Bombay High Court
Hdfc Bank Ltd vs Rohan Dyes And Intermediates Ltd., Cin ... on 19 July, 2016
Author: B. P. Colabawalla
Bench: B.P.Colabawalla
HDFC BANK CP320 OF 2013.docx
dik
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
COMPANY PETITION NO. 320 OF 2013
HDFC Bank Ltd. ...Petitioner
vs
Rohan Dyes & Intermediates Ltd. ...Respondent
.....
Mr. Zubin Behramkamdin a/w Ms F Behramkamdin, Ms Slesha Sheth, Mr.
Saahil Bijliwala i/b FZB & Associates for the Petitioner.
Mr. Rohan Cama a/w Ms Sapna Raichure i/b T.N.Tripathi & Co. for the
Respondent.
CORAM : B.P.COLABAWALLA, J.
Reserved On : 15 April, 2016.
Pronounced On : 19 July, 2016.
[JUDGEMENT]
1. This Company Petition has been filed by the Petitioner -
HDFC Bank Ltd. seeking to winding up the Respondent Company -
Rohan Dyes and Intermediates Ltd. on the ground that the Respondent Company is unable to pay its debts. It is the case of the Petitioner that the Respondent Company is indebted to the Petitioner in the sum of approximately Rs.8.74 Crores which comprises of a principal sum of Rs.8.19 Crores and simple interest of Rs.54.96 Lacs.
Pg 1 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:16 ::: HDFC BANK CP320 OF 2013.docx The claim in the present Petition arises out of certain derivative transactions that were entered into between the Petitioner Bank and the Respondent Company, the details of which are narrated hereinafter. I must mention here at the outset that it is not in dispute that the Petitioner Bank is an authorised dealer in foreign exchange and is in fact listed as an authorised dealer in Category - I as per the Reserve Bank of India Guidelines.
2. Before dealing with the facts of this case, it would be necessary to mention here that this Company Petition was originally heard by another Judge of this Court ( S. C. Gupte J. ), who by his order dated 7 September, 2015 dismissed this Company Petition.
Being aggrieved by this order, the Petitioner Bank preferred an Appeal before the Division Bench of this Court, who by its order dated 4 February, 2016 set aside the order dated 7 September, 2015 and remanded the matter back to this Court for a fresh hearing. It is in these circumstances that the present Company Petition has come up for admission before me once again.
3. The brief facts giving rise to the controversy in the present Petition are as follows:-
Pg 2 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:16 ::: HDFC BANK CP320 OF 2013.docx
(a) It is the case of the Petitioner that the Respondent Company during the course of its business, export large quantities of products and have a large annual turnover.
Apart from this, the Respondent Company also has a substantial amount of imports. By virtue of this business (Import and Export), according to the Petitioner, the Company is therefore exposed to fluctuation risks in the foreign currency market.
(b) With a view to hedge its foreign exchange fluctuation risks, the Respondent Company approached the Centurion Bank of Punjab ("CBOP"), in the year 2007 in order to enter into certain derivative transactions. It must be mentioned here that there is no dispute that CBOP merged with the Petitioner Bank with effect from 23 May 2008. Consequently, all assets and liabilities of CBOP vested in the Petitioner - Bank.
(c) Consequent to the discussions and negotiations between CBOP and the Respondent Company, CBOP issued a sanction letter dated 8 November, 2007 containing the terms and conditions on which certain derivative Pg 3 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:16 ::: HDFC BANK CP320 OF 2013.docx transactions between CBOP and the Respondent Company were to take place. Pursuant to this, the Board of Directors of the Company passed a resolution on 14 November, 2007 inter alia authorizing the Company to enter into an agreement with CBOP to transact spot and forwards in foreign exchange and enter into interest rate and foreign currency swaps, options and any derivatives that may from time to time be used to hedge the company's interest and foreign exchange exposure. The said resolution also accepted and agreed to the terms and conditions stipulated by CBOP in its sanction letter dated 8 November, 2007 and also authorized its Directors, namely, Radheshyam Tarachand Agarwal and Rohan Agarwal, jointly and severally to enter into the aforesaid transactions for and on behalf of the Respondent Company and execute all necessary documentation in that regard.
(d) Accordingly, and as prescribed by the Reserve Bank of India guidelines, CBOP and the Respondent Company entered into an ISDA Master Agreement dated 15 November, 2007 along with the schedule thereto also Pg 4 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:16 ::: HDFC BANK CP320 OF 2013.docx dated 15 November, 2007 ("ISDA Agreement"). Under this Agreement, CBOP and the Respondent Company agreed to enter into various derivative transactions each to be evidenced by a deal confirmation which would be supplemental to, a part of and subject to the ISDA Agreement and the Schedule thereto.
(e) Along with the ISDA Agreement, the Company also executed a Risk Disclosure Statement dated 15 November, 2007 in acceptance and acknowledgment of its understanding of the risks involved in entering into derivative transactions. It is not in dispute that the ISDA Agreement as well as the Risk Disclosure Statement were signed on behalf of the Respondent Company by persons who were authorized in that regard as per the board resolution dated 14 November, 2007.
(f) As mentioned earlier, on 23 May, 2008 CBOP merged
with the Petitioner Bank under a Scheme of
Amalgamation duly sanctioned by the Reserve Bank of India vide its letter dated 20 May, 2008. Under the said scheme, the Petitioner took over all the rights and Pg 5 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:16 ::: HDFC BANK CP320 OF 2013.docx liabilities of CBOP and stepped into the shoes of CBOP in respect of all pending transactions entered into by CBOP, one of which was under the ISDA Agreement and all derivative transactions entered into by the parties thereunder.
(g) After the aforesaid merger of CBOP with the Petitioner Bank, on 26 June, 2008 a deal confirmation was entered into between the Petitioner Bank and the Respondent Company for the purposes of entering into USD/INR options transaction comprising of a series of options, the expiry / maturity of which, were spread over a period of one year from 27 June, 2012 to 29 May, 2013. This deal confirmation was entered into for modifying and hedging certain other derivative transactions entered into by CBOP with the Respondent Company on 20 November, 2007; 23 November, 2007; 19 December, 2007 and 22 January, 2008. This deal confirmation records that it evidenced a complete and binding agreement between the Petitioner and the Respondent Company as per the terms of the transaction to which the confirmation related. The particular options transactions to which the deal Pg 6 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:16 ::: HDFC BANK CP320 OF 2013.docx confirmation relates were as follows:-
Option Reference No. 86228HM
The Counterparty: ROHAN DYES & INTERMEDIATES LTD.
