments and court orders had also delayed the project; where an agreement contains a 'force majeure' clause, the intention is to save the performing party from the consequences of anything over which he has no control; and the requirement of force majeure are : (a) it must proceed from a cause not brought about by the defaulting party's default; (b) the cause must be inevitable and unforeseeable; and (c) the cause must make execution of the contract wholly impossible. 50. On the other hand Sri Prabhakar Sripada, Learned Counsel, would submit that the land owning companies had no role to play except providing land; the petitioner, exercising his rights under clause 9(b) and (e) of the agreement, had issued legal notice dated 27.06.2010 expressing his intention to terminate the agreement of sale citing various grounds for cancellation, including lack of progress in construction; a reply notice dated 13.07.2010 was issued by the respondent admitting that acute shortage of funds had paralysed development of the Hill County Project; no details of the alleged investors and financial ins .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... s defined in Chitty on contracts as normally used to describe a contractual term by which one (or both) of the parties is excused from performance of the contract, in whole or in part, or is entitled to suspend performance or to claim an extension of time for performance, on the happening of a specified event or events beyond his control. 52. Before examining the question whether the reasons furnished by the respondent-company constitute force majeure events, it is useful to note that the doctrine of frustration of contract is an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and, hence, comes within the purview of S. 56 of the Indian Contract Act. S. 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties. (Boothalinga Agencies v. V.T.C. Poriaswami Nadar AIR 1969 SC 110; Satyabrata Ghose v. Mugneeram Bangur Co. AIR 1954 SC 44). The word impossible has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless fro .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... eement by the developer (respondent herein). Clause 9(b) enables the purchaser to terminate the agreement upon the developer failing to construct the property within the period stipulated in the agreement, and the given grace period and the additional eight months penalty period, as provided in clause 7(a), 7(b) and 7(c) if the developer gave, prior to the expiry of the grace period of eight months, a revised schedule of construction completion or assured that construction would be completed by a new contractor of repute or a combination of both. The purchaser is obligated to accept the same provided the total consideration is not increased. Clause 9(c) stipulates that the termination shall be by a written notice delivered to the opposite party in the manner set out in the agreement. Clause 9(e) provides that, if termination of the agreement is by the purchaser due to the developer's default, the developer and the land owners shall pay back the amounts received from the purchaser within thirty days of cancellation and, if payment is made after the thirtieth day, the developer and the land owners shall pay interest of ten percent per annum beyond the thirtieth day upto the date .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... lingaraju and Satyam Computer Service Limited, which resulted in investigation and proceedings being incorrectly instituted against the respondent; and (2) financial institutions and customers, who had committed to funding the project, had resiled and withdrawn from the Hill County Project. Except for these bald and vague pleas, no material has been placed on record to show which banks/financial institutions or customers had allegedly withdrawn from the project and when had they withdrawn from funding the project, or details of the vendors and when they had stopped supplies. The provisional attachment order dated 18.08.2009 did not result in attachment of any of the properties of the respondent or of the 14 land owning companies (all of whom are subsidiaries of the respondent) and, therefore, the provisional attachment order cannot be cited as a ground for non-performance of the contract. The relief sought for in O.P. No. 2339 of 2009 was only for stay of alienation of the property, and an order of status quo was passed on 09.11.2009. However, subsequently, final orders were passed on 12.03.2010 making it clear that the respondent was outside the purview of the injunction order. Th .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... the parties to be of essence, even if it has been expressly stated that time is of essence of the contract; all the provisions of an agreement have to be read together to understand if time was of the essence of the contract; any cancellation of the agreement of sale has to be consented to by all the parties to the agreement; any unilateral cancellation of the agreement by any one party is illegal and not binding on the other; the agreement of sale is a multi-party agreement wherein 14 land owning companies are also parties; the consideration received from the petitioners, towards cost of the land, was adjusted by the respondent with the other parties to the agreement of sale as they were the land owning companies; there has been no breach of the agreement, and the petitioners are not entitled to seek termination of the contract as such termination was improper, and not in accordance with the terms of the contract. 