TMI Blog2016 (6) TMI 1380X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the creditor to quantify the debt precisely. The counter claim made by the Respondent Company is one for damages mainly on account of the failure of the Petitioner to sell all 20,00,000 shares of Gitanjali between the period 19th March, 2013 to 27th April, 2013 (the date on which freezing order was passed by the EOW). What is pertinent to note here is that, these shares of Gitanjali were pledged with the Petitioner to meet the margin requirements as per the Circulars issued by the Petitioner from time to time in that regard. Since there was a margin short fall, the Petitioner in a meeting held on 14th March, 2013 informed the Respondent Company that they would proceed to sell the shares of Gitanjai pledged with them - In contrast to this, the claim made in the present Petition is with reference to the trades that expired / matured in June 2013. The fact that the claim in the Petition is with reference to the trades that expired / matured in June 2013, is undisputed. In fact, the admission of liability by the Respondent Company is also with reference to these very same trades. A pledgee has the discretion to decide whether he wants to sell the pledge security; when to sell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) The Company Petition shall be advertised in two local newspapers viz. (i) Free Press Journal (in English) and (ii) Navshakti (in Marathi) as also in (iii) Maharashtra Government Gazette . Any delay in publication of the advertisement in the Maharashtra Government Gazette and any resultant inadequacy of notice shall not invalidate such advertisement or notice and shall not constitute non compliance with this direction or with the Companies (Court) Rules, 1959; (iv) The Petitioner shall, on or before 7th July, 2016 deposit a sum of ₹ 10,000/- towards publication charges with the Prothonotary and Senior Master of this Court under intimation to the Company Registrar, failing which the Company Petition shall stand dismissed for non-prosecution without further reference to the Court. After the advertisements are issued, the balance, if any, shall be refunded to the Petitioner. AS PER B. P. Colabawalla J. After the Judgement was pronounced, Mr. Andhyarujina, learned counsel appearing on behalf of the Respondent Company prays for a stay of this order. Dr. Saraf, learned counsel appearing on behalf of the Petitioner, vehemently opposes the said request. In orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to clear and settle the deals executed by the Respondent Company either by itself or as a clearing member of the Petitioner and for this purpose also executed a Clearing Membership Undertaking for the F O segment dated 16th January, 2003. In the normal course of trading on the platform of the NSE in the F O segment, the Respondent Company sold long dated nifty option contracts since June 2012 with their maturity set for September 2012 and December 2012. These contracts were subsequently partly rolled over to March 2013 and June 2013 respectively. (b) As a result of the expiry of the contracts rolled over for March 2013, as on 2nd April, 2013, an amount of ₹ 158.04 Crores became due and payable by the Respondent Company to the Petitioner. The Respondent Company vide its letter dated 2nd April, 2013, has in clear and express terms admitted the outstanding amount of ₹ 158.04 Crores as due and payable by the Respondent Company to the Petitioner and requested the Petitioner to adjust the outstanding amount against the Respondent Company's Fixed Deposits and cash collateral etc lying with the Petitioner. Accordingly, the Petitioner, as per the instru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, 2013 and 22nd March, 2013. The Petitioner ought to have sold all the 20,00,000 shares of Gitanjali, especially in view of the fact that during 19th March, 2013 and 22nd March, 2013 the share price of Gitanjali was approximately ₹ 600/- per share and if all the shares were sold, then nothing would have been due and payable to the Petitioner. In the light of these facts, the Respondent Company called upon the Petitioner to grant them a personal hearing on 2nd July, 2013 to demonstrate that nothing was payable by the Respondent Company to the Petitioner. (e) Thereafter, the Respondent Company by its Advocates' letter dated 31st July, 2013 for the first time raised a counter claim against the Petitioner in the sum of ₹ 213.02 Crores What is pertinent to note in this letter is that the Respondent Company has expressly admitted that an amount of ₹ 90.90 Crores was due and payable by the Respondent Company to the Petitioner. (f) As mentioned earlier, the outstanding of the Petitioner were to the tune of ₹ 94.78 Crores as on 28th June, 2013. Thereafter, certain securities and