2022 (8) TMI 659 - HC - Companies Law

Court sets aside winding-up petition order, directs deposit in interest-bearing account pending arbitration.

August Infocom Pvt. Ltd. Versus Microviews Infosystems Pvt. Ltd.

The court set aside the order admitting the winding-up petition under the Companies Act, 1956. The appellant was directed to deposit a specified amount ... Distribution of proceeds - winding up proceedings - whether the appellant-company had received amounts in excess of Rs.1,43,05,661/-, and furthermore, as to how the said amount(s) were distributed? - HELD THAT:- The S.A. seems to suggest that Rs.77,00,000/-, received in the first instance, was accounted for, and after adjusting the expenses that had been incurred by the appellant-company, was distributed equally between the parties. 24.5. Insofar as the balance amount i.e., Rs.66,05,661/- is concerned, the figures given in the winding up petition show that the respondent received, if not, Rs.22,22,000/-, it surely did receive Rs.20,22,000/- - It does appear that there is a typographical error vis-à-vis the figure shown against the date set forth in the table, which is 25.06.2009. The respondent clearly did not place any material before the Learned Single Judge, to demonstrate that the appellant had received monies in excess of Rs.1,43,05,661/-. Distribution of Rs.9,99,894.50/- - HELD THAT:- Although Ms Altaf says that the respondent is required to bear the burden of expenses incurred in the arbitration proceedings, there is no material to demonstrate, at least presently, that the respondent was called upon to share the expenses. The impugned order dated 07.01.2019 is set aside - The appellant-company will deposit 50% of Rs.9,99,894.50/-. with the Registry of this Court - Appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether the winding up petition under Sections 433(e), 434 and 439 of the Companies Act, 1956 is sustainable on the basis of the materials before the Court, specifically whether the company received monies from a third party (WTL) in excess of declared receipts and failed to distribute the same in terms of a settlement agreement. 2. Whether the respondent placed sufficient material before the learned trial court to establish that undistributed funds remained with the company after December 2009, justifying appointment of a provisional liquidator and admission of the winding up petition. 3. Whether typographical or arithmetical errors in the settlement accounting affect entitlement to sums and the legal conclusion on winding up. 4. The legal consequence of concurrent/arising arbitration proceedings between the company and the third party (WTL) on the distribution of disputed funds and on interim relief (deposit/investment of contested amount) pending arbitration. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sustainability of winding up petition under Sections 433(e), 434 and 439 of the Companies Act, 1956 Legal framework: Sections 433(e), 434 and 439 permit winding up where the company is unable to pay its debts and where just and equitable or other statutory grounds exist; admission requires material establishing a creditor's claim and, where applicable, that monies due remain unpaid or wrongfully withheld. Precedent Treatment: No specific precedents were relied upon or distinguished in the judgment; the Court proceeded on the statutory test and the facts on record. Interpretation and reasoning: The Court examined the 2008 Agreement and the 2009 Settlement Agreement (SA). The SA expressly allocated receipts from WTL on a 50:50 basis after adjustment for expenses borne by the company. The Court focused on whether the respondent demonstrated that the company had received monies beyond the admitted Rs.1,43,05,661/- and had failed to distribute them in terms of the SA. The respondent did not place material before the learned Single Judge to show receipt by the company of sums exceeding the admitted total. The winding up admission turned on absence of proof of undistributed excess receipts. Ratio vs. Obiter: Ratio - A winding up petition cannot be admitted solely on assertion; admission requires material proof that the company received additional monies and failed to distribute them in terms of a binding settlement. Obiter - Observations on the accounting arithmetic and typographical errors are ancillary to the principal statutory test. Conclusions: The Court found that the respondent had not established receipt by the company of amounts in excess of the admitted total or non-distribution thereof; therefore, the admission of the winding up petition could not be sustained. Issue 2 - Sufficiency of material before trial court to justify appointment of provisional liquidator Legal framework: Appointment of a provisional liquidator is an extraordinary interim