TaxTMI 
TaxTMI 
TaxTMI 
2008 (12) TMI 408
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....ommitted defaults in payment of a sum of US $ 9,464,562.40 with interest awarded as on 31-12-2003, to a sum of US $ 484,686.53, thus, aggregating to a sum of US $ 9,949,248.93. 3. It is alleged that Pentasoft Singapore (P.) Ltd., the respondent-company, incorporated Ruby Orifice Group Inc., under the laws of the Seychelles. This company entered into a settlement with the petitioner-company agreeing that Ruby Orifice Group Inc., would repay the amount due to the petitioner and thereby discharge the liabilities of Pentasoft Singapore (P.) Ltd., and all its guarantors as a consideration of transfer of securities by Pentasoft Singapore (P.) Ltd. It is stated that the petitioner made a demand on Pentasoft Singapore (P.) Ltd., for repayment of sum of US $ 11,390,164.29 by 31-7-2005, the amount due under its letter dated 7-7-2005, as on 30-6-2005. Taking the defence that the claim was barred by limitation, the respondent referred to the agreement that Pentasoft Singapore (P.) Ltd., had entered into with Ruby Orifice Group Inc., on 19-3-2004, as resulting in novation of the contract, and thereby denied its liability. This resulted in the petitioner moving the High Court of Justice, Queen'....
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....ore the English Court and submitted that the decree being one based on the judgment on the merits, it is a debt in terms of section 434(1)(a) and (b) of the Act. He placed reliance on the decision in International Woollen Mills v. Standard Wool (U.K.) Ltd. [2001] 5 SCC 265. As to the defence of the respondent that contrary to the FEMA and RBI provisions, the respondent cannot give any guarantee, learned counsel, appearing for the petitioner, submitted that the defence is a fraudulent one and that having given such guarantee, the respondent cannot escape from its liability. He pointed out that the claim as to the novation of the original agreement is a false claim, considering the fact that the directors of the company V. Chandrasekar and S. Chandrasekar are the beneficial directors of Ruby Orifice Group Inc., forming part of the respondent group companies. Placing reliance on the decision in State of U.P. v. Renusagar Power Co. [1991] 70 Comp. Cas. 127 (SC), he pleaded that once the corporate veil is pierced, the real state of affairs will show the falsity of the claim of the respondent. 9. Setting up an alternate plea that even otherwise, the petitioner is entitled to maintain th....
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....ded for ordering winding up of the company. 12. Heard learned counsel on ether side and perused the materials placed before this Court. 13. It is seen from the financial statement of Pentasoft Singapore (P.) Ltd., that it is a wholly-owned subsidiary of Esoft com (Mauritius) Ltd. The ultimate holding company is Pentasoft Technologies Ltd., incorporated in India, the respondent herein. The financial statement for the financial year ending 31-3-2002, of Pentasoft Singapore Ltd., gives the address of the branch office in the United Kingdom at 15, Cambridge Court, 210, Shepherds Bush Road, Hammersmith, London W6 7NJ. It is seen from the records that in the meeting held on 21-9-2000, the Singapore company passed a resolution as to the borrowing and authorised V. Chandrasekar, director to negotiate and finalise the terms of the facility and execute the necessary document. 14. In the meeting held on 21-9-2000, the board of directors of the respondent-company referred to the resolution of Pentafour Inter- national (Singapore) (P.) Ltd., to avail of financial facility up to US $ 10 million from the petitioner herein for the purchase of software and related products and passed after detai....
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....1)(a) of the Act also came up for consideration in the decision in Seethai Mills Ltd. v. N. Perumalsamy [1980] 50 Comp. Cas. 422 (Mad.). While considering the issue as to whether a decree holder had to proceed under section 434(1)(b) of the Companies Act and not under section 434(1)(a) of the Act that he ceases to be a creditor, this Court pointed out that the fact that the original debt had merged into a decree and the person who was originally a creditor had become a decree holder does not destroy his character as a creditor or the character of money due to him from the company as a debt. This Court pointed out : "From the very language of section 434(1)( b), it may be stated that it does not even contemplate a money decree or order for payment of money and it generally uses the expression 'if execution or other process issued on a decree or order of any Court in favour of a creditor of the company'. Therefore, the decree or order that is contemplated by section 434(1)(b) is not confined only to a money decree or an order for payment of money. On the other hand, it is general in nature. However, what we have to concentrate on is, whether a person who had obtained a decree for mo....
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....hat at the stage of issuance of summons, the Court forms a prima facie opinion. Only thereafter, the Court has to consider the case on the merits by looking into the evidence led and documents proved before it, as per its rules. It is only if this is done, that the decree can be said to be on the merits. The Supreme Court pointed out that even in cases where the defendant remained ex parte, it is possible for the plaintiff to adduce evidence in support of the claim, so that the Court may consider the claim in the background of the evidence and give a decision on the merits. It cannot be said that such a decision on the merits is possible only in cases where the defendant enters appearance and contests the plaintiff's claim. Thus, the non-appearance of the defendant will not by itself determine the nature of the judgment one way or other. 20. A decree not on the merits could not be enforced in India. It pointed out : "To say that a decree has been passed regularly is completely different from saying that the decree has been passed on merits. An ex parte decree passed without consideration of merits may be a decree passed regular if permitted by the rules of that Court. Such a decr....
