Infrastructure Leasing and Financial Services Ltd. vs S.A. Builders Ltd.

G.C. Garg, J. 1. This petition under Sections 433, 434 read with Section 439 of the Companies Act, 1956 (for short "the Act"), has been filed by Infrastructure Leasing and Financial Services Limited (hereinafter referred to as "the petitioner") for seeking winding up of S. A. Builders, a company registered under the Act (hereinafter referred to as the company).

The case of the petitioner is that some time in April, 1989, the company as a promoter of Indian Acrylics Limited (for short "the IAL"), approached the petitioner for obtaining finance for setting up of I. A. L. A tripartite agreement, annexure P-A, was entered into between the petitioner, I.A.L. and R.K. Garg and the company whereby the petitioner agreed to purchase ten lakh shares of I.A.L. and the company agreed, at any time after the expiry of 36 months but not later than 39 months unless mutually agreed upon, from the date of allotment, to buy back the said shares at a price which was to be the face value of the shares and at a return calculated at the face value of the shares as detailed in the agreement for every financial year and upon shares being offered, the company was to promptly purchase the said shares upon terms and conditions detailed in the agreement and in the event of not accepting either wholly or in part the offer for sale of shares within a period of 90 days from the receipt of the offer, the intending subscriber, i.e., the petitioner was free to sell such shares offered to the company and not accepted by it to any other person. In the event of the petitioner not being able to realise from the sale of the said shares the price as fixed under the agreement, the difference in the price realised by sale of the shares and the price determined in terms of the agreement was to be made good by the company. Ten lakh shares of I.A.L. were allotted to the petitioner on April 16, 1990. The petitioner in terms of the agreement offered the shares to the company within the time envisaged by the agreement. The company failed and neglected to make payment of the aggregate sum of Rs. 1,68,52,000 being the value of the shares calculated in terms of the agreement despite reminders. Further, the allegation is that the company has failed and neglected to make payment of the undisputed and admitted amount and the petitioner by its letter dated July 26, 1993, finally called upon the company to make payment of the principal amount along with all outstanding interest and late charges latest by July 31, 1993, failing which the petitioner was at liberty to have recourse to law. Correspondence exchanged between the parties was initially filed collectively and marked as annexure P-B with the petition. However, on a later date all these documents were filed with the replication and have been marked as annexures P-2 to P-24. In the above situation, the case of the petitioner is that by reason of default and failure of the company to pay a sum of Rs. 1,68,52,000 to the petitioner in spite of demands, the petitioner caused a statutory notice of winding up through its advocate on October 28, 1993. Notice was received by the company in November, 1993, and in spite of receipt of notice, the company has not made the payment, it is therefore liable to be wound up, for it is unable to pay its admitted debts, under the provisions of the Act.

Notice of this petition was issued and the company in response thereto has filed reply. By way of preliminary objections, it was pleaded that not even a penny was advanced to the company and there is no debt due from the company to the petitioner and the petition deserves to be dismissed. The bona fides of the dispute and existence of the debt were disputed. The further objection is that under the agreement, the petitioner subscribed to ten lakh equity shares of I. A. L. and under the agreement there is a buy-back clause whereby after the expiry of a certain period, the petitioner was to offer the said shares to the promoters of I.A.L., i.e., R.K. Garg and the company and in the event of the shares being not accepted by the said promoters, the petitioner was free to sell the same to any other person and if after the sale, the petitioner got a lower price then the promoters were to make good the difference in accordance with the terms of the agreement. The agreement did not contain a clause under which the promoters had no option but to buy-back the shares. In fact the petitioner neither offered the shares to the promoters within the stipulated time nor has the petitioner alleged that it sold the shares to any other person in accordance with the terms of the agreement. The petitioner had filed this petition without complying with the terms of the agreement and the same was liable to be dismissed as such being wholly misconceived. The non-joinder of necessary parties is the other objection on account of which a prayer for dismissal of the petition has been made. Still further it is averred by way of another preliminary objection that the disputes arising under the agreement are referable to arbitration and the petition has been filed without having recourse to the arbitration clause. On the merits, it is submitted that there was no express undertaking that the company was to buy back the said shares. The shares were only to be offered to the promoters and in case they did not buy the shares, the petitioner was free to sell these shares to any other person and in fact the shares were never offered to the promoters for buying back in terms of the agreement and in the event of the petitioner getting a lower price by sale of shares, the promoters were to make good the difference in accordance with the agreement. The petitioner has not sold the shares to any other person. It was denied that the company is commercially insolvent and unable to pay its debts. It was rather pleaded that during the year 1994, the company earned a profit of more than rupees five crores and that the petition is nothing but a pressure tactic to force the company to buy ten lakhs shares of I.A.L.