59. The submission that the agreement of sale does not provide for unilateral termination of the contract is misconceived. Clause 9 deals with termination of the agreement and, under sub-clause (a) thereof, the developer and the land owners are entitled to terminate t .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... such clauses would be construed as rendering ineffective the express provision relating to the time being of the essence of contract. (Hind Construction Contractors (1979) 2 SCC 70). 62. The question whether or not time was of the essence of the contract would essentially be a question of fact, and the real test is the intention of the parties to be gathered from the terms of the contract. It depends upon the facts and circumstances of each case. (Hind Construction Contractors (1979) 2 SCC 70). The intention can be ascertained from (i) the express words used in the contract; (ii) the nature of the property which forms the subject-matter of the contract; (iii) the nature of the contract itself; and (iv) the surrounding circumstances. The onus to plead and prove that time was of the essence of the contract is on the person alleging it, thus giving an opportunity to the other side to adduce rebuttal evidence that time was not of essence. (Swarnam Ramachandran v. Aravacode Chakungal Jayapalan (2004) 8 SCC 689; Pollock Mulla: Indian Contract Specific Relief Acts (2001), 12th Edn., p. 1086). 63. It is no doubt true that Clause 7(d) is a penal clause requiring the developer and .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... espondent cannot, therefore, be said to have neglected to pay its dues; the petitioners had filed winding up petitions only to arm-twist and coerce the respondent to repay the amount paid by the petitioners earlier as sale consideration; there exists a bonafide dispute between the petitioner and the respondent with regards the obligation to pay the monies claimed; no money is due or liable to be paid to the petitioners; there is no admitted debt as alleged; the aforesaid issues constitute a substantive defence for refusing cancellation of the agreement, if a suit were to be instituted; the Company Court must dismiss the winding up petition if it reaches the conclusion that a Civil Court, in a summary suit, would have granted leave to defend; in the present case, the defences are not only plausible but raise serious triable issues; the respondent company cannot be deemed to be unable to pay its debts as the prerequisite for such a presumption is not satisfied; and the company petition is liable to be dismissed. 66. On the other hand Sri Prabhakar Sripada, Learned counsel, would submit that the petitioner, in C.P. No. 172 of 2010, had pleaded that ₹ 76,47,122 is due and paya .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ere 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 order without requiring the creditor to quantify the debt precisely. (In Re Tweeds Garages Ltd. (1962) 32 Comp Cas 795 (Chd.)). The principles on which the court acts are first that the defence of the company is in good faith and one of substance; secondly, the defence is likely to succeed in point of law and thirdly the company adduces prima facie proof of the facts on which the defence depends. (Madhusudan Gordhandas Co. (1971) 3 SCC 632; Reliance Infocomm Ltd. (2008) 142 Comp. Cas. 170; Mediquip Systems (P) Ltd. (2005) 7 SCC 42). 68. If the debt is not disputed on some substantial ground, the Court/Tribunal may decide it on the petition and make the order. (Mediquip Systems (P) Ltd. (2005) 7 SCC 42). The Court is entitled to investigate the question as to whether a dispute has been manufactured in order to delay and defeat realisation of the dues of the petitioning creditor, and is merely a cloak for the inability of the company to pay its just debts. (S.M. Patel Iron Traders P. Ltd. (2011) 162 Comp Cas .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... nternational Limited, Bangalore v. United Breweries Limited, Bangalore (2005) 6 Kar. L.J. 615; Reliance Infocomm Ltd. (2008) 142 Comp. Cas. 170). Exercise of discretion would arise only after the Court comes to a prima facie conclusion that the defence raised by the Company in respect of the debt, which is the subject matter of a petition, is not bonafide and/not acceptable. In that case, the Court would have to consider various other factors so as to decide whether the discretion should be exercised for the purpose of winding up the Company or dismissing the petition. (S.M. Patel Iron Traders Private Limited (2011) 162 Comp Cas 298 (Guj)). The company court can go behind the disputes, agreement, award or can pass any order to determine whether the disputes sought to be raised are bonafide or not. (Goetze India Ltd. (1994) 80 Comp Cas 340). The machinery for winding up will not be allowed to be utilised merely as a means for realising the debts due from a company. (P.G. Bhatia Co. (1977) 47 Comp Cas 438; State Trading Corporation of India Ltd. v. Punjab Tanneries Ltd (1994) 2 CLJ 270; Kanchanaganga Chemical Industries (1998) 91 Comp Cas 646; Pradeshiya Industrial and Investment C .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... f the respondent is neither valid nor is it bonafide, and is a mere moonshine. A presumption under Section 434(1)(a) arises that the respondent is unable to pay its debts. Such a presumption has not been satisfactorily rebutted by the respondent. Prima facie the ingredients of Section 433(e) read with Section 434(1)(a) of the Companies Act are satisfied which may well necessitate exercise of discretion by this Court to admit the Company Petition. VI. COMMERCIAL INSOLVENCY: 74. Under Section 439(1)(b) of the Companies Act, an application to the Court for the winding up of the company can be presented by any creditor including any contingent or prospective creditor. If leave, as required under Section 439(8), is granted by the Court before the Company Petition is admitted, the question whether the respondent company is unable to pay its debts, attracting the ingredients of Section 433(e) read with Section 434(1)(c), has necessarily to be examined even in a petition filed by a contingent or prospective creditor. Black's Law Dictionary defines contingent as possible, but not assured; doubtful or uncertain; conditioned upon the occurrence of some future event which is itse .