Option Style : EUROPEAN
Expiration Time: TOKYO CUT 15:00:00
Trade Date: 06/25/08
Ref Num Eff Option Call Call Put Put Amount Expiry Dt. Settlement Strike
Date Buyer Ccy
ig Amount Ccy Date Price
86228HM 25JUN- COUNTER INR 21,575,000 USD 500,000 27JUN-12 29JUN-12 43.1500
08 PARTY
86229HM 25JUN- HDFC USD 800,000 INR 34,520,000 27JUN-12 29JUN-12 43.1500
08 BANK LTD
86230HM 25JUN- COUNTER INR 21,575,000 USD 500,000 27JUL-12 31JUL-12 43.1500
08 PARTY
86231HM 25JUN- HDFC USD 800,000 INR 34,520,000 27JUL-12 31JUL-12 43.1500
08 BANK LTD
86232HM 25JUN- COUNTER INR 21,575,000 USD 500,000 29AUG-12 31AUG-12 43.1500
08 PARTY
86233HM 25JUN- HDFC USD 800,000 INR 34,520,000 29AUG-12 31AUG-12 43.1500
08 BANK LTD
86234HM 25JUN- COUNTER INR 21,575,000 USD 500,000 26SEP-12 28SEP-12 43.1500
08 PARTY
86235HM 25JUN- HDFC USD 800,000 INR 34,520,000 26SEP-12 28SEP-12 43.1500
08 BANK LTD
86236HM 25JUN- COUNTER INR 21,575,000 USD 500,000 29OCT-12 31OCT-12 43.1500
08 PARTY
86237HM 25JUN- HDFC USD 800,000 INR 34,520,000 290CT-12 31OCT-12 43.1500
08 BANK LTD
86238HM 25JUN- COUNTER INR 21,575,000 USD 500,000 28NOV-12 3ONOV-12 43.1500
08 PARTY
86239HM 25JUN- HDFC USD 800,000 INR 34,520,000 28NOV-12 3ONOV-12 43.1500
08 BANK LTD
86240HM 25JUN- COUNTER INR 21,575,000 USD 500,000 27DEC-12 31DEC-12 43.1500
08 PARTY
86241HM 25JUN- HDFC USD 800,000 INR 34,520,000 27DEC-12 31DEC-12 43.1500
08 BANK LTD
86242HM 25JUN- COUNTER INR 21,575,000 USD 500,000 29JAN-13 31JAN-13 43.1500
08 PARTY
Pg 7 of 52
::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:16 :::
HDFC BANK CP320 OF 2013.docx
86243HM 25JUN- HDFC USD 800,000 INR 34,520,000 29JAN-13 31JAN-13 43.1500
08 BANK LTD
86244HM 25JUN- COUNTER INR 21,575,000 USD 500,000 26FEB-13 28FEB-13 43.1500
08 PARTY
86245HM 25JUN- HDFC USD 800,000 INR 34,520,000 26FEB-13 28FEB-13 43.1500
08 BANK LTD
86246HM 25JUN- COUNTER INR 21,575,000 USD 500,000 27MAR-13 29MAR-13 43.1500
08 PARTY
86247HM 25JUN- HDFC USD 800,000 INR 34,520,000 27MAR-13 29MAR-13 43.1500
08 BANK LTD
86248HM 25JUN- COUNTER INR 21,575,000 USD 500,000 26APR-13 30APR-13 43.1500
08 PARTY
86249HM 25JUN- HDFC USD 800,000 INR 34,520,000 26APR-13 30APR-13 43.1500
08 BANK LTD
86250HM 25JUN- COUNTER INR 21,575,000 USD 500,000 29MAY-13 31MAY-13 43.1500
86251HM
08
08
PARTY
25JUN- HDFC
BANK LTD
USD
ig 800,000 INR 34,520,000 29MAY-13 31MAY-13 43.1500
(h) The counter party referred to above is the Respondent
Company and HDFC Bank Ltd is the Petitioner before me.
The strike price agreed to was Rs.43.150000. To put it simply, as per this deal confirmation, on the relevant expiry dates, if the USD traded below Rs.43.15 per US Dollar then the Respondent Company would sell US$500,000/- to the Petitioner Bank @ Rs.43.15 per US Dollar. Similarly, on the relevant expiry dates, if the USD traded above Rs.43.15 per US Dollar, then it was agreed that the Respondent Company would sell US$800,000/- to the Petitioner @ Rs.43.15 per US Dollar. After entering into the aforesaid deal confirmation, the Respondent Pg 8 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx Company on 16 July, 2008 also provided details of the underline business transactions for which said deal confirmation was entered into.
(i) Under this deal confirmation, a Mark to Market ("MTM") and margin condition was also agreed upon between the Petitioner Bank and the Respondent Company. It was agreed between the parties that any time after six months from the trade date (25 June, 2008) till the expiry / maturity of the deal, if negative MTM of the options transaction exceeded Rs.5 Crores, the Petitioner Bank would be entitled to make a margin call on the Company for excess of the negative MTM over the amount of Rs.5 Crores. In accordance with this agreement the Company also furnished a post-dated cheque for an amount of Rs.5 Crores that was to be encashed by the Petitioner Bank only after the margin call arising under the aforesaid options transactions was not complied with and the Respondent Company failed to make alternative arrangements within 30 days from the date of demand. It is the case of the Petitioner that since the Company failed to comply with the margin call arising Pg 9 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx under the aforesaid options transactions despite expiry of 30 days from the date the Respondent Company was called upon to do so, the Petitioner presented the said cheque on 4 December, 2012 which was dishonoured for the reason "insufficient funds".
(j) One such incident of negative MTM took place on 26 December, 2008 that is six months after the date of execution of the said options transactions due to fluctuations in the foreign currency exchange rates. The MTM value in respect of said options transaction exceeded its limits of Rs.5 Crores and touched the value of Rs.10 Crores. In this view of the matter, the Petitioner, vide their letter dated 30 December, 2008 issued a margin call in terms of the deal confirmation. Since, there was no reply, the Petitioner Bank addressed another letter dated 13 May, 2009 to the Respondent Company, once again making a margin call and requested the Respondent Company to comply with its obligations under the deal confirmation.
(k) The Respondent Company vide its letter dated 20 May, Pg 10 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx 2009 expressed its inability to comply with the margin call made by the Petitioner Bank citing the reason that due to cash constraints, global slowdown in the market and prior business commitments, it was unable to cater to the margin call made by the Petitioner Bank. However, what is important to note is that in this very letter the Respondent Company expressed its intention to continue with the options transaction entered into with the Petitioner Bank and expressed its commitment to clear all dues and outstanding at the relevant expiry -
settlement dates under the deal confirmation. I must mention here that the Respondent Company has raised a dispute with reference to this letter dated 20 May, 2009 inter alia contending that the same has not been issued by the Respondent Company and the same is not signed by its authorized signatory. I will deal with this contention later in the judgment.
(l) Be that as it may, the Petitioner once again, by its letter dated 15 July, 2009 called upon the Respondent Company to comply with the margin call made by the Petitioner, which at that point of time was Rs.4.03 Crores.
Pg 11 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx In reply thereto, the Respondent Company once again vide its letter dated 22 July, 2009 reiterated their earlier request not to insist on any margin call and reiterated that they intend to continue with the transaction entered into between the Petitioner Bank and the Respondent Company. The Respondent Company further stated that they were hopeful that the Rupee was going to appreciate in the short term as well as in the long term and, therefore, in a short while, the MTM would be below the sanction limit of Rs.5 Crores. Looking to the longstanding and healthy relationship of the Respondent Company with the Bank, the Company urged the Petitioner Bank to kindly not insist for further margin call against the options transaction. I must mention here that this letter of 22 July, 2009 is also disowned by the Respondent Company by stating that it was never issued by it and is not signed by any authorized signatory. This contention also I shall deal with later in this judgment.
(m) Thereafter, the Petitioner Bank vide their demand notices dated 6 July, 2010; 5 August 2010; 1 September, 2010;
and 14 March, 2012 issued a margin call on the Pg 12 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx Respondent Company in terms of the deal confirmation without any success.
(n) Be that as it may, as per the deal confirmation dated 26 June, 2008, on the expiry of the first option (i.e. on 27 June, 2012), since the US Dollar was trading above Rs.43.15 per Dollar, the first option was exercised by the Petitioner on the expiry date of the said option. As per the said option, the Company was obliged to sell US$800,000/- to the Petitioner at the pre - agreed USD/INR rate of Rs.43.15 (the strike price). Hence the Petitioner addressed an email dated 27 June, 2012 to the Company containing the details of the said option and called upon the Company to inform the Petitioner as regards utilization and/or nett settlement of the said option so exercised by the Petitioner.
