TaxTMI 
TaxTMI 
2015 (3) TMI 462
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....a bank incorporated under the Laws of Italy. It is the case of the Bank that in the month of October 2006 Videocon approached the Bank for financial assistance to the tune Euros 35 Millions for its first generation step down subsidiary viz. VDC Technologies S.P.A. (the Subsidiary). As a condition to secure the financial assistance, Videocon offered and ultimately issued a guarantee letter styled as 'Patronage Letter' on 5 June 2007 in favour of the Bank. Under loan agreement dated 6 June 2007, the Bank advanced financial assistance to the tune of Euros 35 Million to the Subsidiary, in which the terms and conditions for such advance, came to be set out. Clause 7.1 of the loan agreement, inter alia required the Subsidiary to maintain sufficient balance in its current account to repay the loan installments. There was a breach of this provision and consequent default in payment of the very first loan installment. The Bank, therefore, took up the issue of default with the Subsidiary. 3] Correspondence ensued between the Bank and the the Subsidiary, in which, the Subsidiary by letters dated 14 December 2009 and 19 January 2010, acknowledged the default and assured regularization....
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.... 2012 has been instituted by one Mr. Vellatuthodi Krishnakumar through his constituted attorney Mr.Sanjib Chakraborty in the Calcutta City Civil Court seeking, inter alia a declaration that the Patronage Letter dated 5 June 2007, being in violation of FEMA 1999 is null and void. It is the case of the Bank that this suit is a collusive proceedings engineered by Videocon, in order to avoid payments under the Patronage Letter. As the Bank was not even impleaded as a party in the suit, it has taken out appropriate proceedings to seek intervention/impleadment in order to protect its right and interest. Till date however, there is no injunction to restrain enforcement of right under the Patronage Letter dated 5 June 2007. 8] The Bank, ultimately issued notice under Section 433 read with 434 of the Company Act, 1956 (the Act) demanding payment of Euros 38 Million from Videocon in discharge of its liabilities under the Patronage Letter. This was received by the Videocon at its registered office on 7 July 2012. 9] Videocon through its advocate addressed a reply dated 28 July 2012 to the Bank, in which the execution of Patronage Letter was neither denied nor disputed. Even the defaults rep....
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....ourt. Until and unless such defences are determined by this Court in the pending civil suit, the winding up petition cannot be proceeded with. (c) Videocon also has the defence that the Patronage Letter was issued in breach of the statutory provisions under the Foreign Exchange Management Act, 1999 ("FEMA") because prior permission of the Reserve Bank of India was not obtained before issuing such Patronage Letter. This contention was raised by Videocon in its affidavit in reply to the winding up petition. At the hearing of the winding up petition before the learned Company Judge, Videocon had not abandoned the said defence but at the hearing Videocon was not in a position to substantiate its defence. The fact that the defence was not abandoned would also be clear from the written submissions submitted after conclusion of the arguments and, therefore, this Court may not proceed on the basis that Videocon had abandoned its defence that issuance of Patronage Letter was illegal as in violation of the statutory provisions of FEMA. In view of such illegality, the Bank is not entitled to prosecute the winding up petition, even if it were to be held that the winding up petition is based o....
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....counsel for the Bank submitted that there was no violation of FEMA or the Regulations thereunder to which detailed reference will be made hereinafter. (c) Without prejudice to the above submissions, it is submitted by the learned counsel for the Bank that : (i) Videocon had never referred to absence of any RBI permission as a ground for not honouring the patronage letter. On the contrary in their letter dated 22 April 2010 whilst suggesting restructuring; Videocon had stated that all the legal requirements were met and had gone to the extent of stating as under: " You may kindly note that the above structure has been worked out keeping in view the broad requirements of laws of different regimes and once confirmed, the finer aspects could be worked out." (ii) In any view of the matter if at all any RBI permission was required by Videocon before issuing the Patronage letter, it was the responsibility of Videocon alone and if it chose not to obtain such permission, it cannot now be allowed to take advantage of its own wrong. 19 July 2014 DISCUSSION 14] We will now take up for consideration the first contention of Videocon that since the Bank has already filed a suit in this Cou....
