TaxTMI 
TaxTMI 
2015 (10) TMI 543
X X X X Extracts X X X X
X X X X Extracts X X X X
....y Application No. 626 of 2015 For the Petitioner : Mr. Aziz Khan with Mr. Swarup Patil i/b. M/s.Divya Shah Associates , Ms. Stuti Murarka with Ms. Maithili Vagal i/b. Crawford Bayley & Co., Ms. S.U. Kamdar, Senior Advocate i/b. M/s. MDP & Partners, Ms. Namrata Shah i/b. M/s. Mansukhlal Hiralal & Co., Mr. Abhishek Bharti i/b. M/s. MZD Legal Consultancy, Ms. Deepti Panda with Ms. Annapurna i/b. M/s. Narayanan & Narayanan, Ms. Tejashree Gawde i/b. Mr. Zohair Zaidy , Mr. Jeetendra Ranawat i/b. Mr. Suresh Jain, Ms.Bhavna Singh with Mr.Vaibhav Sharma i/b. M/s.Mulla & Mulla & CBC, Mr.Dharmapal Dave i/b. M/s.Mansukhlal Hiralal & Co. For the Respondent : Mr. Ali Abbas Delhiwala with Ms.Nidhi Singh i/b. Joy Legal Consultants ORDER : These twenty four petitions seek winding up of the Respondent Company on the ground of inability to pay its debts under Sections 433 and 434 of the Companies Act, 1956 ("the Act"). A brief statement of the respective claims in the petitions, which are not contested seriously on merits, may be noted as follows, before we consider the common defence to these petitions. 2. The debts of the respective Petitioners: 2.1. Company Petition No. 961 of 20....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wed by the Respondent to the Petitioners. As of 20 January 2015, a large liability of over Rs. 9.80 Crores is owed by the Respondent to the Petitioners on the Respondent's own showing. 2.1.3 There are dues owed by the Respondent to other debenture holders as well in respect of the NCDs. In its affidavit dated 20 January 2015, the Respondent has indicated a total claim of the NCD holders including the Petitioners herein of over Rs. 263 Crores. 2.2 Company Petition No. 976 of 2014: 2.2.1 The Petitioners - R. B. Financial Services Ltd. - have lent a total sum of Rs. 50 Lacs by way of business loans to the Respondent on 2 May 2013 (Rs.25 Lacs) and 3 June 2013 (Rs.25 Lacs). It is the case of the Petitioners that a sum of about Rs. 55.53 Lacs is due and payable by the Respondent towards these loans as of 30 November 2014. The Petitioners' statutory demand notice of 20 September 2014 is cryptically replied to by the Respondent by a bare denial of liability in a holding reply of their advocates, awaiting further instructions and documents. 2.2.2 In its reply to the petition, there is no contest to the claim on merits. What is submitted is that the company is going through a fin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....except to say that it needs to be verified. The position remains the same as of date. 2.13 Company Petition No. 39 of 2015: 2.13.1 The claim of about Rs. 56.81 Lacs is not disputed in the reply, which pleads financial difficulties. 2.14 Company Petition No. 42 of 2015: 2.14.1 The claims of about Rs. 1.19 Crores on account of an Inter Corporate Deposit of Rs. 1 Crore is not contested on merits. 2.15 Company Petition No. 47 of 2015: 2.15.1 The claim of about Rs. 56.86 Lacs is on account of an Inter Corporate Deposit and is contested in the reply by a bare denial. 2.16 Company Petition No. 112 of 2015: 2.16.1 The Petitioner's claim of about Rs. 59.13 Lacs on account of an Inter Corporate Deposit is not contested in the reply except to say that till such time as the representatives of both the Petitioner and the Respondent sit together and reconcile the account, there is no way of knowing whether the accounts referred to in the petition are correct or not. That was as of 12 March 2015. The position remains the same as of date. 2.17 Company Petition No. 136 of 2015: 2.17.1 The Petitioner's claim is for a sum of about Rs. 82.20 Lacs on account of goods sold ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... some reshuffling in the management, some employees have left and the company has yet to verify the records and reconcile accounts. All replies plead temporary financial crisis. There is no change in this position over the last many months during which the petitions have been pending and adjourned from time to time. 3.2 At the hearing of these petitions for admission, learned Counsel for the Respondent did not even attempt to contest any of the debts of the petitioning creditors. He instead relied on a few common affidavits which deal with the financial circumstances of the Respondent Company and its attempts to get over the financial crisis. These shall now be dealt with in the following paragraphs. 3.3 Before we do so, it would be appropriate to note briefly how the petitions have progressed before this Court, particularly since it has a vital bearing on the merits of this common defence. 3.4 Company Petition No. 961 of 2014 appeared on board on 28 October 2014. (The Petitioner's debt, as noted above, was over Rs. 9.50 Crores as of that date.) An undertaking was furnished on that day by the Managing Director of the Respondent Company, in order to prove its bona fides, to....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... parties. The learned Judge, in his order dated 24 February 2015, directed sale of Elder House in Court through a private receiver. This order was carried in appeal by the Respondent before a Division Bench of this Court. The Appeal Court, whilst directing a notice, granted an ad-interim stay against sale of Elder House, clarifying that there would be no stay against steps being taken for sale of other properties. By its detailed order dated 30 March 2015, the Appeal Court directed the creditors of the Respondent to first sell the other properties of the Company, namely, two plots at MIDC, Thane - Belapur Road, Thane and land at Charba in Dehradun within three months from 30 March 2015. The Appeal Court observed that if upon sale of these properties, sufficient funds were not generated to pay off the dues of the Petitioner - Tata Capital and the dues of the secured debenture trustees / debenture holders, the question of sale of Elder House could be considered. The Appeal Court also directed a sum of Rs. 1 crore to be paid by the Respondent to the Petitioners - Tata Capital within three weeks and another sum of Rs. 1 crore within six weeks from 30 March 2015. The appeal of the Respo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 13 August 2015 and listed the matter on 14 August 2015. The Court observed that if by that date the agreement between the Company and the financial institution was not placed on record, all ad-interim orders passed earlier would be vacated. 