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.... account of liquidated and ascertained damages, giving a total judgment sum of US $ 13,362,754.05. (5) The defendant to pay the claimant's costs of the application and the action summarily assessed at GBP 47,512.15." 22. Learned counsel for the petitioner, however, pointed out that contrary to the submission of the respondent the decree had not been granted on what was prayed for. The claim made before the Court sought for a decree on a sum of US $ 12,504,045.62 and accruing thereafter at a daily rate of US $ 2,658.54 until payment as particularised in the form stated therein; that the Court granted a decree for US $ 858,708.42 profit from 24-8-2006, to the date of the judgment at a daily accrual of US $ 2,658.54 on account of ascertained liquidated damages, thus, totalling to a sum of US $ 13,362,754.05. He further pointed out that the affidavit filed before the Court clearly showed that the respondent was served with notice of the proceedings and there was an affirmation of service of the notice on respondent Nos. 1 and 2. He further pointed out that the claim form with all the details were hand delivered to the respondents' representative who had also put his signature and sea....
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....ment without adverting to the merits of the claim and the materials supporting the claim. I do not agree with the said submission. 25. The answer to the said contention can be found in the very same decision of the Apex Court referred to above, wherein, the Apex Court approved the decision of the Kerala High Court in Govindan Asari Kesavan Asari v. Sankaran Asari Balakrishnan Asari AIR 1958 Ker. 203, which, in turn, referred to the Madras High Court decision in R.E. Mahomed Kassim & Co. v. Seeni Pakir-bin Ahmed AIR 1927 Mad. 265 and A.N. Abdul Rahman v. J.M. Mahomed Ali Rowther AIR 1928 Rangoon 319. The Apex Court extracted the decision of the Kerala High Court which contained the extract from the Rangoon decision which reads as follows : "It will not satisfy even the minimum requirements of a judgment on the merits of the claim. What such requirements are, have been explained in A.N. Abdul Rahman v. J.M. Mahomed Ali Rowther AIR 1928 Rangoon 319, in the following terms : 'A decision on the merits involves the application of the mind of the Court to the truth or falsity of the plaintiff's case and, therefore, though a judgment passed after a judicial consideration of the matter b....
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.... the proceedings before the English Court for the purpose of the present proceedings, it is not necessary to consider the same. 28. Going by the very terms of the decree passed by the English Court, I have no hesitation in rejecting that the contention of the petitioner decree-holder is binding on this Court. However, this does not prevent the petitioner from seeking a prayer for winding up under section 434(1)(a) of the Companies Act. As pointed out by the Division Bench of this Court, an alternative prayer is nevertheless maintainable provided, there is a debt enforceable. 29. As already seen in the preceding paragraphs as to the facts herein, the respondent herein gave a corporate guarantee under the resolution of the board of directors of the respondent. Hence, having given the guarantee to the amount borrowed and the petitioner informed of the board resolution, as seen from the endorsement in the bottom of the page giving details of the extracts of the meeting of the board of directors of the respondent, it is difficult to accept the case of the respondent that by reason of the assignment of the debt to Ruby Orifice Group Inc., there is novation of contract. Hence, the respo....
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..... 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) : [1962] Ch. 406). 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. Another rule which the Court follows is that if there is opposition to the making of the winding up order by the creditors the Court will consider their wishes and may decline to make the winding up order. Under section 557 of the Companies Act, 1956, in all matters relating to the winding up of the company the Court may ascertain the wishes of the creditors. The wishes of the shareholders are also considered, though, perhaps, the Court may attach greater weight to the views of the creditors. The law on this point is stated in Palmer's Company Law, 21st edition, page 7....
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....when they fell due. The claim of the petitioner is contested by the respondent as follows : that the English Court has no jurisdiction to pass a decree, since there is no office in England; that in view of the subsequent agreement with Ruby Orifice Group Inc., there is a novation of the contract and as per the provisions of the Indian Contract Act, 1872, the guarantor stands discharged; that the guarantee, given is void as there is a failure to obtain permission from the RBI and as per the Foreign Exchange Regulation Act, 1973; that the judgment given by the English Court is not one on merits and, hence, hit by section 13(b) of the CPC; that the Company Court cannot be used as a execution court to collect the debt disputed on various grounds including a plea of limitation. Apart from these, the respondent denied the claim of the petitioner as to the several claims of the creditors, remaining outstanding and unhonoured. 34. In the decision in Tata Iron & Steel Co. v. Micro Forge (India) Ltd. [2001] 104 Comp. Cas. 5331 , the Gujarat High Court listed various aspects exhaustively which need to be kept in mind while considering the petition for winding up. The Gujarat High Court point....