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....al cause of action will have no relevance whatsoever even though it may not have merged in that judgment." (emphasis 'A' supplied by the Bank) (emphasis 'B' supplied by Videocon ) 16] Learned counsel for Videocon has particularly placed heavy reliance on the underlined observations at 'B' that once the creditor chooses to sue upon the judgment, he cannot found jurisdiction for the institution of the suit on the basis of the original cause of action because once he chooses to rest himself on the judgment obtained by him in a foreign court, the original cause of action will have no relevance whatsoever even though it may not have merged in that judgment. 17] On the other hand, learned counsel for the Bank has submitted that in Badat's case the Supreme Court has recognized the principle that the original cause of action does not merge in a foreign judgment and therefore even after obtaining a foreign judgment, the Creditor can sue on the original cause of action. Secondly, the observation at 'B' in Badat's case would not apply to the facts of the present case because in that case the Supreme Court was dealing with a suit for recovery of mone....
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....earned counsel for Videocon however submitted that since the parties had signed term sheet on 9 December 2010, there was a novatio and therefore the Bank cannot rely upon the Patronage letter or the subsequent correspondence till the date of the signing of the term sheet. The contention cannot be accepted because the termsheet signed by the parties on 9 December 2010 specifically referred to the finance documents including the term loan agreement dated 6 June 2007 for the loan of 35 Million Euros, the Patronage Letters dated 1 June 2007 and 5 June 2007 granted by Videocon in favour of the Bank for the above loan agreements. The termsheet further referred to the conditions precedent, which included providing new Patronage Letter to guarantee the existing obligations. The relevant documents specified as condition precedent were not furnished by Videocon. There is no dispute about the fact that Videocon did not comply with these conditions precedent and therefore it cannot be said there was a novatio between the parties so as to exonerate Videocon from the liabilities arising from the Patronage letter dated 5 June 2007 for 38 Million Euros. 21] It is also necessary to note that the....
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...........Defence is taken that the Patronage Letter violates the Indian Law i.e. FEMA. The Respondent in the reply to the notice of winding up and also in the affidavit in reply, has stated that the Patronage Letter violates the provisions of FEMA. During the course of the argument, the learned counsel for the Respondent abandoned this ground. In fact nothing was pointed out as to which provision of the Indian or Italian law the Patronage Letter violates. 54. In the present case even though a contention was taken in the reply that the patronage letter is in violation of Foreign Exchange Management Act, this point was abandoned during the arguments. As stated earlier there is no ground raised whatsoever that the patronage letter was in violation of any law much less Italian law. The Respondent cannot raise academic questions, it must indicate which are the questions of fact the court of Turin had an exclusive jurisdiction to decide. Even assuming the question of service of summons has been established in the pending suit in Calcutta, which will be referred to later on." [emphasis supplied] 25] The aforesaid statements made in the judgment of the learned Company Judge must be accept....
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....f any letter of guarantee without permission of RBI. However, the statutory regulations being Foreign Exchange Management (Guarantees) Regulations, 2000 provide as under: "Reg. 3 : Save as otherwise provided in these regulations, or with the general or special permission of the Reserve Bank, no person resident in India shall give a guarantee or surety in respect or, or undertake a transaction, by whatever name called, which has the effect of guaranteeing, a debt, obligation or other liability owed by a person resident in India to, or incurred by a person resident outside India." While Regulation 4 refers to guarantees which may be given by authorised dealers, Regulation 5 deals with guarantees which may be given by persons other than authorised dealers. A person other than the authorised dealer may give a guarantee in the specified cases. The relevant clause being (b) reads as under: "5(b) a company in India promoting or setting up outside India, a joint venture company or a wholly owned subsidiary, may give a guarantee to or on behalf of the latter in connection with its business." 29] It is true that Videocon which is a person resident in India gave such a guarantee for its s....
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....company under the Automatic Route, within the prevailing limit for overseas direct investment. Such guarantees will have to be reported to the Reserve Bank in Form ODI, as hitherto, through the designated AD concerned. (b) Further, it has also been decided that issue of corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries will be considered under the Approval Route, provided the Indian Party directly or indirectly holds 51 per cent or more stake in the overseas subsidiary for which such guarantee is intended to be issued." The said circular came to be further clarified by Foreign Exchange Management (Guarantees) (Fourth Amendment) Regulations, 2013 contained in Notification dated 8 may 2013. Relevant portion of amended Regulation 5 (b) reads as under:" (ii) An Indian Party promoting or setting up outside India, a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS), may give a guarantee to or on behalf of the first generation step down operating company in connection with its business." 32] Though learned counsel for Videocon submitted that the aforesaid amendment came into force from 27 May 2011 and therefore long after issua....
