Judgment:
Permod Kohli, J.
1. The petitioner and the respondent are both limited companies incorporated under the Companies Act, 1956. The authorised share capital of the petitioner-company is Rs. 12,50,00,000 divided into 1,25,00,000 shares of Rs. 10 each, as per the balance-sheet of the petitioner-company up to the date of filing of this petition. Similarly, the respondent-company has paid-up capital of Rs. 3,75,65,640 divided into 37,56,564 shares of Rs. 10 each. The present petition has been instituted by the petitioner-company seeking winding up of the respondent-company on its failure to pay debts. The factual background leading to the filing of the present petition is as under:
As per the averments made in the petition, the respondent-company is engaged in the business of manufacturing industrial control equipments. On the request of the respondent-company, the petitioner advanced short-term loans to the respondent-company for funding its capital requirement for the purpose of development of a chip called VCU (Versatile Component Unit). The total loan advanced by the petitioner-company from time to time is said to be Rs. 5,40,893,273. It is alleged that these short-term loans were repayable after one year or at least with the close of the financial year. The respondent-company issued various post dated cheques for the re-payment of the loan and also issued receipts acknowledging the advancement of the loan from time to time. The loan was repayable with interest. The respondent-company paid interest through cheques after deduction of TDS. It is stated that the balance confirmation of the loan is acknowledged by the respondent vide certificate for the year 2005-06, copies whereof have been placed on record as annexure P3. The parties also entered into a loan agreement dated April 15, 2005 (annexure P4). Clause (b) of the aforesaid agreement, inter alia, refers to earlier loans and also additional loan as detailed in annexure A to the agreement and also the additional loan of Rs. 2 crores. The copy of TDS certificate dated June 30, 2004, in Form No. 16A regarding payment of the interest has also been placed on record at page 98 of the petition. It is further alleged that simultaneously with the execution of the loan agreement and another share pledge agreement dated April 15, 2005, was also executed by M/s. R. L. Verma and Sons (HUF), as pledgers, in favour of the petitioner-company, as pledgee duly confirmed by the respondent-company. It was duly acknowledged in the deed of pledge that the petitioner-company had already advanced a sum of Rs. 19.20 crores to the respondent-company and it further agreed to advance an amount of Rs. 2 crores. It is also the case of the petitioner that even after the execution of the loan agreement, the petitioner-company paid an additional loan at the request of the respondent-company and the total amount at the time of filing of the petition was more than Rs. 54 crores as noticed hereinabove which is duly reflected in the books of account maintained by the petitioner-company. The amount is repayable with interest at the rate of 12 per cent. per annum. It is alleged that the respondent-company committed various defaults and breaches of understanding between the parties, including the terms of the loan agreement and has failed to pay the loan amount with interest as per the stipulations contained therein. Reference is made to various clauses of the agreement in paragraph 14 of the petition. It is not necessary to deal with every kind of alleged breach. On failure of the respondent to pay the loan, the petitioner served a legal notice dated January 5, 2007 (annexure P7) under Sections 433 and 434 of the Companies Act, 1956, through its advocate Mr. Sudhir K. Makkar demanding the entire outstanding loan amount of Rs. 54,08,93,273 and interest through registered post. The said notice was received by the respondent who also sent a reply dated January 27, 2007 (annexure P8) through its advocate Shri P. A. S. Rao. It is alleged that the respondent illegally refuted its liability for payment of the loan on the false plea that there was some understanding between the parties where-under the loan amount was to be converted as share money for allotment of equity shares of another company, namely, Vasucorp Inc. USA. It is also the stand of the petitioner that the issuance of share capital in the Vasucorp Inc. USA was independent of the loan transaction and was not in lieu of the loan amount advanced by the petitioner. It is also stated that Mr. Pradip Burman, managing director of the petitioner-company separately paid the share money for purchase of the share in Vasucorp Inc. USA and it has nothing to do with the loan transaction. It is further case of the petitioner that the respondent issued various post dated cheques for payment of outstanding loan amount and some cheques were replaced by some fresh cheques at the request of the respondent as on the dates the said cheques matured, the respondent did not have adequate funds and requested the petitioner to accept fresh cheque in lieu of the outstanding amounts. A list of such cheques allegedly issued by the respondent is placed on record as annexure P10. It is also the case of the petitioner that some of the cheques were presented for clearance and two such cheques were returned dishonoured for insufficiency of funds in the account and after issuing statutory notice under Section 138 read with Section 142 of the Negotiable Instruments Act, 1881, proceedings under Section 138 read with Section 142 of the aforesaid Act were also instituted before the Chief Metropolitan Magistrate, New Delhi. It is also stated that the respondent made payment against three dishonoured cheques by making payment through pay order under the cover of its letter dated January 23, 2007. In the said letter the respondent informed the petitioner that it shall be sending demand drafts against the remaining two cheques, which have not been received. It is finally stated that the respondent is indebted to the petitioner and has become commercially insolvent company unable to discharge its lawful liability. Thus, the respondent-company is liable to be wound up.