The petitioner filed a replication controverting the averments made in the reply and reiterating those made in the petition.

During the course of hearing, the terms of the agreement executed between the parties were not at all disputed by either of the parties. Learned counsel for the petitioner submitted that the petitioner by letter dated April 12, 1993, annexure P-2 wrote to the company through its financial director requiring it to make payment of Rs. 1,68,52,000 on or before April 16, 1993, as detailed therein and the company vide letter dated April 21, 1993, annexure P-5 wrote back that the project was in a critical stage and, therefore, it was not immediately in a position to pay this amount and the company agreed to pay debit note and financial advisory service charges by the end of June, 1993. However, a request was made to allow it a period of one year for payment of Rs. 163.6 lakhs. The company also agreed to pay interest at the rate of 19 per cent. per annum for this period. The petitioner in reply thereto, wrote back vide annexure P-6 that it was willing to accede to the request provided a personal guarantee of R. K. Garg and a corporate guarantee of Steel Strips Limited for the outstanding amount was furnished with interest at the rate of 24 per cent. on account of overdue interest and that after exchange of certain correspondence the director of the company wrote to the petitioner that the shareholding of the company was non-transferable, it also cannot pledge the shares of the company and furnish a corporate guarantee of the Steel Strips Limited and ultimately the company wrote back that it was unable to pledge additional shares to the extent of 1.5 times. However, it was agreeable to furnish corporate guarantee. It also communicated that they approve the rate of interest of 20 per cent. instead of 24 per cent. Since neither the payments were made nor the documents were furnished by the company, the petitioner was left with no option but to serve a notice of winding up under the Act. In the above premises, learned counsel for the petitioner vehemently submitted that having regard to the correspondence exchanged between the parties and placed on the record, it is clearly proved that the petitioner offered to the company to purchase the shares and it agreed to purchase the same but offered to pay the amount after some time and ultimately did not make the payment and thus, it is unable to pay the admitted debts and is, therefore, liable to be wound up under the provisions of the Act.

Learned counsel for the petitioner placing reliance on Madhusudan Gordhandas and Co. Vs. Madhu Wollen Industries Pvt. Ltd., , submitted that the principles on which the court acts are, firstly whether 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. Support for this view was also sought from a decision of this court in Bharadwaj and Associates v. Pure Drinks (New Delhi) Ltd. (C. P. No. 35 of 1985, decided on 1-12-1993). On the other hand, M.L. Sarin, senior advocate, learned counsel for the company vehemently contended by reference to agreement annexure P-1 that the offer to buy back the shares was to be made through registered AD post to the promoters, i.e., the company and R.K. Garg, after the expiry of 36 months but not later than 39 months of the allotment of the shares and the company was thereafter at liberty to exercise its option in the next three months and in the event of not accepting the offer either wholly or in part within the period of 90 days from the date of receipt of the offer, the petitioner was free to sell the shares offered to the promoters, i.e., the company and R.K. Garg, to any other person and in the event of the petitioner being not able to realise for the said shares the price determined in accordance with Article 61 of the agreement, the difference in the price realised and the price determined under Article 61 of the agreement was to be made good by the promoters, i.e., the company and R.K. Garg to the petitioner. According to learned counsel, the petitioner never offered the shares under the buy-back provisions in the agreement through registered AD post within the time allowed under the agreement, the question of accepting the offer therefore, did not arise. Some correspondence was exchanged between the parties but proposals never materialised. It was thus, open to the petitioner to assume that the company was not interested to purchase the shares. It could thus sell the same in the open market and thereafter ask the promoters, i.e., the company and R. K. Garg to pay the balance if any, in terms of the agreement entered into between the parties. Learned counsel appearing for the company submitted that no money was advanced by the petitioner to the company ; no notice was ever served on the company in terms of the agreement to buy back the shares ; letter annexure P-3 even if taken to be a notice, though not a registered one, is beyond the period of 39 months ; the shares have not been sold by the petitioner till today; the agreement contains an arbitration clause in case of dispute ; no steps have been taken to get the matter settled through arbitration and even if an award had been made by the arbitrator and was not made a rule of the court, the amount due could not be said to be a debt which may give a right to a creditor to claim winding up under the provisions of the Act. Learned counsel appearing on behalf of the company submitted that the company was a going concern and in the facts and circumstances of this case, may not be ordered to be wound up. Learned counsel placed reliance on Pradeshiya Industrial and Investment Corporation of U.P. Vs. North India Petrochemical Ltd. and Another, to contend that the claim made in the petition was itself doubtful which requires adjudication and, therefore, is not a debt as contemplated by the provisions of Sections 433 and 434 of the Act. Learned counsel further contended that the petition was not maintainable, the defence raised by the company being substantial, the debt being disputed and the provisions of the agreement on which the debt is claimed having not been strictly followed inasmuch as the petitioner did not sell the shares before filing the present petition and that the company was running in profit. Reference was also made to Parmetex Inc. Hackettstown v. Punjab Concast Steels Ltd. [1994] 1 PLR 503 to contend that when the company is a going concern, the court may go slow in ordering its advertisement and the petitioner in such situation may be relegated to the remedy of a civil suit. Reference in support of this contention was also made to Madhusudan Gordhandas and Co. Vs. Madhu Wollen Industries Pvt. Ltd., ) wherein it was observed as under (page 131):