deposits of the Respondent Company were appropriated towards the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely negated by this Court by its order and judgment dated 22nd August, 2013. Being aggrieved thereby, the Petitioner preferred an appeal to the Supreme Court which is pending. I must also mention here that the Supreme Court by its interim order allowed the Petitioner to sell the balance 17.03 Lac shares of Gitanjali and deposit the sale proceeds thereof in the Supreme Court. (h) Be that as it may, since the Respondent Company failed to make payment of its outstandings in accordance with the Rules, Regulations and Bye-Laws of the Petitioner, the Respondent was declared as a defaulter on 15th October, 2013. Subsequently, the Respondent Company was also declared a defaulter by the Bombay Stock Exchange vide its Notification dated 17th October, 2013. Subsequent to this, on 7th March, 2014 the Respondent Company has also been expelled from the trading membership of the NSE in all segments. I must mention here that the Respondent Company challenged the action of the Petitioner in declaring them as a defaulter before the SAT without any success. The Respondent Company thereafter challenged this order of the SAT dated 30th June, 2015 before the Supreme Court, which is pending. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the Petitioner. Mr. Tulzapurkar, brought to my attention the particulars of claim in the suit filed by the Respondent Company [Suit (L) No.939 of 2013] wherein an amount of ₹ 90.90 Crores has been admitted as due and payable by the Respondent Company to the Petitioner because the Respondent Company itself has given credit for the same in the particulars of claim, to the Petitioner. Apart from the admission in the aforesaid suit, the learned counsel also brought to my attention a letter dated 31st July, 2013 (Exhibit J, page 55 of the paper book) addressed by the Advocates of the Respondent Company to the Advocates of the Petitioner wherein, after giving a break up of the alleged loss suffered by the Respondent company of ₹ 213.02 Crores, the Petitioner is called upon to pay a sum of ₹ 122.12 Crores as a compensation failing which the Respondent Company would adopt such legal proceedings as may be advised. Mr. Tulzapurkar, submitted that therefore reading this letter as a whole, it is clear that the dues of the Petitioner, atleast to the extent of ₹ 90.90 Crores have been expressly admitted by the Respondent Company. 4. Apart from this, Mr. Tulz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 939 of 2013 is a legitimate claim which has every chance of succeeding when the Suit goes to trial. It would therefore be highly unfair at this stage to seek orders of winding up of the Respondent Company when that Suit is still pending. 8. To elaborate this point further Mr. Andhyarujina was at pains to point out that the major loss suffered by the Respondent Company was due to the fact that the Petitioner, though holding 20,00,000 shares of Gitanjali and which were pledged to them, did not sell the same between 14th March, 2013 and 27th April, 2013. He submitted that if the 20,00,000 Gitanjali shares were sold during this period, at an average price of approximately ₹ 600/- per share, the Petitioner would have been able to recover approximately ₹ 118 Crores from the sale proceeds thereof and then nothing would be due and payable by the Respondent Company to the Petitioner. He submitted that this loss is directly attributable to the negligence of the Petitioner. He submitted that a meeting was held between the representatives of the Petitioner and the Respondent Company on 14th March, 2013 wherein the Petitioner clearly conveyed to the Respondent Company that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r itself had conveyed to the Respondent Company that it was going to sell all the shares of Gitanjali and thereafter sold only 2,97,731 shares, itself goes to demonstrate that the sale of Gitanjali shares was conducted improperly which has given rise to the claim in damages and which is the subject matter of Suit (L) No. 939 of 2013 filed by the Respondent Company against the Petitioner. He therefore submitted that there is a bonafide dispute raised by the Respondent Company in relation to the debt owed by the Respondent Company to the Petitioner. In support of his propositions, Mr. Andhyarujina relied upon following judgments:- (a) Vimal Chandra Grover v/s Bank of India (2000) 5 SCC 122 (paragraphs 12 16). (b) S. L. Ramaswamy Chetty and Another v/s M. S. A.P.L. Palaniappa Chettiar AIR 1930 Madras 364. 