(o) In reply thereto, the Respondent Company by its email dated 28 June, 2012 for the first time disputed the options transaction. It was stated in the said email that the said options transaction was entered into only to square off all old contracts / deals dated 20 November, Pg 13 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx 2007; 23 November, 2007; 19 December, 2007; 19 December, 2007; and 22 January, 2008 that were entered into with CBOP. The Respondent Company stated that the options transaction was entered into to square off the old dues which were not enforceable in law and that this deal confirmation - options transaction was only a paper contract so that the accounts of the Petitioner Bank could be squared up. An identical reply was given by the Respondent Company when the Petitioner exercised their second option which expired on 27 July, 2012. Similar replies have been given by the Respondent Company for all the options exercised by the Petitioner Bank on their respective expiry dates as more particularly set out in the deal confirmation.
(p) It is not in dispute that all the options have been duly exercised by the Petitioner in view of the fact that the US Dollar rate on the date of exercising the options was higher than Rs.43.15. It is the Petitioner's case that since the Company refused to honour its obligations under the options transaction as envisaged by the deal confirmation, the Petitioner was forced to procure Pg 14 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx US$800,000 from the open market on 29 June, 2012 (in relation to the first option) and crystallized the said options transaction thereby incurring a loss of Rs.1,07,68,000/-. Similarly, it is pleaded in the Petition that for all the other options also the Petitioner had to procure US$800,000 from the open market to crystallize the said options transactions which resulted in a loss that was attributable to the Respondent Company.
ig These details and averments can be found from paragraphs 21 to 31 of the Company Petition.
(q) It is the case of the Petitioner that the amounts claimed in the Company Petition is the amount of difference in the strike price agreed to between the parties in the deal confirmation (namely Rs.43.15) and the US Dollar rate on the date of expiry of the option. For example, under the deal confirmation, on the expiry date of a particular option, if the US Dollar traded at Rs.44.15, the Respondent Company was bound to sell US$800,000 to the Petitioner Bank @ Rs.43.15 per US Dollar. If it did not do so then the Respondent Company had to make good the difference in the Dollar rate being Rs.1.00 per US Pg 15 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx Dollar for US$800,000 (being Rs.8 Lacs). Though the Petitioner has termed the word "loss" in a very loose manner, it is the case of the Petitioner that these amounts were payable under the contract (namely the deal confirmation read with the ISDA Agreement and other documents executed between the parties) and irrespective of whether or not the Petitioners had purchased US Dollars from the open market and suffered a loss. This payment was due by the Respondent Company to the Petitioner under a written contract entered into between them, was the submission of the Petitioners. In other words, it is the case of the Petitioner that this is nothing but a debt due from the Respondent Company to the Petitioner Bank.
(r) Be that as it may, on 4 September, 2012 the Petitioner's Advocate addressed a notice to the Respondent Company and its guarantors placing on record all the facts and called upon the Respondent Company to honour its obligations under the deal confirmation. It is pertinent to note that in this letter, specific references have been made to the letters dated 20 May, 2009 and 22 July, Pg 16 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx 2009 which the Respondent Company now seeks to disown. A reference to these letters can be found in paragraph 4 (page 142 of the paper book). There is no dispute that this letter dated 4 September, 2012 has been received by the Respondent Company and yet it chose not to reply to the same or controvert the allegations and the contentions raised therein.
(s) Since the Respondent Company failed to honour its commitments under the deal confirmation, the Petitioner through their Advocate's notice dated 18 January, 2013 and delivered at the registered office of the Company, called upon the Respondent Company to pay a sum of Rs.6,86,00,436.15 as on 31 December, 2012, within a period of 21 days from the date of receipt of the notice failing which the Petitioner would be constrained to initiate legal proceedings against the Respondent Company including initiating winding up proceedings contemplated under Section 433 read with Section 434 of the Companies Act, 1956. Despite receipt of this notice, no reply was given to the said notice and hence the present Company Petition. It would be pertinent to Pg 17 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx mention that the amount claimed in this notice was for a lesser amount than what is claimed in the Company Petition, because options 8 and 9 (expiring in January, 2013 and February, 2013 respectively) had not yet expired when the said notice was issued. Since the Petition is filed after the expiry of even options 8 & 9 and payments thereunder have not been made by the Respondent Company, the same are included in the claim made in the present Company Petition. I must also mention here that by the time I heard this Petition, all the options have expired (namely options 10, 11 & 12) and no payments thereunder have been made by the Respondent Company to the Petitioner - Bank.
(t) For the sake of completeness, I must also mention here that to recover its dues under the very same transaction as pleaded in the Company Petition, the Petitioner - Bank has also filed an Original Application before the Debts Recovery Tribunal at Ahmedabad ("DRT"), being Original Application No.163 of 2012 and which is pending. The Petitioner has also filed a complaint under Section 138 of the Negotiable Instruments Act, 1881 for dishonour of Pg 18 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx the cheque of Rs.5 Crores before the Metropolitan Magistrate Court, Ahmedabad, being Case No.163 of 2012, and which is also pending till date.
4. In this factual backdrop, Mr Kamdin, learned counsel appearing on behalf of the Petitioner Bank, submitted that the facts in this case are really undisputed. He submitted that there is no dispute that the deal confirmation was entered into on 26 June, 2008. Under the said deal confirmation it was agreed between the parties that if on the expiry date of the relevant option the US Dollar was traded at a rate higher than Rs.43.15 then the Respondent Company would to either deliver US$800,000 to the Petitioner Bank at the rate of Rs.43.15 per US Dollar or pay the difference between the US Dollar rate on the date of the expiry of the option and the strike price agreed to between the parties, namely Rs.43.15. Mr. Kamdin submitted that it is not in dispute that on the expiry dates of all the 12 options, the US Dollar was traded at a rate higher than Rs.43.15. In terms of the deal confirmation, the Petitioner therefore called upon the Respondent - Company to either deliver to the Petitioner US$800,000 under each of the options or pay the difference between the US Dollar rate on the date of the expiry of the respective option and the strike price agreed to between the parties, Pg 19 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx namely Rs.43.15. Since the Respondent - Company failed to do either, the present Company Petition has been filed seeking to wind up the Respondent Company on the ground that it is unable to pay its debts.
5. According to Mr Kamdin, this liability of the Respondent Company arises on account of the contract entered into between the parties and was payable as per the terms of the contract.
ig He submitted that as per the Risk Disclosure Statement executed by the Respondent (Page 73 of the paperbook), the deal could be fulfilled in two manners set out above i.e. either by delivering US$800,000 under each option at the pre-agreed / strike price of Rs.43.15 per US Dollar or pay the difference between the Dollar rate on the date of the expiry of the respective option and the strike price agreed to between the parties, namely Rs.43.15. According to Mr. Kamdin this is also further borne out by the Master Circular No./6/2007-08 dated 2 July, 2007 issued by the Reserve Bank of India, and more particularly Annexure VII thereof which stipulates that option contracts could be settled on maturity either by delivery on spot basis or by net cash settlement in Rupees on spot basis as specified in the contract.
6. On the other hand, despite several contentions being Pg 20 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx raised in the Affidavit in Reply, Mr Cama, learned Counsel appearing on behalf of the Respondent Company, resisted this Petition only on the following grounds:-
(i) the aforesaid Deal Confirmation was entered into to square off the old contracts/deals dated 20 November, 2007; 23 November, 2007; 19 December, 2007; 19 December, 2007 and 22 January 2008 entered into by the Respondent Company with CBOP. The purpose of entering into this Deal Confirmation was to square off all the earlier deals which were unenforceable in law. This Deal Confirmation which was entered into with the Petitioner Bank was merely a paper transaction entered into to accommodate the Petitioner and was not to be enforced by either party. This being the case, there was no liability on the Respondent Company to make payment of any amount whatsoever under the aforesaid Deal Confirmation dated 26 June, 2008;
(ii) in any event, the Deal Confirmation dated 26 June, 2008 does not caste any obligation on the Respondent Company to make any payment. Under the Deal Confirmation, if the US Dollar traded above Rs.43.15 per Dollar, then, the Respondent Company was to sell US$800,000 to the Petitioner at the price of Rs.43.15 per US Dollar. If the Respondent Company failed to sell US$800,000 as contemplated in the Deal Confirmation, then the remedy of the Petitioner was to seek specific performance thereof.