"Two rules are well settled. First if the debt is bona fide disputed and the defence is a substantial one, the court will not wind up the company. The court has dismissed a petition for winding up where the creditor claimed a sum for goods sold to the company and the company contended that no price had been agreed upon and the sum demanded by the creditor was unreasonable (see London and Paris Banking Corporation, In re [18741 LR 444. Again, a petition for winding up by a creditor who claimed payment of an agreed sum for work done for the company when the company contended that the work had not been done properly was not allowed."

On a consideration of the matter, I am of the opinion that the company has raised a defence which cannot on the face of it be said to be frivolous or that the amount claimed in the petition to be an admitted debt. Under the agreement entered into between the parties, it was incumbent upon the petitioner to offer shares for sale within a period allowed under the agreement and in the event of the promoters, i.e., the company and R.K. Garg not accepting the offer, wholly or in part within a period of 90 days from the date of the offer, the petitioner was free to sell the shares offered to them and not accepted by them. Admittedly, in this case the petitioner did not offer the shares for sale under the buy-back clause to one of the promoters, i.e., R.K. Garg and he has not even been made a party to this petition. During the period of 90 days in which the promoters were to accept the offer, no settlement was arrived at either in respect of a definite amount or the interest payable thereon, in the event of payment being deferred. True, some correspondence was exchanged between the parties regarding purchase or sale of shares but as is clear from the correspondence so exchanged between the parties and attached with the petition, a final decision however did not emerge. The petitioner also did not offer the shares for sale to other parties after the promoters, i.e., the company and R. K. Garg refused to purchase the same or did not agree to pay the amount that was to be worked out under the agreement. It was open to the petitioner to sell the shares in the open market and claim the loss suffered by it by sale of shares in the open market after taking into consideration the amount realised and the amount that would have been worked out under the agreement. Admittedly, the petitioner has not sold the shares till today. An impression is left that the petitioner is forcing the company to purchase the shares and to pay to it the amount as may be worked out under the agreement or some price that may be acceptable to the parties. It is not obligatory under the agreement for the company to purchase the shares and to pay the price thereof. It was an option with it to purchase or not to purchase the same. The petitioner cannot force the company to purchase the shares. The shares, as already noticed, have not been offered to one of the promoters, i.e., R.K. Garg even till today what to talk of within the period envisaged by the tripartite agreement.

Article 10 of the agreement, annexure P-l provides for settlement of dispute. It provides that any question arising under the agreement shall be referred to the arbitration of three arbitrators. The company and the promoters were to provide one arbitrator and the intending subscriber was to appoint another arbitrator and the two arbitrators were to appoint an umpire. In the event of a dispute having arisen between the parties regarding settlement of price under the buy-back article in the agreement, it was open to the petitioner to refer the dispute to the arbitrators by invoking the arbitration clause in order to get a decision as to whether it was entitled to certain amounts and if so, to what extent. The petitioner however, without getting its claim settled through arbitrators as envisaged under the agreement, has rushed to this court by way of this petition under Sections 433 and 434 of the Act.

In the situation as noticed hereinbefore, I am of the opinion that the amount worked out by the petitioner under the buy-back clause, cannot be said to be an admitted debt or that the company is unable to pay the same. As already said, it was open to the petitioner to sell the shares and thereafter claim the balance amount after serving a notice and in that situation perhaps it could not be disputed that the amount claimed would have been an admitted debt. The defence raised is substantial and it was open to the company to show and in fact it has prima facie been able to show that the shares were not offered for sale under the buy-back clause within the time allowed and that it never admitted a definite amount to be due to the petitioner.

It also could not be disputed during the course of arguments that the company is a going concern or that it is able to pay its admitted debts.

For the reasons recorded above, I refuse to entertain this petition and relegate the parties to the remedy of civil suit especially having regard to the fact that the petitioner still continues to be a holder of the shares which were the subject-matter of the buy-back article under the agreement. The company petition thus stands disposed of accordingly.