11. Mr. Andhyarujina submitted that this claim of damages and which is directly attributable to the negligence of the Petitioner can be set off against the debt owed to the Petitioner notwithstanding the fact that the dues of the Petitioner had been admitted by the Respondent Company. He submitted that a defense in a winding up Petition can be set up by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both parties. He therefore submitted that the claim of the Respondent Company against the Petitioner cannot be disregarded or discarded at this stage itself and hold that the Respondent Company did not have a bonafide defense to the Company Petition. For all these reasons, Mr.Andhyarujina submitted that the Company Petition be dismissed and the Petitioner be relegated to file a Civil Suit to recover their dues. 13. In addition to the aforesaid argument, Mr. Andhyarujina also submitted that the Petitioner issued a Circular dated 20th December, 2012 under which certain securities were suddenly removed from the permissible list. Mr. Andhyarujina submitted that by virtue of this Circular many of the securities pledged by the Respondent Company with the Petitioner towards the F O margins were deemed ineligible for acceptance as collateral and the value of the securities pledged with the Petitioner was reduced drastically to the tune of about 100 Crores. According to him, overnight the said securities all of a sudden became ineligible securities for no reason whatsoever. The Petitioner thereafter required from the Respondent Company replacement of these ineligible se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d defense to the Company Petition. 15. On a bare perusal of the proceedings in Suit (L) No.939 of 2013 it is clear that the claim therein is in damages. In a nutshell, this claim mainly arises due to the fact that according to the Respondent Company, even though the Petitioner had informed the Respondent Company that they would sell all 20,00,000 shares of Gitanjali, which were pledged with the Petitioner, the same was not done. If the shares were sold between the period 19th March, 2013 to 27th April, 2013 (the date on which the freezing order was passed by the EOW), the Petitioner would have realized far more than what was due to them. According to Mr. Andhyarujina this was admittedly not done, and therefore, the Respondent Company has suffered a huge loss on that count. 16. In my view, a set off or a counter claim can be considered as a bonafide defense to a winding up Petition if, firstly the defense is in is in good faith and one of substance, secondly, the defense is likely to succeed on the point of law, and thirdly that the Company adduces prima facie proof of the facts on which the defense depends. Where the debt is undisputed, the Court will not act upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence to the trades that expired / matured in June 2013, is undisputed. In fact, the admission of liability by the Respondent Company is also with reference to these very same trades. 18. Section 176 of the Contract Act, 1872 deals with the rights of a Pawnee where the Pawner make default. Section 176 reads as under:- 176. Pawnee's right where pawnor makes default.--If the pawnor makes default in payment of the debt, or performance, at the stipulated time, of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale. If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor. 19. As the Section clearly stipulates, if the pawnor makes default in payment of the debt, or performance, at the stipulated time, of the promise, in respect of whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law, the Petitioner, from 19th March, 2013 to 27th April, 2013, could not have sold 20,00,000 pledged shares of Gitanjali for the recovery of the debt that became due only in June 2013, then, I find, at least prima facie, that the claim made for damages against the Petitioner is not bonafide. What is important to note is that in the meeting of 14th March, 2013, the Petitioner informed the Respondent Company that it would be selling Gitanjali shares to make up the short fall in the margin. It was unilateral decision of the Petitioner. It is not as if there was any agreement between the Respondent Company and the Petitioner that the Petitioner would sell all the Gitanjali shares and because of a breach of the said agreement a claim for damages has been made. In fact, Mr. Andhyarujina very fairly conceded that there was no agreement between the parties that the Petitioner would sell 20,00,000 shares of Gitanjali. Therefore, I find that in law the Petitioner could not have sold 20,00,000 shares of Gitanjali in March - April 2013 for recovery of the debt that became due only in June 2013. If this be the case, then at least prima facie and in my view, the Respondent Company cannot conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done and the sale proceeds applied to the debt; (ii) in case the pledgee did not exercise the power of sale, then the Pledgor can redeem the pledge on payment of the