The fact that the Deal Confirmation contemplated that the Pg 21 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx Respondent Company was to sell US$800,000 to the Petitioner itself shows that it was a commodity that ought to be delivered by the Respondent Company to the Petitioner. If there was no physical delivery required then the same would amount to a wagering contract hit by Section 30 of the Contract Act, 1872;
(iii) the claim made in the present Petition was nothing but in the nature of damages. This being the case, there was no debt due and payable by the Respondent Company to the Petitioner in presenti, and therefore, the Company Petition could not be maintained on the basis of a claim in damages;
(iv) that there is a serious dispute with reference to the amounts owed to the Petitioner in view of the fact that there was nothing to indicate what was the US Dollar rate on the date of the expiry / settlement of the respective options; and
(v) That in any event the Deal Confirmation that was stamped, was not signed by the Respondent Company, but the signature of the Respondent Company can be found only on a duplicate of the Deal Confirmation. Therefore there was a variance in the primary document itself which has given rise to a bonafide dispute between the parties.
7. For all the aforesaid reasons, Mr Cama submitted that Pg 22 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx there is no merit in this Company Petition and the same ought to be dismissed. He submitted that, in any event all these issues would give rise to a bonafide defence to the Company Petition, and therefore, this Court ought not to entertain the same and leave the Petitioner to recover its dues in the Original Application filed before the Debt Recovery Tribunal.
8. I have heard the learned counsel for the parties at length and perused the papers and proceedings in the Company Petition as well as the annexures thereto. The first defence raised by Mr Cama was that the Deal Confirmation dated 26 June, 2008 entered into with the Petitioner Bank, was only for the purpose of squaring off the old transactions entered into by the Respondent Company with CBOP which were unenforceable in law. According to Mr Cama, it was the understanding between the Petitioner Bank and the Respondent Company that this Deal Confirmation was entered into only to accommodate the Petitioner Bank and allow it to square off old transactions that were entered into with CBOP and who was subsequently taken over by the Petitioner Bank.
9. After carefully considering the argument canvassed by Mr Cama, I am unable to agree with the aforesaid submissions. As Pg 23 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx noted earlier, under the Deal Confirmation, it was agreed between the parties that any time after six months from the trade date (25 June, 2008) till the expiry / maturity of the deal, if negative MTM of the options transaction exceeded Rs.5 Crores, the Petitioner Bank would be entitled to make a margin call on the Company for excess of the negative MTM over the amount of Rs.5 Crores. Since the negative MTM exceeded Rs.5 Crores, the Petitioner Bank by its letter dated 13 May, 2009 called upon the Respondent Company to fulfill its obligations and make up the shortfall in the margin as contemplated under the Deal Confirmation. In reply to this letter, the Respondent Company by its letter dated 20 May, 2009 (Exh P to the Petition) expressed its inability to comply with the margin call citing the reason that due to cash constraint, global slow down in the market and prior business commitments, the Respondent Company was unable to cater to the margin call made by the Petitioner Bank.
However, in this very letter, the Respondent Company expressed its intention to continue with the options transaction (as set out in the Deal Confirmation) and committed itself to clearing all the dues and outstandings on the relevant expiry / settlement dates as set out in the Deal Confirmation. This letter would clearly establish that way back in May 2009, the Respondent has categorically affirmed the Deal Confirmation entered into by it with the Petitioner Bank.
Pg 24 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx Thereafter the same commitment has been given by the Respondent Company once again vide its letter dated 22 July, 2009 (Exh. R to the Petition). These two letters establish beyond any doubt that as way back as in May 2009 and July 2009, the Respondent Company affirmed the options transactions as recorded in the Deal Confirmation dated 26 June, 2008 and represented to the Petitioner Bank not to insist on any margin call as they would honour their commitments under the Deal Confirmation on the relevant expiry/ settlement dates of the options. In view of these two categorical letters, I am unable to accept the submissions of Mr Cama that the Deal Confirmation dated 26 June, 2008 was entered into only to accommodate the Petitioner Bank to square off the old transactions entered into by the Respondent Bank with CBOP and which was not to give rise to any liability to either party.
10. Faced with this situation, Mr Cama contended that the letters dated 20 May, 2009 and 22 July, 2009 did not emanate from the Respondent Company and were not signed by a person authorized by the Respondent Company as per its resolution dated 14 November, 2007. According to Mr Cama this resolution (Exh B to the Petition) only authorized Mr. Radheshyam Agarwal and/or Mr. Rohan Agarwal to transact in spot and forward any foreign exchange Pg 25 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx and enter into interest rate and foreign currency swap options and any other derivative transactions that may from time to time be used to hedge the Company's interest and foreign exchange exposure risk.
He submitted that admittedly these letters have not been signed by either Mr. Radheshyam Agarwal or Mr. Rohan Agarwal, and therefore, the same are not binding on the Respondent Company.
11. I am unable to accept this submission of Mr Cama for multiple reasons. Firstly, the board resolution, and on which reliance was placed by Mr. Cama, only authorized Mr. Radheshyam Agarwal and/or Mr. Rohan Agarwal to enter into derivative contracts. This does not mean that all correspondence that is subsequently exchanged between the Respondent Company and the Petitioner has to be only signed by Mr Radheshyam Agarwal and/or Mr Rohan Agarwal. It is one thing to contend that the transaction itself was not entered into by an authorized person and it is wholly another to say that the correspondence exchanged with reference to that very transaction, was not signed by a person authorized to do so. I, therefore, find that the reliance placed by Mr Cama on the board resolution to further this argument is wholly misplaced. Secondly, I find that the Deal Confirmation dated 26 June, 2008 (Exh K to the Petition), apart from being signed by a person authorized by the Pg 26 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx board resolution dated 14 November, 2007, is also signed by the gentleman who has signed the letter dated 20 May, 2009. The Deal Confirmation as well as the letter dated 20 May, 2009, specifically state that this person signing the Deal Confirmation as well as the letter dated 20 May, 2009 is the authorized signatory of the Respondent Company. I am, therefore, unable to accept the argument of Mr Cama that these letters dated 20 May, 2009 and/or 22 July, 2009 have not been signed by the authorized signatory of the Respondent Company, and therefore, not binding on them.
12. There is yet another reason why I am unable to accept the submissions of Mr. Cama. As noted earlier, since the incident of negative MTM took place on 26 December, 2008, the Petitioner vide their letters dated 30 December, 2008 as well as 13 May, 2009 issued a margin call in terms of the Deal Confirmation. Thereafter, by several other letters dated 15 July, 2009; 6 July, 2010; 5 August, 2010; 1 September, 2010 and 14 March, 2012 issued further margin calls on the Respondent Company in terms of the Deal Confirmation.