remedy requiring satisfying material that assets are at risk or that prima facie the petition should be admitted. Precedent Treatment: No authority cited; Court applied factual and statutory standards. Interpretation and reasoning: The learned Single Judge appointed the Official Liquidator as provisional liquidator and ordered immediate takeover and publication of citations. On appeal, the coordinating Court reviewed the evidence of receipts and distributions (SA and accountings). The Court held that the respondent had not presented material proving undistributed receipts beyond the amounts accounted for; accordingly, the basis for immediate seizure and the provisional appointment was undermined. Ratio vs. Obiter: Ratio - Provisional liquidator appointment cannot rest on unsubstantiated assertions of undistributed funds; there must be material showing prima facie entitlement or risk to assets. Obiter - Directions concerning publication costs and deposit are procedural and remediable. Conclusions: The provisional liquidator appointment and ancillary directions were set aside for want of sufficient foundational material. Issue 3 - Effect of typographical/arithmetical errors in settlement accounting on legal outcome Legal framework: Courts treat clerical or typographical errors as correctable where the true intention and documentary context are clear; substantive entitlement is determined by the agreement and admissible accounting, not by inadvertent arithmetic slips. Precedent Treatment: No case law cited; Court relied on conventional corrective approach. Interpretation and reasoning: The SA and accompanying tables contained arithmetical discrepancies (e.g., cumulative totals and an item totalling Rs.35,95,308/- versus Rs.35,95,358/- and consequent typographical misstatement). The Court examined the underlying entries, reconciled totals, and corrected the typographical error to reflect Rs.53,61,822/- as the correct cumulative expense. The corrections did not alter the contractual distribution principle (50:50) and did not supply the respondent with missing proof of additional undistributed receipts. Ratio vs. Obiter: Ratio - Clerical or arithmetic errors in accounts may be corrected by the Court where surrounding documentary evidence shows the intended figures; such corrections do not create substantive new liabilities absent evidentiary support. Obiter - The specific arithmetic corrections are fact-specific and do not establish general accounting rules beyond the case. Conclusions: The typographical errors were corrected; corrections confirmed that the SA's allocation principles controlled and that no additional undisputed sums were shown to remain undistributed. Issue 4 - Consequences of concurrent arbitration between the company and the third party on distribution of disputed funds and interim disposition of contested amount Legal framework: Where substantive disputes as to entitlement to funds are subject to arbitration, courts may preserve the disputed funds pending arbitration by directing deposits/investments to protect rights of the parties and ensure effective relief after arbitral determination. Precedent Treatment: No precedent was cited; the Court invoked equitable interim powers to preserve the disputed amount pending arbitration. Interpretation and reasoning: The appellant was prosecuting arbitration against the third party (WTL) concerning claims that affect the quantum available for distribution under the SA. The respondent's obligation to share arbitration expenses was asserted but unsupported by material showing that such sharing had been enforced. Given absence of proof of undistributed receipts and the existence of the arbitration, the Court directed that 50% of the remaining contested amount (Rs.9,99,894.50/-) be deposited with the Registry and invested in an interest-bearing FDR, to abide the arbitration outcome. The Court further directed refund of publication costs to the respondent if not expended by the Official Liquidator, recognizing the stay earlier granted. Ratio vs. Obiter: Ratio - Where entitlement to disputed funds depends on outcomes of arbitration and factual issues unresolved before the court, the court may direct preservation of a proportionate share of the contested sum in an interest-bearing account pending arbitral determination. Obiter - Allocation of exact percentages and choice of instrument are discretionary and fact-sensitive. Conclusions: The appeal was allowed in part: the impugned order admitting the winding up petition and appointing a provisional liquidator was set aside; directions issued to deposit and invest 50% of the contested residual amount with the Court to abide the arbitration decision; and procedural relief concerning refund of citation publication costs was granted where applicable.