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... t even commenced; though the valuation report of Cushman Wakefield dated 12.04.2010 was strictly confidential to the addressee , it was enclosed along with the counter affidavit; it was evident from the report that no due and legal diligence was undertaken by the valuer; copies of the title deeds were not even seen by them; even the basic precautions for valuing the property was not taken; the property was not physically measured to arrive at its value; the report was based on the premise that certain lands, which are presently notified as a special economic zone, would be de-notified; the report includes an extent of 38.29 guntas of land which is already mortgaged to State Bank of Mysore, and a notice under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was issued on 13.11.2010 by the bank; the respondent had advanced ₹ 247 crores as loans and advances to its subsidiaries; the respondent had become commercially insolvent, and was not in a position to repay its debts; it owed huge sums to various other institutions and individuals; the respondent had suffered an award for ₹ 600 crores on the c .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ounting assumptions in accordance with the general accepted accounting principles such as the principle of conservatism, going concern, accrual, historical cost etc; financial insolvency is different from commercial insolvency; commercial insolvency only means that the company is not able to pay its debts as and when it is due; and a mere statement in the Balance Sheet that the liabilities of the respondent exceed its assets would not amount to commercial insolvency. 77. An examination of the company's solvency may be a useful aid in deciding whether the refusal to pay is a result of a bonafide dispute as to liability or whether it reflects an inability to pay. (IBA Health (India) Private Limited (2010) 10 SCC 553). In cases where the presumption under Section 434 (1) (a) does not arise then, of necessity, the Court has to consider whether any such presumption arises under Section 434 (1) (c) and satisfy itself that, prima facie, the Company is unable to pay its debt as its assets are insufficient to meet all its liabilities, actual and contingent. (Reliance Infocomm Ltd. (2008) 142 Comp. Cas. 170; Airwings (P). Ltd. AIR 1995 Kar 69; American Express Bank Ltd., (1999) 96 Com .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... Ltd., (1998) 93 Comp. Cas. 296). A Company is commercially insolvent when it has no wherewithal to meet its commercial liabilities. (M/s. Excel Embroideries v. Trend Designs Ltd., AIR 1997 Ker 329). The petitioner is obliged to show that the financial status or the monetary substratum or the commercial viability of the company has gone so low and down that winding up is obviously, and evidently, unavoidable. (Tata Iron and Steel Co. (2001) 104 Comp Cas 533 (Guj)). The Court has to examine the company's inability to pay its debts with reference to the date when it became absolutely due for payment, along with the contingent and prospective liabilities of the company. (Sri Shanmugar Mills Ltd. v. Dharmaraja Nadar [1969] 39 Comp. Cas. 297 (Mad.)=AIR 1970 Mad 203; S. Sohanmull Gotcha P. Ltd., (1972) 42 Comp Cas 386). One of the considerations to determine inability of a company to pay its debts is whether the company is commercially insolvent and unable to meet its liabilities as and when they accrue. (P.G. Bhatia Co. (1977) 47 Comp Cas 438). That it is commercially solvent means that the company should be in a position to meet its liabilities as and when they arise. (Mediquip S .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... abilities are liabilities that may or may not be incurred by a company depending on the outcome of a future event. These liabilities are recorded in a company's accounts and shown in the Balance Sheet if they are both probable and reasonably estimable. A footnote to the Balance Sheet describes the nature and extent of the contingent liabilities. The likelihood of the loss is described as probable, reasonably possible, or remote. The ability to estimate a loss is described as known, reasonably estimable, or not reasonably estimable. 81. S.R. Batliboi Associates (auditors of the respondent) in their audit report, annexed to the Balance Sheet as at 31.3.2009, stated that the respondent had incurred losses of ₹ 538,90,76,457/- during the year; its accumulated losses were ₹ 518,04,82,387/- resulting in complete erosion of its net worth; subsequent to the year end, and till the date of the report, the company had insignificant sales; a number of customers had cancelled their bookings; there had been no significant progress of the project; the construction contract, by the sole contractor, had been terminated; restrictions had been imposed by the Income Tax Department .