2. The respondent-company filed its detailed written statement opposing the petition for winding up. Rejoinder thereto has also been filed. It is necessary to briefly notice the stand of the respondent-company. It is alleged that there are serious disputes and differences between the parties arising after December 11, 2006. The petitioner attempted to oust the respondent and the promoter group from the ownership, management and control of Vasucorp Inc. USA. The stand of the respondent is that it invented a novel idea of Versatile System On Chip (VSOC), a new technology and the said invented technology will challenge the micro controller architecture of global corporate giants such as Hitachi, Mitsubishi, NEC, Philips, Infineon (Siemens), Texas Instruments, Samsung, etc. The said invention was at a conceptual stage in 1999. ICICI Venture Funds Management Co. Ltd., also became interested in the new venture and also took equity stake in the respondent-company and also agreed for funding the development of new technology. It is also stated that in the year 2001, there was change in the management of the ICICI and the new management cut the financial support due to change in their funding strategy and thus, the respondent-company was faced with the financial crunch. It was interested in financial support for which market borrowing was resorted to. Mr. Pradip Burman, one of the directors of the petitioner-company agreed to financially support the project of the respondent-company. On the basis of the aforesaid agreement, the petitioner initially gave an inter corporate deposit of Rs. 2 crores in three instalments carrying an interest of 12 per cent. per annum. Subsequently, there were number of meetings and discussions between Mr. Pradip Burman and Mr. Dhruv Varma, managing director of the respondent-company and the petitioner continued to advance additional funds for implementation of the project. The respondent-company was accordingly, incorporated in the State of Delaware in March, 2004. Mr. Pradip Burman who was taking keen interest in the project agreed to convert the loan into equity and was appointed as director in Vasucorp Inc. USA on June 27, 2004. He continued to attend the board and management meetings in the U. S. till he resigned on December 15, 2006. It is further alleged that Mr. Pradip Burman is a party to the agreement dated July 1, 2004, to subscribe share of Vasucorp Inc. USA. Based upon mutual understanding, Vasucorp Inc. USA issued 1.05 million shares to M/s. Wogan Technologies, a corporation organised in the British Virgin Islands, and owned and controlled by Mr. Pradip Burman on August 10, 2004, at par and Mr. Dhruv Varma transferred 0.65 million shares to M/s. Wogan Technologies on March 11, 2005, at par, which was to be adjusted against the shares to be transferred in terms of the e-mails. E-mail dated May 9, 2006 from Dhruv Varma to Pradip Burman refers to discussion regarding allotment of shares in the loans given to Vasu Tech. and subscription of an additional four million shares of Vasu Tech. It also refers to primary shareholding of Vasu Tech. between Dhruv Varma and associates and Pradip Burman and associates. The aforesaid e-mail has been replied on the same date by Pradip Burman wherein details of the outstanding loans have been communicated to Mr. Dhruv Varma and also refers to payment of Rs. 2.25 crores paid to ICICI ventures for the release of shares of Vasu Tech. It also refers to primary shareholding of Vasu Tech. This also refers to the share value. There is another e-mail dated October 10, 2006 from Pradip Burman giving the outstanding position of Vasu Tech. and shares thereof. There is similar e-mail dated October 11, 2006, from Dhruv Varma to Pradip Burman dealing with the loan of Vasu Tech., as also shares due from Vasu corp. In this e-mail, Mr. Dhruv Varma is said to have confirmed the calculation in the e-mail of Pradip Burman. The respondent has further referred to a draft agreement said to be between Dhruv Varma on behalf of the Vasu Corp Inc., Vasu Tech., i.e., the respondent-company on the one hand and Pradip Burman and M/s. Wogan Technologies, on the other hand. It has been argued on behalf of the respondents that the petitioner had proposed the aforesaid agreement for allotment of shares which was not acceptable to the respondent. It is contended that there has been novation of contract. The first novation was in November 2006, and last novation was in December 2006. It is alleged that Mr. Pradip Burman on behalf of the petitioner wanted Mr. Dhruv Varma on behalf of the respondent to sign certain agreements without any negotiation. The respondent has denied the allegation of the petitioner that the respondent has become insolvent. In paragraph 21 of the reply, it is stated that the respondent is a commercially solvent company. It also denied the allegation that the business of the respondent-company has come to a stand still. Even though the receipt of legal notice has been admitted, but its allegations have been denied. Another stand taken by the respondent is that the respondent-company filed Civil Suit (O.S.) No. 570 of 2007 in the High Court of Delhi seeking a prohibitory and mandatory injunction against the petitioner. Though initially an interim injunction from presenting the cheques was issued, however, subsequently, the injunction was vacated by the hon'ble High Court, Delhi, vide its order dated June 15, 2007, on an appeal preferred by the petitioner. Against the order of the hon'ble Division Bench, the respondent filed SLP. Initially, the hon'ble Supreme Court stayed the order of the hon'ble Division Bench of the Delhi High Court. Between the time of passing of the order by the High Court of Delhi and the matter being taken up by the hon'ble Supreme Court, the petitioner-company presented the cheques and thus, the SLP was finally dismissed. In the meanwhile, the suit filed by the respondent was withdrawn.