debt or such part of it that has remained unpaid; and (iii) in case the sale was improperly exercised, to get damages caused thereby. This proposition of law has been laid down as far back as in the year 1930 in a decision of the Madras High Court in S. L. Ramaswamy Chetty and Another v/s M. S. A.P.L. Palaniappa Chettiar AIR 1930 Madras 364 This decision of the Madras High Court has been referred to by the Supreme Court with approval in the case of Vimal Chandra Grover v/s Bank of India (2000) 5 SCC 122 (paragraphs 12 16). In fact, a Division Bench of this Court in the case of State Bank of India v/s Neela A. Naik and another (AIR 2000 Bom 151) has also taken the same view. aragraphs 12 to 16 of the said decision read thus:- 12. We may notice that in the present appeal there are no disputes on facts. The contentions are purely legal. Now we would consider the first contention regarding applicability of Sec. 176 of the Contract Act. Section 176 provides for pawnee's right where pawnor makes default. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cise of discretion by the Bank as to the time of appropriation of the amount from the collateral security to it in the form of FDRs. 14. In the Gulamhusain Lalji Sajan v. Clara D'souza, AIR 1929 Bombay 471, it was held that in cases of a pledge the creditor has two rights which are concurrent and the right to proceed against the property is not merely accessory to the right to proceed against the debtor personally and on the same lines. Reliance in the said decision was also placed on a Full Bench decision of the Madras and Calcutta High Courts. The same principles were held to be applicable to the cases of hypothecation or mortgage of movable property. Section 176 has been held to be mandatory in the Division Bench decision of this Court in Official Assignee, Bombay v. Madholal Sindhu(AIR 1947 Bom 217). 15. In view of aforesaid legal position, we are unable to accept the contention that the Bank was obliged to adjust the instalments immediately on amount becoming due from the FDRs. Faced with this position, Mr. Thali, learned counsel for the respondents, contends that Sec. 176 has no applicability since it applies only to goods and the Fixed Deposit Receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13, at least to my mind, it is clear that the claim for damages is made on account of the Petitioners' failure to sell all 20,00,000 shares of Gitanjali between the period 19th March, 2013 and 27th April, 2013. It is not the case of the Respondent Company that the sale of the shares of Gitanjali by the Petitioner was conducted in breach of any agreement arrived at between the parties or was done improperly which has given rise to the claim in damages. As laid down in the judgment of the Madras High Court in the case of S. L. Ramaswamy Chetty and Another (AIR 1930 Madras 364) and which has got approval of the Supreme Court in the case of Vimal Chandra Grover (2000) 5 SCC 122 (paragraphs 12 16), the claim for damages can be brought by the pledgor against the pledgee only in the event that the pledgee sells the pledged goods and the same are sold improperly. In the facts of the present case the Respondent Company alleges that the Petitioner (who was the pledgee) ought to have sold all 20,00,000 shares and not only 2,97,731 shares of Gitanjali. This to my mind, does not in any way amount to a sale being conducted improperly as contemplated in the aforesaid two judgments. In fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tay its hands and in my view correctly so. The fact that this was a correct decision is now further borne out by subsequent events because not only on 27th April, 2013 the EOW passed an order under Section 102 of the CrPC freezing the sale of these very same shares, but the Petitioners being aggrieved by this order, challenged the same by way of a Writ Petition in this Court which was ultimately dismissed on 22nd August, 2013. Being aggrieved by the said order, the Petitioners preferred an SLP to the Supreme Court in which an interim order was passed allowing the Petitioners to sell the balance 17.03 Lac shares of Gitanjali and the sale proceeds thereof were ordered to be deposited in the Supreme Court. That SLP is still pending. All these facts clearly bare out the fact that it was not as if the Petitioners unilaterally one day decided not to sell all 20,00,000 shares of Gitanjali that has resulted in a loss to the Respondent Company. They stopped selling the shares of Gitanjali once they received intimation from the EOW that the shares and the title thereto was being investigated by them, and therefore, not to dispose of the same. To my mind, the actions of the Petitioner at leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. It was stated in this circular that a list of approved securities