3.5 That is where the matter of Tata Capital had stood when I heard all these petitions. There is still no payment of Rs. 1.60 Crores to Tata Capital. No agreement between the Company and its supposed lender is placed on record. I am asked not to admit the petitions on the strength of the same confidential term sheet, which is even till date not disclosed to the creditors, who are pressing for the admission of winding up petitions. As I have discussed below, it is not possible, in the face of the facts recounted above, to dismiss the winding up petitions or even postpone the hearing for admission on the basis of a mere indicative term sheet or even a so called final term sheet (which is not even disclosed to me), which is said to be confidential and therefore, not to be disclosed to the Petitioners before this Court. 3.6 Let me now take up the common defence of the Respondent to all these petitions. This defence is contained in an additio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sed commercial insolvency staring all the creditors. (b) The Respondent is in the process of entering into an agreement with a Financial Institution and therefore the Company Petition be adjourned: 3.8 The Respondent once again relies on the ubiquitous "term sheet" with "a Financial Institution" and an "agreement", which is 'likely to be executed' between the Company and the Financial Institution 'on or about 30 September 2015'. The Respondent says that ICD holders and other creditors 'would be paid on or about 31 December 2015' in accordance with this term sheet. The term sheet, it is said, contains that proverbial "confidentiality Clause", due to which neither the name of the Financial Institution nor the details of the term sheet can be disclosed to any third party 'at this moment'. 3.9 The plea seems to be nothing but a dishonest attempt to hoodwink the Court. It would be a travesty of justice to accept such a plea. As I have noted above, an indicative 'term sheet' was produced before this Court for the first time on 24 April 2015. On that day the Court was told that a definitive agreement based on this term sheet was being executed within about ten days. Thereafte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....5, the Respondent came up with this term sheet and got an ad-interim stay on sale of properties; All this while, this Court from time to time extended the period for payment of Rs. 2 Crores to Tata Capital, finally extending it upto 13 August 2015 for the balance of Rs. 1.60 Crores; That payment has not been made as yet; And there is no agreement in place as yet with the so called lender. All this reflects poorly on the bona fides of the Company. The Appeal Court, in its order of 3 August 2015, in fact observed that it was not satisfied about the bona fides of the Company's last request for extension. That situation continues even till the date of this order. Even in the face of a so called final term sheet, there is as yet no concrete proposal placed on record for payment of the Petitioners' dues. We are still told that the agreement with the lender is yet to be made and we must even now make do with the confidential 'term sheet' and either reject the petitions or at any rate, adjourn them on the basis of a term sheet which is not even disclosed to the Petitioners. The Petitioners still do not even know the name of the so called lender or the terms of his engagement. It is a p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h is said to be worth over Rs. 170 Crores on a report of 10 May 2014 produced by the Respondent, was valued at merely Rs. 113 Crores as of 5 February 2015 by a valuer appointed by the Court. There is no authentic valuation of a recent date (all reports are of more than a year back) placed before this Court in support of the alleged value of over Rs. 667 Crores. 3.13 Besides these fixed assets, all that the Respondent has is the so called brand value. On a report relied on by the Respondent,that value for a particular brand is not over Rs. 9.80 Crores. (On an estimate of reputed valuers, Deloitte, the value of the brand works out to Rs. 8.7 Crores as of 30 April 2015.) The valuation of remaining 70 brands is said to be Rs. 568 Crores. Again this is nothing but the Respondent's own guesstimate. 3.14 Based on these unilateral figures, the total assets of the Company are said to be worth approximately Rs. 1935.77 crores ( in the stand alone balance sheet) as of 30 June 2014. As against these assets, the total liability of the Company is said to be Rs. 1150.18 Crores ( in the stand alone balance sheet) as on 30 June 2014. Unaudited 'stand alone' financial results for the quarter e....