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... y the profit and loss account is to be adjusted for the effects of transactions of a non-cash nature such as depreciation, amortization, deferred tax expenses etc. As the explanation to Section 2(29-A) of the Companies requires the reserves created from out of revaluation of assets to be excluded from the ambit of free reserves , the net worth of a company must necessarily be determined on the basis of the historical cost of its assets, and not any value which is placed thereon consequent upon its revaluation. 85. Net-worth is calculated to determine the creditworthiness of a company. Excess of liabilities over assets and capital stock, resulting from operating losses, is also called negative net-worth. Erosion of net-worth of a company means that the accumulated losses of a company, at the end of a financial year, are more than its entire net-worth (total assets minus total liabilities). Complete erosion of net worth means that the accumulated losses of a company coupled with the liabilities of the company far exceed its assets . 86. The Balance Sheet of the respondent company, as at 31.3.2008, shows that its share capital was ₹ 5.00 lakhs, and its reserves and surpl .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... were correct. Under the note to clause 2.5, the valuers stated that no legal due diligence had been undertaken by them on the said property, or on the copies of the title deeds as shared with them by the respondent; unless disclosed to them to the contrary, and recorded in the property report - Part B, their valuation was on the basis that the property in the subject location possessed a good and marketable title, and was free from any unusually onerous encumbrances. Under the head other key assumptions in Clause 2.8.4 the valuers stated that, in view of the fact that there existed high vacancies in the commercial office space real estate market in the city, there was little visible demand for additional commercial office space in the micro market; due to this it was assumed that the land lord/developer (respondent) would denotify the SEZ status of Ac. 74 of land to unlock the maximum value of the property; and the value, as arrived of the subject property, was assuming a mixed use and not SEZ usage. It is not in dispute that these Ac. 74-00, allotted for an SEZ, has not been de-notified from the SEZ status till date. Reliance placed by the respondent on the valuation report to c .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... induction, the IL FS Group has been actively involved in infusing funds into the respondent-company to bring the Hill County Project, back on track, and to settle all disputes including tax liabilities of the respondent; the new promoters have invested more than ₹ 150 crores, and the project is now proceeding at a fast pace; the validity of the order of the CLB dated 13.1.2011 has not been challenged and, therefore, is binding on the customers; IL FS has been focusing mainly on completion of the Hill County Project; if any adverse order is passed against the respondent-Company at this juncture, it would cause irreparable and seriously damage to the reputation of the IL FS Group in which a major shareholding is that of public sector undertakings; and it would, therefore, be in the interest of the customers, the company, the implead petitioners, workers, and in general public interest, that the Company Petitions be dismissed. 90. Sri S. Niranjan Reddy, Learned Counsel, would submit that, of the eleven residential towers that were planned, the company is taking steps to complete construction of the flats in nine towers and, accordingly, had requested the customers in the r .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... n, may damage the credit worthiness or financial standing of the company; the winding up procedure has to be resorted to only when other means of healing an ailing company are of absolutely no avail; and this Court can adjourn the matter conditionally or unconditionally or make such interim orders as it thinks fit, exercising its powers under Section 443(1)(b), so that winding up proceedings are not reduced into an instrument of arm-twisting a corporate body or of destroying it; and this Court should refrain from exercising its discretion to admit the Company Petition in larger public interest, and in the interests of the stakeholders, as the Company is on a revival path. 91. On the other hand Sri Prabhakar Sripada, Learned counsel, would submit that, on the order of the CLB dated 13.01.2011 being challenged by SRS Orion and Investments Limited, the Supreme Court had directed the CLB to hear their objections, and to reexamine the correctness of its order dated 13.01.2011; hearing before the CLB is in progress; the respondent continued to be oblivious to the hardships faced by the petitioners; the order of the CLB dated 13.01.2011 called upon IL FS to settle all disputes, includi .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... dia Saw Mills (P) Ltd. (1975) 45 Comp Cas 273 (Ker)). The Company Court is not bound to entertain a petition for winding up nor is it bound to order winding up even if a case to that effect on facts is made out. (Premlal Birla v. Gilt Pack Ltd., (2004) 121 Comp Cas 802 (MP)). 93. A petition for winding up would be deemed to be a representative action, and in public interest. An order passed in a winding up petition is an order in rem. The court is bound to keep in view the public interest. Primarily, the court is concerned not only with the interest of the petitioner or the creditors but it has to keep in view the interest of the company's shareholders, contributories, etc., also. While ordering the winding up of a company, when it is unable to pay its debts, the court will keep in view (1) that the winding up is for the benefit of all concerned; (2) the winding up does not result in conferring any special privilege on the petitioner, i.e., the creditor or any other person making the application for winding up. (Goetze India Ltd. (1994) 80 Comp Cas 340). (b): WINDING UP: REMEDY OF THE LAST RESORT: 94. Winding up of any company is always regarded as an extreme and/or .