for the month would be announced and the date of implementation would be intimated subsequently. Further the criteria for member specific limits were expressly provided in the said circular dated 13th December, 2011. In fact the Respondent Company vide its email dated 12th September, 2012 addressed to the Petitioner noted its understanding of the circular dated 13th December, 2011 and the effect of its implementation. Thereafter, several other circulars dated 18th June, 2012; 20th July, 2012; 22nd August, 2012; 26th September, 2012; 19th October, 2012; 20th November, 2012; 20th December, 2012 and 21st January, 2013 were issued by the Petitioner for the purposes of implementing the revised prudential norms in a phase-wise manner. 29. What is important to note is that this was done and applied to all the members of the Petitioner and was not restricted only to the Respondent Company. On going through these circulars, I find, and as correctly submitted by Mr Tulzapurkar, that the aforementioned circulars (including the circular dated 20th December, 2012) merely implement the norms notified by the circular da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the Respondent Company has huge trade receivables from their clients, the advertisement of the admission of the Company Petition would cause grave prejudice to the Respondent Company. 32. I am unable to accept this submission for the simple reason that the purpose of advertisement of the Petition is to put on notice the public at large that a winding up petition had been entertained by the Court against the Respondent Company and if anybody has a claim against them, they can join in the winding up. It also puts the public at large to notice to be careful in their dealings with the Company. It would be meaningless, at least in the peculiar facts of this case, to simply admit the Petition and not have the same advertised. In this view of the matter, I would have to reject this contention also. 33. This now only leaves me to deal with the Judgment of the Court of Appeal in Re Portman Provincial Cinemas Ltd. (1999 (1) WLR 157) Mr Andhyarujina relied upon the aforesaid decision to contend that a claim in damages can be legitimately set up as a cross claim in a winding up petition and that the threshold to see whether the claim is genuine or not, is extremely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issed the appeal. He submitted that the same test ought to be applied in the present case also. 34. I am unable to agree with the submission of Mr Andhyarujina for more than one reason. Firstly, the majority view in Re Portman Provincial Cinemas Ltd. (1999 (1) WLR 157) is not binding on me and has only persuasive value. Secondly, as mentioned earlier, the law laid down in India by the decision of the Supreme Court in the case of M/s Madhusudan Gordhandas and Co. (1971) 3 SCC 632) is that the defence in the Company Petition (i) has to be in good faith and one of substance; (ii) that it is likely to succeed on a point of law; and (iii) the company adduces prima facie proof of the facts on which the defence depends. Thirdly, what is important to note is that the courts in India have in fact consistently followed the view taken by Lord Denning M.R. in the aforesaid decision rather than following the majority view. The observations in this regard by the Karnataka High Court in the case of State Bank of Hyderabad Vs Varson Chemicals Pvt. Ltd. Anr. (1988 SCC OnLine Kar 138 : ( 1989) 3 Kant LJ 222) are apposite. Paragraph 30 of the said decision reads thus: 30. Whateve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , likely to succeed in a point of law and nor has the Respondent Company adduced prima facie proof of the facts on which the defense is made. In these circumstances, the following order is passed. (i) The Company Petition is admitted and made returnable on 8th August, 2016; (ii) Learned counsel appearing on behalf of the Respondent Company waives service of the notice under Rule 28 of the Companies (Court) Rules, 1959; (iii) The Company Petition shall be advertised in two local newspapers viz. (i) Free Press Journal (in English) and (ii) Navshakti (in Marathi) as also in (iii) Maharashtra Government Gazette . Any delay in publication of the advertisement in the Maharashtra Government Gazette and any resultant inadequacy of notice shall not invalidate such advertisement or notice and shall not constitute non compliance with this direction or with the Companies (Court) Rules, 1959; (iv) The Petitioner shall, on or before 7th July, 2016 deposit a sum of ₹ 10,000/- towards publication charges with the Prothonotary and Senior Master of this Court under intimation to the Company Registrar, failing which the Company Petition shall stand dismi ..... 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