3. In the rejoinder filed by the petitioner, it has also been admitted that two suits for recovery under Order XXXIIV, Rule 1 of the CPC have been filed by the petitioner in Delhi High Court, one for recovery of Rs. 20 crores and the other for recovery of Rs. 40 crores and the applications for leave to defend are pending.
4. I have heard learned Counsel for the parties. It has been argued on behalf of the petitioner that the liability of loan has been admitted by the respondent as is evident from the loan agreement dated April 15, 2005, receipts (annexure P2) and the various post dated cheques issued by the respondent as also the deed of pledge (annexure P5), deed of guarantee (annexure P6) and the letter dated September 27, 2006, whereby fresh cheques for re-payment of the principal and interest were issued by the respondent. It is also argued by Mr. Makkar that even the suit filed by the respondent before the Delhi High Court itself indicates that post-dated cheques were issued by the respondent and the suit already stands withdrawn. He has also referred to the Division Bench judgment of the Delhi High Court to argue that there is no bona fide dispute regarding the payment of debt. In sum and substance, the argument is that the dispute being not bona fide, the liability having been admitted, this Court cannot shirk its responsibility of initiating proceedings for winding up. Accordingly, it has been argued that the loan was advanced to the Vasu Tech Ltd., the respondent-company. All loan transactions were with the said company and there was no loan transaction with Vasucorp Inc. USA. The petitioner has relied upon a judgment of the Karnataka High Court passed in the case of B. P. Malini v. Ramachandra Pesticides P. Ltd. [2001] 103 Comp Cas 329. In the aforesaid case, the following observations have been made (page 336):
Adverting here, it is necessary to settle the position in law vis-a-vis the misnomer that whenever a dispute is pleaded a winding up petition must fail. In every such proceeding a defence will always be put up and the liability will be disputed. With a bit of legal ingenuity, a colour and garb is invariably attributed to the defence in order to make it appear very solid and profound. Like the old maxim which required a court to 'lift the veil' the court has to examine, sift and evaluate the credibility of the defence and if it is an afterthought, sham or hollow it will have to be discarded.
5. In the aforesaid case, even the respondent offered to deposit the entire money to show its bona fide with a prayer that the winding up petition be relegated to the civil court and in the event a decree is passed the amount may be released. Even this prayer was declined by the High Court and the petition was ordered to be admitted and advertised for the purpose of winding up.
6. In the case of Softsule P. Ltd., In re [1977] 47 Comp Cas 438 the Bombay High Court discussed the scope of Section 433(e) of the Companies Act and has made the following observations (page 443):
Firstly, it is well-settled that a winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the company. If the debt is not disputed on some substantial ground, the court may decide it on the petition and make the order.
Secondly, if the debt is bona fide disputed, there cannot be 'neglect to pay' within the meaning of Section 434(1)(a) of the Companies Act, 1956. If there is no neglect, the deeming provision does not come into play and the winding up on the ground that the company is unable to pay its debts is not substantiated.
Thirdly, a debt about the liability to pay which at the time of the service of the insolvency notice, there is a bona fide dispute, is not 'due' within the meaning of Section 434(1)(a) and non-payment of the amount of such bona fide disputed debt cannot be termed as 'neglect to pay' the same so as to incur the liability under Section 433(e) read with Section 434(1)(a) of the Companies Act, 1956.