Even if I were to ignore the letters dated 20 May, 2009 and 22 July, 2009 written by the Respondent Company to the Petitioner, there is not a single letter written by the Respondent Company in response to the aforesaid letters (making a margin call) contending that the Pg 27 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx entire transaction entered into between the Petitioner bank and the Respondent Company was only a paper transaction and was not to be enforced and or acted upon. To my mind, any prudent person, after receiving these letters calling upon him to provide a short fall in the margin, would have immediately replied to the same and refuted the entire transaction thereby denying that any margin shortfall ought to have been made up by him. Admittedly, no such reply was ever given. This alone speaks volumes about the conduct of the Respondent Company and how it treated the Deal Confirmation as a valid and binding transaction between the Respondent Company and the Petitioner. I must mention here that this defence was raised for the first time only when the Respondent Company was called upon to honour its commitments under the first option that expired on 27 June, 2012. Looking to all these facts, I am clearly of the view that this defence has been put up only as an afterthought to somehow wriggle out of the liability that the Respondent Company had incurred under the said Deal Confirmation. For all the aforesaid reasons, I have no hesitation in rejecting the argument of Mr Cama that the Deal Confirmation dated 26 June, 2008 entered into between the Petitioner Bank and the Respondent Company was not a real transaction that could be enforced against the Respondent Company.
Pg 28 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx
13. The next argument canvassed by Mr Cama was that the Deal Confirmation dated 26 June, 2008 does not cast any obligation on the Respondent Company to make any payment. He submitted that the Deal Confirmation itself contemplated that on the date of the expiry of the relevant option, if the US Dollar traded above Rs.43.15, then the Respondent Company was to sell US$800,000 to the Petitioner @ Rs.43.15 per US Dollar. If the Respondent Company failed to sell/ deliver US$800,000 as contemplated in the Deal Confirmation, then the remedy of the Petitioner was to seek specific performance thereof. An ancillary argument to this is that if no physical delivery was required then the same would amount to wagering contract which would be squarely hit by Section 30 of the Indian Contract Act, 1872.
14. I am unable to agree with this submission. It is common knowledge that any derivative transactions, essentially of the nature like in the present case, the market practice is that when there is no delivery, there is a nett cash settlement. In fact the Risk Disclosure Statement executed by the Respondent Company (at page 73 of the paper book ) itself contemplates that the deal can be settled either by a cash settlement or the purchaser of the option acquiring or delivering the underline asset. The relevant portion of the said Risk Pg 29 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx Disclosure Agreement reads as under:
"................You should calculate the extent to which the value of the options would have to increase for your position to become profitable, taking into account the premium paid and all transaction costs. The purchaser of options may exercise the options or allow the options to expire. The exercise of an option results either in a cash settlement or in the purchaser of the option acquiring or delivering the underlying asset....................."
(emphasis supplied)
15. Even Annexure VII of the Master Circular No./6/2007-08 dated 2 July, 2007, (which deals with Foreign Currency - Rupee Options) states as under:
"g) Option contracts may be settled on maturity either by delivery on spot basis or by net cash settlement in Rupees on spot basis as specified in the contract. In case of unwinding of a transaction prior to maturity, the contract may be cash settled based on the market value of an identical offsetting option."
(emphasis supplied)
16. In fact, the Deal Confirmation dated 26 June, 2008 itself contemplates payment being made on the expiry of the relevant option. The relevant portion of the Deal Confirmation reads thus:
"Each party will make each payment specified in this Confirmation as being payable by it, not later than the due date for value on that date in the place of the account specified below, in the freely transferable funds Pg 30 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx and in the manner customary for payments in the required currency. If on any date amounts would otherwise be payable in the same currency by each party to the other, then on such date, each party's obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount."
(emphasis supplied)
17. Looking to all these facts, I am unable to accept the submission of Mr Cama that on expiry of the relevant option, if the Respondent failed to sell/ deliver US$800,000 to the Petitioner, then the only remedy available to the Petitioner was to sue for specific performance. The Master Circular issued by the Reserve Bank of India as well as other documents (as more particularly set out above) clearly establish that the options transactions were to be settled either by delivery of the US Dollars or by a nett cash settlement. This being the position, I have no hesitation in rejecting this argument.
18. As far as the argument of Mr Cama on this contract being a "wagering contract" is concerned, I find this argument to be without any basis. The issue whether a transaction like in the present case, is a "wagering contract" has been dealt with extensively in a leading Pg 31 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx decision of the Madras High Court in the case of Rajshree Sugars & Chemicals Ltd. Vs. Axis Bank Ltd.1 The facts of this case would reveal that in pursuance of the ISDA Master Agreement, at least 10 deals were struck between the Plaintiff therein and UTI Bank (which later became AXIS BANK LTD). Admittedly, 9 out of those 10 deals had already matured without any dispute on either side. But the Plaintiff has come to court with regard to the 10th deal bearing contract No. OPT 727. The disputed deal was a USD-CHF (U.S.Dollar-
Swiss Franc) Option Structure, entered into by the Plaintiff with UTI Bank. The structure of the said deal was as follows:
"(i) The plaintiff would receive USD 100,000 on 23.6.2008 if spot never trades at 1.2385 from trade date namely, 22.6.2007 till fixing date 1 namely, 19.6.2008.
(ii) During the reference period from 22.6.2007 to 19.6.2008, if USD-CHF never touches 1.1250 and 1.2385 and if it ever touches 1.2385, there is no exchange of principal, but if it ever touches 1.1250 and never touches 1.2385, the plaintiff should buy USD 20 million against paying CHF at 1.3300.
During the reference period from 22.6.2007 to 15.6.2009, if USD- CHF never touches 1.1200 and 1.2385 or if it ever touches 1.2385, there is no exchange of principal, but if it ever touches 1.1200 and never touches 1.2385, the plaintiff should buy USD 20 million against paying CHF at 1.3300.
(iii) If the USD-CHF touches the level of 1.2385 ever during the period starting from 22.6.2007 to 15.6.2009, then the entire structure gets knocked out with no subsequent liability and the plaintiff would receive USD 100,000 on the spot date of touch. However if spot touches 1.2325, then the plaintiff would receive instant payment of USD 100,000, though the structure will not get knocked out."
1 AIR 2011 MADRAS 144 : 2008 SCC OnLine Mad 746 : (2009) 1 CTC 227 Pg 32 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx
19. In terms of the said deal, the Defendant paid to the Plaintiff US$100,000 which was received by the Plaintiff. However, after six months, the Plaintiff sent a letter dated 12 December, 2007 claiming that the entire structure as per the contract dated 22 June, 2007 got knocked out with no liability to either of the parties. By a reply dated 7 January, 2008, the Bank challenged this claim and contended that the contract was still alive and that the Bank was prepared to work out suitable risk mitigation structures.
ig Not satisfied with the stand taken by the Bank, the Plaintiff filed a suit before the Madras High Court inter alia seeking a declaration that the Deal Confirmation in Contract No. OPT 727 purportedly made by the Plaintiff was void ab-initio, illegal, violative of RBI Guidelines, opposed to public policy and unenforceable and not binding on the Plaintiff. One of the issues raised before the Madras High Court for challenging the said Contract No.OPT 727 was that the same amounted to a wagering contract and therefore hit by Section 30 of the Indian Contract Act, 1872. Dealing with this contention as to what is a contract of wagering, the observations of the Madras High Court (at paragraph 53 to 59) are very instructive in this regard and read thus:-
53. As we have seen in the first part of this order, the plaintiff challenges the contract in question as being void, violative of the law of the land, opposed to public policy and as a wagering contract. It is the stand of the plaintiff in the suit that the contract is violative of Pg 33 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx the Master circulars and Regulations issued by the Reserve Bank of India and consequently hit by Section 23 of the Contract Act. It is the further contention of the plaintiff that since there was no underlying exposure, the contract was, per se, speculative and a wagering contract, hit by Section 30 of the Contract Act. Therefore, it is necessary to analyse whether the contract in question is hit by Section 23 and/or Section 30 of the Contract Act.
54. Though the Indian Contract Act, 1872 defines a "Contingent Contract" under Section 31, it does not define what a "Wagering Contract" is. But the consequences of a Wagering Contract are indicated in Section 30, which reads as follows:
"30. Agreements by way of wager, void. -- Agreements by way of wager are void; and no Suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide by the result of any game or other uncertain event on which any wager is made.
