2013 (8) TMI 578 - HC - Companies Law

Respondent company facing winding up due to admitted liability and failure to pay

Ernst and Young (P.) Ltd. Versus Jagson International Ltd.

The Court found that the respondent company had an admitted liability towards the petitioner but was unable to pay. The petition for winding up was ... Winding up u/s 433(e) r.w 434(1)(a) - Inability to pay Debts - Petition for winding up was made on the ground of Defendant’s inability to pay its debts – Held that :- The order of winding up of the company to be kept in abeyance for a period of eight weeks to give JIL one last opportunity to make payment to E&Y of the admitted liability to the satisfaction of E&Y – The present petition will be disposed of leaving it open to E&Y to institute other appropriate proceedings in accordance with law to recover the balance amount claimed by it - If such payment was not made by JIL to E&Y – Following order would become immediately operational - The OL was appointed as the Provisional Liquidator ('PL') of the JIL. The OL was directed to take over all the assets, books of accounts and records of the JIL immediately upon this order becoming effective - The OL shall in that event also prepare a complete inventory of all the assets of the JIL before sealing the premises in which they are kept - He may also seek the assistance of a valuer to value the assets - He was permitted to take the assistance of the local police authorities, if required – Decided in favor of Petitioner. ISSUES PRESENTED AND CONSIDERED 1. Whether there exists an ascertained and admitted debt or liability such that a petition under Section 433(e) read with Section 434(1)(a) of the Companies Act, 1956 can be entertained. 2. Whether the terms of the Letter of Engagement (LOE) entitled the professional adviser to a Success fee where the original envisaged transaction changed in structure and/or quantum, and whether 'assistance' in obtaining finance falls within the LOE's scope for attracting Success fees. 3. Whether discrepancies in claimed figures (including exchange-rate fluctuations) render the debt unascertained and bar winding up proceedings. 4. Whether a bona fide dispute as to liability exists such that there is no 'neglect to pay' for the purposes of Section 433(e), notwithstanding alleged commercial solvency of the company. 5. Whether the petition should be admitted and whether appointment of a provisional liquidator is warranted pending payment or further proceedings. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Existence of an ascertained and admitted debt Legal framework: A winding-up petition under Section 433(e) / Section 434(1)(a) proceeds where a company neglects to pay an ascertained debt; an undisputed or admitted liability can found the petition. Precedent treatment: The Court relied on principles from Supreme Court authority distinguishing bona fide disputes from neglect to pay; cited authorities addressing whether admission/unambiguous liability exists. Interpretation and reasoning: The LOE provided a fee regime and invoices were issued. Correspondence from the company (letter dated 27 January 2011 and e-mails requesting time) constituted an unequivocal admission of receipt of an invoice for Rs.4,90,04,429 and an acknowledgement of liability. The company never terminated the LOE, did not contest the invoiced claims contemporaneously, and did not protest the Success fee rate until filing its reply in the petition. Delay and the content of communications showed neither repudiation nor bona fide dispute at the relevant times. Ratio vs. Obiter: Ratio - an unequivocal contemporaneous admission of liability in correspondence can render a debt ascertained for winding-up purposes; contemporaneous conduct (failure to protest invoices or terminate engagement) is relevant. Distinguishing points on prior authorities were applied as factual distinctions (obiter on comparative facts). Conclusion: There exists an ascertained and admitted debt sufficient to entertain the winding-up petition. Issue 2 - Entitlement to Success fee where transaction changes; 'arranging' vs 'assisting' finance Legal framework: Contractual interpretation of the LOE governs entitlement to fees; plain language controls, including clause preserving entitlement where structure/nature changes. Precedent treatment: No earlier authority was applied to override clear contractual wording; Court interpreted the LOE on its terms. Interpretation and reasoning: Clause 3.3.2 explicitly provided that the Success fee 'will not be prejudiced' if a transaction evolves from that originally envisaged and that E&Y would still be entitled to the Success fee based on any consideration paid in relation to any transaction advised upon. The Court rejected the respondent's narrow construction that fees