Fourthly, one of the considerations in order to determine whether the company is able to pay its debts or not is whether the company is able to meet its liabilities as and when they accrue due. Whether it is commercially solvent means that the company should be in a position to meet its liabilities as and when they arise.
7. Similarly, the Madras High Court in Tube Investments of India Ltd. v. Rim and Accessories P. Ltd. [1990] 3 Comp LJ 322, at page 326 has laid down as under:
(1) If there is a dispute as regards the payment of the sum towards principal, however small that sum may be, a petition of winding up is not maintainable and the necessary forum for determination of such a dispute existing between parties is the civil court ;
(2) The existence of a dispute with regard to payment of interest cannot at all be construed as existence of a bona fide dispute relegating the parties to decide such a dispute before the civil court and in such an eventuality, the company court itself is competent to decide such a dispute in the winding up proceedings ; and
(3) If there is no bona fide dispute with regard to the sum payable towards the principal, it is open to the creditor to resort to both the remedies of filing of a civil suit as well as filing of a petition for winding up of the company.
8. In the case of Madhusudan Gordhandas and Co. v. Madhu Woollen Industries P. Ltd. : [1972]2SCR201 , the hon'ble Supreme Court has observed as under (page 131):
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 (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 order without requiring the creditor to quantify the debt precisely (see Tweeds Garages Ltd. In Re: [1962] 32 Comp Cas 795 (Ch. D)). 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.
9. In the light of the ratio of the aforesaid judgments, the contention of Mr. Makkar is that the defence of the respondent is not bona fide and is of no substance. The dispute sought to be raised is only a device to prevent the winding up of the company.
10. To the contrary, Mr. Chopra has argued that the petitioner having filed 1 the civil suit before the civil court is not entitled to invoke the discretionary jurisdiction of this Court for winding up of the company. Reliance is placed upon Mediqup Systems P. Ltd. v. Proxima Medical System GmbH : AIR2005SC4175 , wherein following observations have been made (page 481):
18. This Court in catena of decisions held that an order under Section 433(e) of the Companies Act is discretionary. There must be a debt due and the company must be unable to pay the same. A debt under this section must be a determined or a definite sum of money payable immediately or at a future date and that the inability referred to in the expression 'unable to pay its dues' in Section 433(e) of the Companies Act should be taken in the commercial sense and that the machinery for winding up will not be allowed to be utilised merely as a means for realising debts due from a company.
19. The respondent is not a creditor and the appellant is not a debtor in so far as US $ 11,000 is concerned. The defence raised by the appellant is a substantial one and not mere moonshine which is to be finally adjudicated upon the merits before the appropriate forum.
11. In Niyogi Offset Printing Press Ltd. v. Doctor Morepen Ltd. 140 [2007] DLT 579 : [2009] 149 Comp Cas 467, the Delhi High Court, while considering the scope of winding up petition under Section 433(e) of the Companies Act, made following observations:
26. Generally speaking, an admission of debt should be available and/or the defence that has been adopted should appear to the court not to be dishonest and/or a moonshine, for proceedings to continue. If there is insufficient material in favour of the petitioners, such disputes can be properly adjudicated in a regular civil suit. It is extremely helpful to draw upon the analogy of a summary suit under Order XXXVII of the Code of Civil Procedure. If the company court reaches the conclusion that, had it been exercising ordinary original civil jurisdiction it would have granted unconditional leave to defend, it must dismiss the winding up petition.
27. The claim of the petitioner for recovery of the amount has become barred by time. If the petitioner files a suit for recovery of the said amount, the suit will be dismissed as barred by time. If the claim of the petitioner to recover the amount has become barred by time, it will not be appropriate to initiate the process of winding up of the respondent-company. Under Section 433(e) of the Companies Act, 1956, the machinery for winding up cannot be allowed to be utilised merely as a means for realising debts due from a company which is also barred by time. Consequently, there are no grounds to initiate the winding up proceedings against the respondent-company. The petition, therefore, is without merit is liable to be dismissed. The petition therefore, is dismissed.