Exception in favour of certain prizes for horse-racing. -- This Section shall not be deemed to render unlawful a subscription or contribution, or agreement to subscribe or contribute, made or entered into for or toward any plate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be awarded to the winner or winners of any horse-race."
In Carlill v. Carbolic Smoke Ball Co., 1892 (2) Q.B. 484, 490, Hawkins J., defined a wager as follows:
"A wagering contract is one by which two persons professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependent upon the determination of that event, one shall win from the other, and that other shall pay or hand over to him, a sum or money or other stake; neither of the contracting parties having any other interest in that contract than the sum or stake he will so win or lose, there being no other real consideration for the making of such contract by either of the parties."
The above view was first affirmed in 1893 (1) Q.B. 256 and later in Weddle Beck & Co. v. Hackett, 1929 (1) K.B. 321 and Ellesmere v.Wallace, 1929 (2) Ch. 1.
55. The essential features of a Wagering Contract as formulated by the English Courts are as follows:
Pg 34 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx (1) There must be 2 persons or 2 sets of or 2 groups of persons holding opposite views touching a future uncertain event. It may even concern a past or present fact or event.
(2) In a Wagering Contract, one party is to win and the other to lose upon the determination of the event. Each party must stand either to win or lose under the terms of the contract. It will not be a Wagering Contract if one party may win but cannot lose or if he may lose but cannot win or if he can neither win or lose. (3) The parties have no actual interest in the occurrence or non-
occurrence of the event, but have an interest only on the stake.
56. Applying the above essential features, contracts for differences in stock exchange or commodity market transactions were once treated as wagers Grizewood v. Blane, ig 1851 (11) CB 526 and Richards v. Starck, 1911 (1) K.B. 296. They were held to be wagers because of the understanding of the parties that the subject matter should neither be transferred nor paid for, on the settlement day, but that on that day, one party should pay to the other, the difference between the market price on that day and the price on the day of the contract. Thus where a series of contracts for the sale and purchase of shares gave the buyer an option to demand delivery on payment of an extra sum, it was held that they were wagers, since it was only if the option was exercised that they would become genuine transactions of sale and purchase. But if one party to the transaction undertakes a real liability to give or take delivery, the mere fact that the other party intends by a subsequent transaction to arrange that delivery under the first transaction shall not take place, does not turn the transaction into a wager. A genuine purchase of shares followed by a separate and genuine sale, creates enforceable obligations, even though the original purchaser never intended to take delivery of the shares and was in fact merely speculating upon their value. Sales and purchases of stocks and shares are not wagering transactions unless there is an agreement between the parties to them that they shall not be actually carried out but shall end only in the payment of differences. If there is an agreement to this effect, the transaction will be a wager notwithstanding the fact that the ostensible terms of business give a right to insist on delivery (Chitty on Contracts, Volume II − 29th Edition Page 1119).
57. Until the enactment of the Gaming Act, 1845, wagering contracts were not prohibited by law in England. But Section 18 of the Gaming Act, 1845 (UK) declared that all contracts or agreements by way of wager shall be null and void and that no Suit shall be brought or Pg 35 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx maintained in any Court of law and equity for recovering any sum of money or valuable thing alleged to be won upon any wager. However, certain dealings in investments by way of business are excepted from invalidity under Section 18 even though they might amount to wagering contracts. For example, contracts for differences or bets on stock market indices, City Index Ltd. v. Leslie, 1992 (1) Q.B. 92.
58. Though every wagering contract is speculative in nature, every speculation need not necessarily be a wager. In Bhagwandas Parasram v. Burjori Ruttonji Bomanji, AIR 1917 PC 101, it was held that speculation does not necessarily involve a contract by way of wager and that to constitute a Wagering Contract, a common intention to wager is essential. It was further held therein that in a wagering contract, there has to be a mutuality in the sense that the gain of one party would be the loss of the other on the happening of the uncertain event which is the subject matter of wager. The said decision was quoted with approval by the Supreme Court in Firm of Pratapchand Nopaji v. Firm of Kotrike Venkata Setty & Sons and Others, 1975 (2) SCC 208.
59. The mere fact that the parties never intended to take delivery at the end would not also make a transaction a wager. In Ismail Lebbe Marikar Ebrahim Lebbe Marikar v. Bartleet and Company, AIR (29) 1942 Privy Council 19, a firm of share and produce brokers entered into an arrangement with the grower of rubber in Ceylon. Under the arrangement, the broker was to buy rubber for the defendant in the London market, but there was to be no delivery. The arrangement was that the defendant should pay the differences when the market was against him and that he should be paid the differences, when the market was in his favour. Holding such a contract not to be a wager, the Privy Council held as follows:
"The essence of a bet is that both parties agree that they will pay and receive respectively on the happening of an event in which they have no material interest. The transaction may be cloaked behind the forms of genuine commercial transactions; but to establish the bet, it is necessary to prove that the documents are but a cloak and that neither party intended them to have any effective legal operation. Where the documents show an ordinary commercial transaction, and, in conformity with them, one of the parties incurs personal obligations on a genuine transaction with third parties so that he himself is not a winner or loser by the alteration of price, but can only benefit by his commission, the inference of betting is irresistibly destroyed. In such cases the fact that no delivery is required or tendered is of practically no value."
Pg 36 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx
20. Thereafter, applying the aforesaid principles, the Madras High Court examined Contract No. OPT 727 and ultimately held that the said contract was not a wagering contract. I think the issue of whether the present contract is wagering contract, and therefore, hit by Section 30 of the Contract Act, 1872, is squarely answered by this decision of Madras High Court. I am in full agreement with the decision of the Madras High Court on this issue. The facts of the present case would show that the Deal Confirmation dated 26 June, 2008 confers rights on the Petitioner Bank to seek actual delivery.
In other words, the performance of the contract can always be compelled by the Petitioner insisting on actual delivery of US$ 800,000 on the expiry of the relevant option, provided the US Dollar, on the date of expiry / maturity, traded higher than Rs.43.15. If actual delivery can be compelled, then this particular contract can never be termed as wagering contract. In any event, the records do not show or in any manner indicate any intention between the Petitioner Bank and the Respondent Company to enter into a wagering contract, which is sine qua non for the transaction to be dumped as a "wager". I am, therefore, not impressed with the argument of Mr Cama that the Deal Confirmation dated 26 June, 2008 entered into by the Respondent Company with the Petitioner Pg 37 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx Bank is void-ab-initio, illegal and unenforceable as it amounts to a "wagering contract", and therefore, hit by the provisions of Section 30 of the Indian Contract Act, 1872.
21. The next submission canvassed by Mr Cama was that the claim made in the present Company Petition was nothing but in the nature of damages. This being the case, there was no debt due and payable by the Respondent Company to the Petitioner in presenti and therefore, this Company Petition could not maintained on the basis of a claim for damages. In this regard, he was at pains to point out the averments in the Petition wherein the Petitioner has averred that since the Respondent Company did not honour its commitments under the options transactions, the Respondent Company had suffered a "loss". In this regard, Mr Cama placed reliance on a decision of the Supreme Court in the case of Union of India v/s Raman Iron Foundry2, as well as a decision of a Single Judge of this Court (Dr D.Y. Chandrachud J. as he then was) in the case of E-City Media P.Ltd. v/s Sadhrta Retail Ltd.3
22. On carefully considering the arguments of Mr Cama, I am unable to accept the submission that the claim made in the present 2 AIR 1974 SC 1265 3 [2010] 153 Comp Cas 326 (Bom) Pg 38 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx Company Petition is nothing but a claim in damages. As mentioned earlier, the amounts claimed in the present Petition arise directly under the Deal Confirmation dated 26 June, 2008. The options mentioned in this Deal Confirmation could be settled by two methods.