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....ment of employees, the Court cannot remain oblivious to this aspect. The effect of winding up would be of putting an end to the business or an industry or an entrepreneurship and, in, turn, resulting in loss of employment to several employees and loss of production and effect on the larger interest of the society. (6) Even dividend declared by the company regularly and having profit in the light of the profit and loss account, though temporarily, there may be inability to pay the debt or in the case of any eventuality, the company is unable to make the payment of dues and that by itself could not be construed as a ground to wind it up. (7) Winding up of a company, as such, is nothing, but a commercial death or insolvency and, therefore, the Company Court is obliged to take into consideration not only the temporary inability, or disability to make the payment of debts, but the entire status and position of the company in the market. (8) When grounds on which the winding up order can be denied, upon an evaluation of the facts of the case, after admission, exist from the record already placed before the Court, it would be a sound exercise of discretion to reject the petition instea....
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....any has become defunct or has closed its business, for quite sometime, whether it is commercially insolvent. For the purpose of finding commercial insolvency, a mere look into the financial data is relevant to examine about its soundness. In all matters relating to winding up, the Court may have regard to the wishes of the creditors and contributories and may, if necessary, ascertain their wishes appropriately. If the company is solvent, the wishes of the contributories would carry more weight as they are persons, mainly, interested in the assets. (18) The element of public policy in regard to commercial morality has, likewise, to be taken into account before determining the winding up issue. The Court has also to consider the purpose and policy behind sections 443 and 557 of the Companies Act. (19) Winding up is the last thing the Court would do and not the first thing to do having regard to its impact and consequences. Winding up of a company would ensue : (a )closing down of a company which is engaged in production or manufacture or which provides some services; (b )it would throw out of employment numerous persons and result in gross hardship to the members of families of t....
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....pondent-company. No materials are placed before this Court to show that there was novation of contract and that the respondent is not bound by the guarantee given. Although the details of the guarantee and indemnity executed by the respondent are not enclosed in the material papers before this Court, yet, the details of the same are found extracted in the claim petition before the English Court, which are not denied by the respondent. Going by the terms of the guarantee executed, I do not find any justifiable ground in the defence taken by the respondent as one in good faith. 36. This leads us to the further question as to whether this court should order winding up in the face of the decision of the Apex Court in Madhusudan Gordhandas & Co.'s case (supra) holding that where the debt is undisputed, the Court will not act upon the defence that the company has the ability to pay the debt but the company chooses not to pay the particular debt. In the decision in Pradeshiya Industrial & Investment Corpn. of Uttar Pradesh v. North India Petro Chemical Ltd. [1994] 79 Comp. Cas. 835 (SC) after referring to the decision of the Supreme Court in Madhusudan Gordhandas & Co.'s case (supra) hel....
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.... a prima facie case has to be made out before the Court takes action under this section, since any admission of a petition which leads to an advertisement of the winding up would cause immense injury to the company if ultimately the application has to be dismissed. 39. It is relevant to point out herein that when a petitioner invokes a just and equitable ground under section 443(2) to wind up a company, the petitioner must convince the Court not only of just and equitable ground for ordering winding up, but also that there is no alternative remedy open to the petitioner. Apart from this, the petitioner is bound to substantiate the conditions of insolvency existing to persuade the Court to exercise the equitable jurisdiction. If the details as to the insolvency are wanting and no supportive documents are produced, then the petitioner could not be said to have proved prima facie the status of the respondent-company's insolvency. The creditor has to show the prima facie evidence that the existing assets and the probable assets are insufficient to meet the existing liabilities that the company is heavily indebted to various debtors that there is no possibility of the respondent-compan....
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....but can one say that by itself is a good ground for this Court to invoke its discretionary jurisdiction to wind up the company. Except for an averment that there are several creditors' petitions pending, there are no details to substantiate the allegation that the substratum of the respondent-company is lost. The petitioner has based its claim for winding up on the judgment of the English Court alone. There are no circumstances given to justify the claim as falling under, the just and equitable clause under section 433(f). Even though in the face of the guarantee given, the defence of the respondent cannot be called as a substantial defence, yet, the balance-sheet, as such, does not support the claim of the petitioner that the respondent-company had reached a stage of commercial insolvency that it had lost all its relevance to exist in terms of the articles of association to warrant an exercise of jurisdiction of this Court to wind up a company. 44. The reply affidavit filed by the petitioner refers to the pendency of several winding up petitions, as against the respondent. The counter, however, asserts that these statements of the petitioner are merely self-serving statements to ....
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....ng up, there are no materials to support such allegation to order winding up of the company. It is not as though the petitioner is remedyless as to its claim against the respondent. The passing of the order, or not passing such an order of winding up would not affect the petitioner adversely considering the fact that the petitioner is not remedyless as to its rights. On the other hand, the company is a going concern whose substratum is not shown to have been eroded, a fact which the petitioner could not deny. In these circumstances, it would be wholly inequitable to bring the insolvency of the company at the behest of a creditor. In the decision in New Swadeshi Mills of Ahmedabad Ltd. v. Dye-Chem Corpn. [1986] 59 Comp. Cas. 183 which related to a case of a company heavily indebted and inability to pay its liabilities itself evident, as a matter of policy, the Gujarat High Court held : "Even so, a Court will exercise a sound discretion in deciding whether to wind up a company or not and in doing so consider many relevant factors. It may be that despite the inability to pay its debts, a company has still prospects of coming back to life and if the Court is told of any specific propo....