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ted to only as a last course. All efforts are to be made for saving the company from being wound up. (M.S.D.C. Radharamanan (2008) 6 SCC 750; Daulat Makanmal Luthria v. Solitaire Hotels Pvt. Ltd., (1993) 76 Comp Cas 215 (Bom)). Winding up is the last thing the Court would do and not the first thing to do having regard to its impact and consequences. (Tata Iron and Steel Co. (2001) 104 Comp Cas 533 (Guj); Ranjana Kumar v. Indian Dyestuff Industries Limited (2001) 107 Comp Cas 579 (Bom.). (c): ADMISSION OF A COMPANY PETITION: ITS EFFECT 97. An order of admission seriously affects the market position of a company-subject to the order. The confidence of the business or trade in the ability of a company to meet its liabilities is liable to be affected upon an order of admission with the consequential advertising of the petition which follows. The admission of a petition for winding up is a serious matter. (Bharat Petroleum Corporation Ltd., (2004) 120 CC 333 (Bom)). A creditor's winding-up petition, in certain situations, implies insolvency of the financial position with other creditors, banking institutions, customers and so on. Publication in the newspaper of the filing of .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... three years. IL FS group was directed to mobilize funds of ₹ 150 crores within a period of three months, and to complete the Hill County Residential Project Phase - I within eighteen months of its induction, and also settle all disputes, tax liabilities, and the contractual dues of other creditors of the respondent company. IL FS group was also required to submit quarterly reports to the CLB, and the Ministry of Corporate Affairs, regarding the status of Maytas Hill County Residential Project Phase I; and all government agencies, banks etc., were directed to co-operate in the implementation of the said order. 99. IL FS group is said to be one of the leading infrastructure Development and Finance Companies having a net worth of approximately ₹ 2440 crores. The IL FS group was promoted by Central Bank of India (CBI), Housing Development Finance Corporation Limited (HDFC) and Unit Trust of India (UTI). Life Insurance Corporation of India, State Bank of India, ORIX Corporation, Japan and Abu Dhabi Investment Authority are said to have been inducted as institutional shareholders in the IL FS group. At present a majority shareholding, in the IL FS group, is said to be hel .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... tion and issuing notice is also part of the hearing of the winding-up petition. (Ramakrishna Industries (P) Ltd. v. P.R. Ramakrishnan (1988) 64 CC 425 (Mad)). Even at the stage of admitting the winding-up petition, or entertaining the winding-up petition, the court has the inherent power to do all that is necessary to prevent the abuse of the process of the court or to advance the cause of justice or make such orders which are necessary to meet the ends of justice. That inherent power of the court is not taken away or in any way restricted by Section 443(1) of the Companies Act. (Ramakrishna Industries (P) Ltd. (1988) vol. 64 CC 425 (Mad)). What a court can direct, in an application for winding up, is set out in S. 443 of the Act. During the pendency of the petition, it can adjourn the hearing conditionally or unconditionally or make such interim order as it thinks fit. It will be competent for the Court, while adjourning the winding up petition, to impose conditions as to the management of the affairs of the company. Such powers can be exercised only if the petition for winding up of the company is kept pending. (Gitanjali Press Private Limited v. S. Thangaswami AIR 1962 Mad. 493) .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... al Plastering) Finishing (Electrical Mechanical) Finishing (Flooring, Paintings) Finishing (Doors Fixtures) Handover date Mussoorie Feb' 12 May' 12 Aug' 12 Oct' 12 Nov' 12 Dec' 12 Nainital Feb' 12 May' 12 Aug' 12 Oct' 12 Nov' 12 Dec' 12 Darjeeling Feb' 12 May' 12 Aug' 12 Oct' 12 Nov' 12 Dec' 12 Khandala Feb' 12 May' 12 Aug' 12 Oct' 12 Nov' 12 Dec' 12 Dalhousie Apr' 12 Jul' 12 Oct' 12 Dec' 12 Feb' 13 Mar' 13 .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... se 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 whether there exists a bonafide dispute. It is only if the respondent company's audited financial statements for the year ending 2011-12 and 2012-13 reflect that its net worth has become positive, and it has completed construction of all the apartments as promised in its letter dated 08.09.2011, (the schedule date for completion of all the apartments is February, 2013), would this Court examine whether it should exercise its discretion not to admit the company petitions. In case the respondent company's audited financial statements show that the networth of the respondent, for the year ending 2012-13, continues to be negative these Company Petitions shall stand admitted automatically, and the order of admission shall be advertisement in Indian Express (English Daily) and Andhra Prabha (Telugu Daily) State Editions before 26th July, 2013 subject, of course, to the .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

 

 

 

 

Quick Updates:Latest Updates