The first method was the actual delivery of US$800,000 on the date of expiry of the relevant option. If this was not done, then the same had to be settled on a nett cash settlement basis. Since admittedly the Respondent Company did not fulfill its obligations under the relevant options by delivering US$800,000 to the Petitioner, the present claim in the Petition has been made on the basis that a nett cash settlement had to be done by the Respondent Company with the Petitioner on the expiry of the relevant options. Therefore, the obligation of the Respondent Company to pay to the Petitioner the amounts claimed in this Petition arise directly under the Deal Confirmation entered into between the parties dated 26 June, 2008.
I am therefore unimpressed with the argument of Mr Cama that the claim of the Petitioner is one in damages. If I was to accept the submission of Mr Cama that the present claim made by the Petitioner under the option transactions entered into with the Respondent Company is in damages, then effectively, non-fulfillment of all derivative transactions, would be a claim in damages. I am unable to accept this submission. In fact, the Madras High Court in the case of Pg 39 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx Rajshree Sugars & Chemicals Ltd.1 has dealt with this issue, albeit in the context of whether a derivative transaction is a debt within the meaning of section 2(g) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. Paragraphs 24 and 25 are very instructive in this regard and read as follows :-
"24. I have carefully considered the rival contentions. The definition of the word "debt" in Section 2(g) of the Act includes any liability claimed as due from any person, by a Bank, during the course of any business activity undertaken by the Bank. Therefore, if the claim of the Bank has arisen during the course of any business activity undertaken by the Bank, then the amount so claimed by the Bank would certainly come within the meaning of the word "debt" as defined in Section 2(g). Section 6(1) of the Banking Regulation Act, 1949, enables a Banking Company to engage in any one or more of the forms of business enumerated in Clauses (a) to (o), in addition to the business of Banking. Sub-section (2) of Section 6 prohibits a Banking Company from engaging in any form of business other than those enumerated in sub-section (1). Therefore if a transaction falls within any one of the forms of business covered by Section 6(1) of the Banking Regulation Act, 1949, it would certainly be a business activity undertaken by the Bank. Consequently, a claim that arises during the course of such a business activity undertaken by the Bank, would come within the definition of the word "debt" in Section 2(g).
25. Transactions in derivatives, fall within the category of "business activity undertaken by the Bank" as they are covered by Section 6(1) of the Banking Regulation Act, 1949. Therefore I have no difficulty in coming to the conclusion that if the transaction in question gives rise to a claim by the Bank, of any liability, on the part of the plaintiff, the defendant-Bank may certainly be able to invoke the provisions of Act 51 of 1993. Since the word "debt" is defined to include any claim arising out of the business activity of the bank, it is not necessary that only in those cases where there is an act of lending and borrowing that the provisions of Act 51 of 1993 could be invoked by the Bank. Therefore I have no difficulty in accepting the first limb of the argument of Mr. V. Ramachandran, learned Senior Counsel appearing for the respondent-Bank, that if the transaction in 1 AIR 2011 MADRAS 144 : 2008 SCC OnLine Mad 746 : (2009) 1 CTC 227 Pg 40 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx question gives rise to a claim by the Bank, the Bank has to go before the Debts Recovery Tribunal."
23. This being the position, I am unable to accept the submission of Mr Cama that the present claim is in the nature of damages and therefore the present Company Petition would not be maintainable.
24. As far as the decisions relied upon by Mr Cama are concerned, there is no dispute with the propositions laid down therein. In Raman Iron Foundry2 the Supreme Court inter alia held that the law is well settled that the claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages are assessed by a decree of the Court or other adjudicating authority. The Supreme Court opined that a claim for damages is therefore not a claim for a sum presently due and payable and therefore, the party against whom the breach is complained of, does not eo instanti incur any pecuniary obligation. The Supreme Court further held that damages or compensation are not awarded by reason of any existing obligation on the part of the person who has committed the breach, but the party complaining of the breach gets compensation as a result of the fiat of the Court. I fail to understand 2 AIR 1974 SC 1265 Pg 41 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx how this judgment can be of any assistance to Mr Cama in the facts of the present case. As elaborated earlier, the claim made in the present case, in my opinion, is not one that is in damages. The pecuniary liability incurred by the Respondent Company and claimed in this Petition, is under the options transactions entered into by the Respondent Company with the Petitioner which form part of the Deal Confirmation dated 26 June, 2008. In these circumstances, the ratio of the decision of the Supreme Court in the case of Raman Iron Foundry2 has no application whatsoever to the factual matrix before me.
25. Similarly, on the same parity of reasoning, I find the reliance placed by Mr Cama on the decision of a Single Judge of this Court in the case of E-City Media P.Ltd.,3 as wholly misplaced. The facts of this case would reveal that the Company Petition was filed admittedly on the basis of a claim for liquidated damages. The learned Judge held that even if the claim was in the nature of liquidated damages, the same would make no difference and therefore a winding up petition would not be maintainable. This decision is also therefore, to my mind, wholly inapplicable to the facts of the present case.
2 AIR 1974 SC 1265 3 [2010] 153 Comp Cas 326 (Bom) Pg 42 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx
26. Mr Cama then submitted that there is a serious dispute with reference to the amounts owed to the Petitioner in view of the fact that there was nothing to indicate what was the US Dollar rate on the date of the expiry / settlement of the respective options. To counter to this argument, Mr Kamdin, and in my view correctly so, submitted that as far as the US Dollar rate is concerned, it is determined at the end of the closing business day of the expiry of the option. In fact, under the Master ISDA Agreement, the calculation agent is the Petitioner Bank, unless otherwise specified in the Deal Confirmation in relation to a particular transaction (See page 64 of the paper-book). In fact, even the Deal Confirmation dated 26 June, 2008 specifically states that the calculation agent shall be as per the signed Master ISDA Agreement which in term makes the Petitioner Bank the calculation agent. In each of the e-mails that have been sent by the Petitioner Bank to the Respondent Company on the expiry of the relevant options, a specific US Dollar rate has been mentioned by the Petitioner Bank. It is therefore incorrect to contend that there was nothing on record to show or indicate as to what was the US Dollar rate on the date of the expiry of each of the options. In any event, Mr Cama tendered the US Dollar rates as downloaded from the internet on the dates when each of these Pg 43 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx options expired. This clearly indicates that the US Dollar rate ranged from approximately Rs.53 per US Dollar to Rs.56 per US Dollar.
Even this clearly shows that on the date of each of the expiry of options the US Dollar rate was far greater than Rs.43.15 per US Dollar. This would clearly show that even if one were to go by the US Dollar rates as handed over by Mr Cama, huge outstandings are due and payable by the Respondent company to the Petitioner which would entitle the Petitioner to an order of admission of this Petition.
In this regard, it would be apposite to refer to a decision of the Supreme Court in the case of Madhusudan Gordhandas and Co. v/s Madhu Woollen Industries Pvt.Ltd.4, and more particularly paragraph 21 thereof which reads thus :-
"21. Where the debt is undisputed the court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt, see Re. A Company. [94 SJ 369] 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 Re Tweeds Garages Ltd.[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."
(emphasis supplied)
27. As clearly stipulated by the Supreme Court, once there is 4 (1971) 3 SCC 632 Pg 44 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx no doubt that the Respondent Company owes to the Petitioner an amount which would entitle the Petitioner to a winding up order, then a winding up order can be passed by the Company Court without driving the Petitioner to quantify the debt precisely. Following this proposition, two Division Benches of this Court have also taken the same view. The first decision is in the case of Pfizer Limited v/s Usan Laboratories Pvt Ltd.5 wherein a Division Bench of this Court held as under:-
"6. The short question we are considering is the position of the notice or of the subsequent petition when a part of the claim made by the creditor is seriously in dispute, but the remaining portion which prima facie would appear to be in order exceeds the limit of Rs. 500/- indicated in section 434. Shri Tulzapurkar submitted that the position is not res integra being concluded by the decisions both of the English Courts and of the Calcutta High Court, which decisions have taken view contrary to the view which found favour with the learned Company Judge. Our attention was invited to these decisions and it becomes necessary therefore to refer to them.
