2012 (5) TMI 155 - HC - Companies Law

Court affirms Provisional Liquidator appointment & Guarantee Declaration enforceability, orders appellant to pay costs Rs. 25,000.

The court upheld the appointment of the Provisional Liquidator and the enforceability of the Guarantee Declaration, dismissing the appeal and ordering the ... Enforceability of corporate guarantee and promissory notes - Authority of agent and effect of board resolution - Doctrine of indoor management - Effect of contravention of FEMA on enforceability of contract - Winding up under Section 433(e) r/w Section 434 - inability to pay debtsEnforceability of corporate guarantee and promissory notes - Guarantee Declaration and promissory notes executed in favour of the respondent are enforceable against the appellant. - HELD THAT: - The Court held that the appellant had assumed the duty to pay under the Guarantee Declaration and the Promissory Notes and that those instruments were enforceable. The Company Judge's finding that the documents could be relied upon was affirmed because the appellant did not satisfactorily explain the circumstances of their execution or rebut the respondent's evidence of the instruments having been executed on behalf of the company. The unstamped nature of the promissory notes and lack of company seal were held not to be an absolute bar to acting on the documents; unstamped documents executed outside India may be relied upon on payment of the penal consequences. The absence of the principal debtor from proceedings did not preclude relief where the guarantor had assumed liability and did not contest default by the purchaser. [Paras 7, 15]The Guarantee Declaration and Promissory Notes are enforceable against the appellant.Authority of agent and effect of board resolution - Doctrine of indoor management - Actions of Mr. Ravi Chilukuri in executing the Guarantee Declaration and Promissory Notes were within apparent authority and binding on the company; the defence of want of power of attorney or internal limitation was rejected. - HELD THAT: - The Court found that the Board Resolution conferred wide authority to Mr. Ravi Chilukuri (and Mr. Mohinder Verma) to sign and execute documents on behalf of the company and that the appellant's pleadings were silent and unconvincing as to why his actions should not bind the company. The principle of indoor management (and related authorities on implied authority) precluded the appellant from denying the authority of the person it had held out as its agent or promoter. The Court also relied on the appellant's conduct and public representation of Mr. Chilukuri as a promoter/face of the company to reject the contention that he lacked authority or acted only jointly. [Paras 7, 8, 13, 14]The acts of Mr. Ravi Chilukuri are binding on the appellant; the appellant cannot successfully deny his authority.Effect of contravention of FEMA on enforceability of contract - Alleged contravention of FEMA does not render the Guarantee Declaration void or unenforceable. - HELD THAT: - The Court examined FEMA and observed that although Section 3 of FEMA restricts dealings in foreign exchange without RBI permission, the statute does not provide for voiding of transactions entered into in contravention thereof. The Court contrasted FEMA with the predecessor FERA, noting omission of a provision that would have otherwise affected enforceability, and concluded that non-compliance may attract penalty or prosecution but does not invalidate the guarantee or prevent recovery. [Paras 12]Breach of FEMA does not render the Guarantee void; it remains enforceable and the appellant may be liable to penalty but cannot avoid liability.Winding up under Section 433(e) r/w 434 - inability to pay debts - The company petition under Section 433(e) r/w Section 434 for winding up was rightly entertained and provisional liquidation and restraint orders were appropriately granted. - HELD THAT: - The Court accepted the Company Judge's finding that no disputed questions of fact arose to preclude the petition, that the appellant was liable to the respondent under the Guarantee and Promissory Notes, and that the respondent had given notice of default. The appellant's contentions based on technicalities, alleged procedural defects in notice, non-production of power of attorney, contention as to period of notice, and absence of the principal debtor were considered and rejected as either unsubstantiated or not sufficient to defeat the petition. The judgment emphasises that where a guarantor has assumed liability and fails to show substantive defence, winding up proceedings on inability to pay are maintainable. [Paras 7, 14, 16]The petition for winding up on the ground of inability to pay debts was rightly allowed and the orders made were sustained.Final Conclusion: The appeal is dismissed and the order appointing the Provisional Liquidator and restraining the directors and officers from dealing with company assets is upheld; the appellant ordered to pay costs. Issues Involved:1. Appointment of Provisional Liquidator.2. Appellant's inability to pay debts.3. Validity and enforceability of the Guarantee Declaration.4. Authority of Mr. Ravi Chilukuri to sign the Guarantee Declaration.5. Compliance with Foreign Exchange Management Act (FEMA).6. Disputed questions of fact.7. Stamp Act compliance.8. Notice under Section 433(e) r/w Section 434 of the Companies Act.9. Authorization to file winding up petition.Detailed Analysis:1. Appointment of Provisional Liquidator:The appellant contested the judgment dated 4th March 2011, where the Learned Company Judge appointed a Provisional Liquidator and restrained the Directors and officers from dealing with the company's assets. The court upheld this appointment, finding no error in the original judgment.2. Appellant's Inability to Pay Debts:The respondent claimed the appellant was unable to pay debts amounting to CZK 215,375,000 under a Guarantee Declaration and Promissory Notes. The court found that the appellant had assumed the duty to pay under the Guarantee Declaration and Promissory Notes.3. Validity and Enforceability of the Guarantee Declaration:The Guarantee Declaration dated 15th March 2007 was scrutinized. Despite the appellant's argument that it was invalid due to lack of authority and compliance with FEMA, the court held it enforceable. The court noted that even if executed in violation of FEMA, the Guarantee Declaration was not null and void but subjected the appellant to penalties.4. Authority of Mr. Ravi Chilukuri to Sign the Guarantee Declaration:The appellant argued that Mr. Ravi Chilukuri lacked the authority to sign the Guarantee Declaration. However, the court found that he was authorized by a Board Resolution, which was in the widest language. The principle of internal management barred the appellant from denying his authority. The court also noted that Mr. Chilukuri had a substantial stake in the appellant company and was a promoter, thus reinforcing his authority.5. Compliance with Foreign Exchange Management Act (FEMA):The appellant contended that the Guarantee Declaration was invalid due to non-compliance with FEMA. The court disagreed, stating that while the appellant could face penalties for not obtaining RBI permission, the transaction itself was not void. The court emphasized that the legislative intent under FEMA did not void such transactions.6. Disputed Questions of Fact:The appellant argued that the case involved disputed questions of fact, making the winding up petition inappropriate. The court found no disputed questions of fact, supporting the decision to proceed with the winding up petition.7. Stamp Act Compliance:The appellant argued that the Promissory Notes were unstamped and thus inadmissible. The court noted that the Stamp Act primarily concerns penalties and that documents executed outside the country could be read upon payment of penalties. This did not bar the court from acting on these documents.8. Notice under Section 433(e) r/w Section 434 of the Companies Act:The appellant contended that the notice dated 1st May 2009 was a demand notice and not a statutory notice under Section 433(e) r/w Section 434. The court found this argument unconvincing, noting that the appellant did not take the plea of the purchaser not being in default, which would have been the primary defense.9. Authorization to File Winding Up Petition:The appellant questioned the authorization of the person who filed the winding up petition. The court did not find merit in this argument, as the respondent had sufficiently demonstrated the appellant's liability and default.Conclusion:The court dismissed the appeal, upholding the appointment of the Provisional Liquidator and the enforceability of the Guarantee Declaration. The appellant was ordered to pay costs of Rs. 25,000/-.