12. Mr. A.K. Chopra, learned senior advocate has vehemently argued that there has been novation of contract, in view of mutual understanding between the parties whereunder the petitioner was to be allotted shares in the US company, namely, Vasucorp Inc. USA for which detailed reference has been made to various e-mails, inter se, parties in the preceding paragraphs of this judgment. It is accordingly contended that the original loan transaction between the parties stood replaced by a new arrangement evident from the various e-mails and thus, there is no cause for filing the winding up petition nor the original loan transaction survives. It is contended that as a matter of fact, initial loan transaction between the parties has merged into a mutual arrangement for investment in the sister concern of the respondent-company, i.e., Vasucorp Inc. USA and thus, the present petition is a device to pressurise the respondent-company to succumb to the designs of the petitioner who intends to control the respondent-company with its high potential in the international market. He has relied upon Sections 62 and 63 of the Contract Act, 1872, which reads as under:
62. Effect of novation, rescission and alteration of contract.-If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.
63. Promisee may dispense with or remit performance of promise.- Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.
13. In sum and substance the argument is that once there is novation of contract, the original contract ceases to operate and the parties are governed by the new arrangement. According to Mr. Chopra, in view of the new arrangements, the petitioner is only entitled to the shares as per mutual agreement and not the amount initially advanced as loan.
14. From the various judgments referred to above the following propositions have emerged:
(1) Winding up is not a mode of recovery of debt or amount payable by the company ;
(2) It is the discretion of the court to order winding up which should be last resort ;
(3) It is the inability of the company to pay its debts which attracts the provisions of Section 433(e) of the Companies Act. Inability is in the nature of commercial insolvency ;
(4) If there is a bona fide dispute regarding the payment of the debt, there cannot be neglect to pay within the meaning of Section 434(1)(a) of the Companies Act. The bona fide dispute means the defence of the company is substantial and raises triable issues which can be more conveniently adjudicated upon in a regular forum in a civil suit ; and
(5) The creditor has both the remedies of filing a civil suit as well as a winding up petition, if there is no bona fide dispute with regard to the sum payable.
15. It is prudent to apply the aforenoted principles to the facts of the present case. It has come on record that the petitioner-company has advanced loan amount of more than Rs. 54 crores as principal carrying interest at the rate of 12 per cent. Various post dated cheques were issued by the respondent-company towards the re-payment of the loan and interest. Some of the cheques have been dishonoured and criminal proceedings under Section 138 of the Negotiable Instruments Act have been filed. The respondent-company while re-paying the amount has made deductions of TDS which itself is an acknowledgment of debt and its liability to pay the loan/interest. As a matter of fact, the respondent-company has admitted the receipt of loan and also issuance of various cheques to the petitioner-company in paragraph 8 of its reply. It has also admitted various cheques having been issued towards the payment of the loan/interest. The only defence of the respondent-company is that there has been a subsequent arrangement between the parties for investment in another company of the respondent, namely, Vasucorp Inc. USA and the loan amount was agreed to be converted into equity shares in the said company for which the novation of contract is, pleaded based upon various e-mails dealt with in detail hereinabove. However, no material has been placed on record by the respondent that number of shares equivalent to the amount of loan and interest accrued thereon have been allotted to the petitioner-company or on its behalf. The plea of novation of contract though raised, has not been substantiated on the record. To the contrary there is written loan agreement between the parties followed by various cheques issued towards its repayment. Even the attempt of the respondent-company to seek injunction against the petitioner-company from encashing the cheques issued by the respondent-company and the discharge of loan/interest has failed up to the hon'ble Supreme Court and eventually, the suit filed by the respondent-company seeking restraint order against the petitioner-company from presenting cheques for encashment has been withdrawn. The petitioner has already filed two civil suits for recovery where the leave to defend is yet to be granted by the concerned civil court. Be that as it may, the defence raised in the present petition is not substantial one. The specific plea raised in paragraphs 20 and 21 of the winding up petition that the functioning of the respondent-company has come to a stand still and it is unable to pay its debts has been simply denied by the respondent-company. No material has been placed on record to establish that its worth is equal or more than its liability and also that the company is still functioning and has substantial and sufficient resources to pay its debts. Even the balance-sheet for the relevant period has not been placed on record to rebut the specific allegations made in the winding up petition that the company is unable to pay its debts. There is huge outstanding against the respondent-company. Its substratum, the financial health and functionality has not been disclosed.
16. In view of the totality of the circumstances, I am of the considered view that this is a fit case where this petition is to be admitted.
17. Petition is admitted. The factum of admission be published in The New Indian Express and The Times of India (Delhi edition) and Dainik Bhaskar (Haryana edition) as also in the Official Gazette of State of Haryana.
List on July 23, 2009.