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....ch less any inherent illegality. 34] In any view of the matter, it is also necessary to know that Videocon had never contended in any of its correspondence between 2007 till giving reply to the statutory notice that the Patronage Letter was issued in contravention of the provisions of FEMA or in breach of any other legal requirements. The defence is, therefore, raised for the first time only after receiving statutory notice i.e. after almost four years of issuance of the Patronage Letter. Assuming that Videocon have committed any wrong in issuing the Patronage Letter without obtaining permission of the Reserve Bank, as per the settled legal position, it is not open to a party to take advantage of its own wrong. In Eurometal Ltd. v. Aluminium Cables and Conductors (U.P) Pvt. Ltd.) [(1983)53 Comp Cas 744 Cal and SRM Exploration Pvt. Ltd. v. N & S & N Consultants S.R.O [ (2012) 4 Comp L.J. 178 (Del)], Calcutta and Delhi High Courts respectively have frowned upon company facing a winding up petition taking up such dishonest defence. In these decisions High Courts have taken the view that in matters of commercial transactions involving crores of amount where the company facing winding ....
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....he courts are very casual in issuing notices and ordering publication in the newspapers which may attract adverse publicity. 37] We have given careful consideration to the principles laid down by the Apex Court in the above judgment. The caveat sounded by the Apex Court is in the context of cases where the Company bonafide disputes a debt and the creditor is trying to pressurize the company to pay a debt which is substantially disputed. However, as indicated in the foregoing discussion, step down subsidiary of Videocon in Italy had admittedly taken a loan of 38 Million Euros from the Bank in Italy. Admittedly, Videocon had given a guarantee in the form of Patronage letter of 5 June 2007 for the aforesaid loan but it kept its liability limited to 38 Million Euros. As noted by the learned Company Judge and as was the case before us, there is no denial of the aforesaid basic facts. In fact Videocon had admitted its liability before issuance of the statutory notice by the Bank. For instance, in the letter dated 19 January 2010, the Subsidiary not only admitted the liability, but requested the Bank not to enforce the guarantees backing the loan stating that Videocon is one of the olde....
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....s not to pay that particular debt. [Madhusudan Gordhandas (supra)]. (iii) Where there is no doubt that the company owes the creditor a debt entitling him to the 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. [Tweeds Garages Ltd. Re, (1962) Comp Cas 795 (Ch D)]; (iv) Where the defence of the company is in good, fair and one of substance, and the defence is likely to succeed in point of law, and the company adduces prima facie proof of the facts on which the defence depends, the petition should be rejected. [Madhusudan Gordhandas (supra)] (v) The court may consider the wishes of the creditors so long as these appear to be reasonable and justified. It is also well settled that a winding up order will not be made on a creditor's petition, if it would not benefit him or the company's creditors generally. Therefore, the grounds furnished by the creditors opposing the winding up will have an important bearing on the reasonableness of the case. [P. J. Macrae Ltd. Re, (1961) 1 All ER 302]; (vi) The machinery of windingup should not be allowed to be utilised mer....
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....unt could have been directed to be deposited in Court but not paid over to the Bank. It was vehemently submitted that the winding up petition is for the benefit of all the creditors and any amount paid after filing of the winding up petition would enure for the benefit of all the creditors and, therefore, the impugned direction given by the learned Judge requiring Videocon to pay 38 Million Euros to the Bank is contrary to the settled legal position. 43] The argument is fallacious for the simple reason that after Videocon pays the amount to the Bank, the winding up petition would stand dismissed and, therefore, there would be no order of admission of the winding up petition or publication of the advertisement for inviting other creditors to come forward with their claims. That stage would not at all arise if Videocon makes the payment. It is only if Videocon fails to make payment even after three adjudications that Company Petition would stand admitted, which would be followed by publication of the advertisement for inviting claims from the other creditors. We, therefore, do not find any merit in this contention also. 44] As already discussed above, the subsidiary of Videocon had....