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (v) The outcomes of various pending suits against the Company and their impact on the affairs of the Company were not provided to the auditors. The independent auditors have, in their report, emphasised the following: "Without qualifying our report, we draw attention to the following points: 1. We draw attention to Note No.40 of the Notes annexed to and forming part of the financial statements stating that the financial statements are being prepared on a going concern basis, notwithstanding the fact that the Company has sold and transferred its branded domestic formulations business in India and Nepal to Torrent Pharmaceuticals Limited on a slump sale basis. There are major liabilities outstanding towards vendors, statutory dues and payment to fixed deposit holders and non-convertible debenture holders. These events cast significant doubt on the ability of the Company to continue as a going concern. The appropriateness of the said basis is interalia dependent on the Company's ability to streamline its operations as well as infusing requisite finance to meet its short term and long term financial obligations and other statutory liabilities. The Company mentions th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Court in this group of petitions alone are to the tune of about Rs. 21.21 Crores as of the respective dates of the petitions. The audited balance sheet at the end of 30 June 2014 puts the total liability of the Company (consolidated) at Rs. 1514.84 crores. Despite seeking numerous extensions from this Court for payment of a meagre sum of Rs. 2 crores to the Petitioners in Company Petition No. 691 of 2014 (Tata Capital), which the Company was directed to pay by 1 November 2014 under the order of the Company Law Board dated 21 August 2014 and which the Company was given time by the Appeal Court in its order dated 30 March 2015 to pay by 11 May 2015 as a condition for grant of ad-interim relief in respect of sale of its assets, the Company has till date defaulted in payment (having paid only Rs. 40 Lacs so far). (ii) The inability to pay does not appear to be a temporary phenomenon, due to transient liquidity problems. Even as of this date, there is no concrete plan for payment of these liabilities (owed to these petitioning creditors since over 2 to 3 years on an average). All that the Company has been able to rely upon in support of its proposal of repayment is a confidential t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....provided to the independent auditors, who have opined so in their report, qualifying their report on that ground. 5 In the premises, the Petitioners have clearly made out a case for admission of the company petitions. 6 Learned Counsel for the Company relies upon the judgments of In Re. M/s. Rishi Enterprises, Bombay 1991(2) Vol.XXXII(2) Gujarat Law Reporter 1213 , American Express Bank Ltd. Vs. Core Health Care Ltd. 1999 Vol.96 Company Cases 841 , Tata Iron & Steel Co. Vs. Micro Forge (India) Ltd. 2001 Vol.104 Company Cases 533, and Sudarshan Chits (India) Ltd. Vs. Sukumaran Pillai & Ors 1985 Vol.57 Company Cases 85. and submits that a winding up petition against a company, which is in temporary financial difficulties, but which is otherwise solvent and is in the process of restructuring itself, ought not to be admitted. 7 All these decisions refer to the discretion that a Company Court has in the matter of ordering of winding up. They proceed on the footing that merely because there is a case for winding up on the ground of inability to pay its debts, the creditors have no absolute right to insist on a winding up. In a given case, the Court may not wind up a company by e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mstances, the Court refused to admit the petition. 11 In Sudarshan Chits (India) Ltd. (supra), the Kerala High Court found circumstances which would sufficiently warrant winding up. But the holding company, which was in good financial shape, was prepared to offer its helping hand and the Court felt that if the holding company were to bring in funds (stated to be Rs. 10.44 crores) as a measure of backing up the Company, that may go a long way to bring back the Company to life. In the premises, putting the Company and its holding company to several terms and conditions, the Court decided to give the Company a chance to resurrect itself. What the Court observed in this context is instructive to note. The Court held: "A company which is unable to pay its debts is liable to be wound up under the provisions of the Indian Companies Act. But there is a discretion vested in the court which calls for exercise before the court passes a windingup order. There may be instances where winding-up may be a more effective way of settlement realising for the creditors and even the shareholders whatever could be salvaged from the assets of the company. That will really be so in the case of compa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndarily to attempt the revival and resuscitation of the company. That would be the case where taking into account circumstances such as the degree of solvency, the likelihood of confidence of the customers in the company in view of its history and the resources at its command or at the command of those who may come to its rescue, the court is satisfied that its continued functioning would not result in reducing the realisable assets, but would enable the company to function normally and economically." 12 I have given my anxious thought to whether there is any prospect, which is reasonably borne out by the record of the case placed before me, of revival or restructuring of the Company. There is no specific proposal showing any possibility of bringing the Company back on rails. There is nothing in the financial status, strength or substratum of the Company, as I have discussed in detail above, which suggests that I should exercise my discretion not to admit these winding up petitions, for which there is an overwhelming case. I do not see how delaying the admission of these petitions would serve the interest of any of the stakeholders, or indeed, the public interest. 13 It is no....