only arose where E&Y 'arranged' financing as opposed to 'assisted' obtaining finance. The LOE encompassed assistance in obtaining finance and such assistance fell within the scope of services attracting Success fees. The reservation to renegotiate or withdraw if the structure altered did not negate the clear fee entitlement unless exercised by the adviser; no termination/renegotiation occurred. Ratio vs. Obiter: Ratio - where contract language preserves entitlement despite evolution of transaction, adviser is entitled to Success fee for financings to which contract contemplates assistance, regardless of whether adviser describes its role as 'arranging' or 'assisting'. Conclusion: The LOE entitled the adviser to Success fees for the financings effected or assisted under the engagement, notwithstanding evolution of transaction structure or quantum. Issue 3 - Effect of discrepancies in figures and exchange-rate fluctuations on ascertainability Legal framework: For winding-up, the debt must be sufficiently ascertained in amount; peripheral discrepancies do not necessarily render a debt unascertained if a clear basis and an admitted sum exist. Precedent treatment: Decision distinguishing vague or unascertained claims from admitted sums; reliance was placed on the Court's authority to consider admitted amounts in legal notices. Interpretation and reasoning: Discrepancies in claimed figures were plausibly attributable to exchange-rate fluctuations and different modes of calculation; the legal notice of 31 August 2011 set out an admitted debt of Rs.7,94,65,462 with interest. The existence of that demand coupled with admission in the company's letter anchored ascertainability for present proceedings. Variations in claimed amounts did not displace the admitted figure relied upon in the legal notice. Ratio vs. Obiter: Ratio - reasonable explanation for numerical discrepancies (e.g., currency fluctuation) will not defeat ascertainability when an admitted sum is identified in demand correspondence. Conclusion: Discrepancies did not render the debt unascertained for the purpose of the petition. Issue 4 - Bona fide dispute and commercial solvency Legal framework: If a debt is bona fide disputed on substantial grounds, there is no neglect to pay; commercial solvency alone does not preclude winding-up where liability is undisputed and refusal to pay is not bona fide. Precedent treatment: Court applied Supreme Court principles that bona fide dispute prevents the deeming under Section 434(1)(a), and that solvency is relevant only in the context of whether a dispute is genuine. Interpretation and reasoning: The respondent's defences were raised belatedly and were not shown to be bona fide; contemporaneous admissions and requests for more time undermined the claim of genuine dispute. The company's asserted oral renegotiation of fee rates and contention that the engagement was outside scope were unsupported contemporaneously. Evidence pointed to inability/unwillingness to pay rather than a bona fide dispute about liability. Ratio vs. Obiter: Ratio - late-arising and unsupported contentions of dispute, inconsistent with earlier admissions and conduct, do not amount to a bona fide dispute to defeat a statutory demand and presumption of inability to pay. Conclusion: No bona fide dispute existed; solvency did not protect against winding-up when liability was admitted and payment neglected. Issue 5 - Admission of petition and appointment of provisional liquidator; conditional stay Legal framework: On establishing an admitted debt and neglect to pay, Court may admit winding-up petition and appoint provisional liquidator; Court may also keep order in abeyance for short period to permit payment and avoid premature sequestration. Precedent treatment: Applied established practice of granting brief conditional respite to enable payment and, if unpaid, implementing provisional measures. Interpretation and reasoning: Having found an admitted debt and absence of bona fide dispute, the Court admitted the petition and appointed the Official Liquidator as Provisional Liquidator with directions for inventory and compliance. The Court exercised discretion to keep the order in abeyance for eight weeks to permit the company a final opportunity to pay the admitted liability; if unpaid, the provisional measures become effective immediately. Ratio vs. Obiter: Ratio - where admission and neglect to pay are established, petition may be admitted and provisional liquidator appointed; equitable discretion permits short conditional respite to enable payment before operationalizing the liquidation machinery. Conclusion: Petition admitted; provisional liquidator appointed; order stayed for eight weeks conditionally to permit payment of the admitted liability, failing which provisional measures to proceed.