7. In point of time, the first of the decisions in the decision given by Plowman J. in In re Tweeds Garages Ltd., [(1962) 1 Chancery 406.] The relevant observations are to be found at pages 413 and 414 of the report. An opinion has been expressed in the said judgment that it would be quite unjust to refuse a winding-up order to a petitioner who is admittedly owed moneys which have not been paid merely because there is a dispute as to the precise amount owing.
8. Almost to the same effect are the observations in Cardiff Preserved Coal and Coke Company v. Norton, [(1866-1867) 2 Law Reports Chancery Appeals 405.]. A contention had been advanced before the appellate Court that the winding-up order which was being considered was bad because the creditor had demanded a sum of £628, and it appeared that he was entitled only to £411 7s. 9d. This argument has been decisively rejected by Lord Chelmsfore, L.C.
5 (1985) Mh. L. J. 554 Pg 45 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx speaking for the Bench at page 410 of the report. It has been observed that even if the creditor has made a demand upon the company for payment of more than was due, that per se will not make the notice or the consequential winding up order bad or invalid, provided that there was a debt in excess of £50 due to the creditor.
9. Both the above decisions have been cited and followed by a Single Judge of the Calcutta High Court in Ofu Lynx Ltd. v. Simon Carves India Ltd. [AIR 1970 Cal. 418.] The learned Single Judge was considering the validity of a notice under section 434 of the companies Act, 1956, and the contention raised was that the notice must be deemed to be bad because a portion of the claim in respect of which notice had been given was disputed and prima facie the dispute was required to be upheld. It was observed:
"I, therefore, hold that notice under section 434 of the Companies Act, 1956 will not be rendered invalid only because of the fact that the amount of debt mentioned in the notice may not be exactly the correct amount of the debt due, provided the amount mentioned in the notice includes the debt due and exceeds the sum of Rs. 500/-."
10. In our opinion, the aforesaid decisions set out the correct principle and once we have reached the conclusion, it will have to be held that the dismissal of the winding-up petition on the basis indicated in the impugned order would be clearly bad and order required to be set aside. Merely because there could be a serious dispute as to the liability to pay interest at all or at the rate of 18% would not render the statutory notice invalid or result in a dismissal of the winding-up petition. The Company Judge was required to consider the claim of the petitioners in respect of the principal amount and to come to a conclusion whether or not there was any real substantial dispute with regard to the said claim. If there was a genuine and bonafide dispute, then certainly it was within his discretion and jurisdication to dismiss the petition and relegate the petitioners to claim the amount by a regular suit. However, he did not go into this aspect but chose to dispose of the winding-up petition by dismissing the same on an erroneous basis which we have earlier indicated. If that be so, the impugned order will be required to be set aside and the petition will now go back to the Company Judge for reconsideration of the position and to decide whether it is required to be admitted and whether further directions after admission are required to be given."
Pg 46 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx (emphasis supplied)
28. The second decision is in the case of Tata Finance Ltd v/s Kanoria Sugar and General Manufacturing Company Ltd., Mumbai.6 The relevant portion reads thus:-
"8. It is well settled that a winding up petition should not be allowed to be taken as a means to recover debt from the company. It is not a legitimate way to enforce payment of debts which are bona fide disputed by the company and cannot be used as a weapon to pressurise and coerce the company to make payments. But it is also equally well settled that when the debt is undisputed and the defence is not bona fideand genuine, the Court will not act upon a defence that the company has liability to pay but chooses not to pay and the creditors will, in such case, be entitled to a winding-up order. This is clear from the following observations of the Supreme Court in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries, (1972) 42 Comp Cases 125:
"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 Corpn., Re. 4) 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. (See Brighton Club and Horfold Hotel Co. Ltd. Re. 5) Where the debt is undisputed the Court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt. (See A Company, Re. 6) 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 6 (2002) 1 Mh. L. J. 617 Pg 47 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx Ltd., Re. 7). The principles on which the Courts 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."
9. In United Western Bank Ltd.'s case, (1978) 48 Companies Cases 378 (Bom), Kania, J. (as he then was) observed that when the defence is that the debt is disputed, the Court has to see first whether the dispute on the face of it is genuine or merely a cloak to cover company's real inability to pay the debts. The inability is indicated by its neglect to pay the debt within three weeks, after proper demand was made. He added that neglect is to be assessed on the facts of each case.
10. In Goel Bros, and Co. Pvt. Ltd.'s case, 1979 Mh. L.J. 607 :
(1980) 50 Comp Cases 356 (Bom.), another Single Judge of this Court, Agarwal, J. held that after the creditor establishes that the debt is clear, valid in law, unimpeachable and indisputable, the creditor is entitled to a winding up order ex debito justitiae. But if the debt is disputed and the dispute is bona fide and genuine, no winding up order can be made. He clarified that neglect to pay is not equivalent to omission to pay for it requires that such omission is without reasonable cause or valid excuse.
11. Applying now, the law as above, to the case in hand, can it be said that the defence raised by the company is legitimate and the debt of company is bona fide disputed. In the instant case, the Company's case is that the total amount of more than Rupees Two crores is payable by the company. It is true that there is some dispute about the claim of enhanced lease rentals on account of disallowance of claim of depreciation by the Income Tax department. There is, however, absolutely no dispute for the outstanding lease rentals which are in the range of nearly Rupees Thirty Lakhs. The terms of agreement are also very clear and in case of default, the company is liable to pay the service charges. When a part of claim made by the creditor is seriously disputed but the remaining portion is prima facie appear to exceed the limit of Rs. 500/- indicated in section 434 of the Act, it would be unjust to refuse wind up order on the ground that there is dispute as to precise amount owned.In re Tweeds Garages Ltd., (1962) 1 Ch. 406: it was clearly held that it would be unjust to refuse a winding up order to the petitioner who has admittedly owned moneys which have not been paid merely because there is a dispute as to the precise amount owning. Almost Pg 48 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx to the same effect are the observations in Cardiff Preserved Coal and Coke Co. v. Norton, (1867) 2 Ch. App. 405.
12. The learned single judge of Calcutta High Court in Ofu Lynx Ltd. v. Simon Carves India Ltd., (1971) 41 Comp Cas 174 has observed:
"I, therefore, hold that a notice under section 434 of the Companies Act, 1956, will not be rendered invalid only because of the fact that the amount of debt mentioned in the notice may not be exactly correct amount of the debt due, provided the amount mentioned in the notice includes debt due and exceeds sum of Rs. 500/-."
13. The Judgment of single judge of Calcutta High Court has been cited with approval by the Division Bench of this Court in Pfizer Ltd. v. Usan Laboratories P. Ltd., 1985 Mh. L.J. 554 : 1985 (57) Comp Cas 236. Therefore, merely because a part of the claim was disputed by the company, the defence cannot be said to be legitimate and bona fide."
(emphasis supplied)
29. In view of this clear enunciation of the law, I find that the argument made by Mr Cama is misconceived. As stated earlier, even if one goes by the US Dollar rates as given by Mr. Cama, (which range from approximately Rs.53 to Rs.56 per US Dollar) huge amounts would be payable by the Respondent Company to the Petitioner which would entitle them to an order of admission of this Company Petition.
In this view of the matter, I find no merit in this submission.
30. The last contention canvassed by Mr Cama was that the Deal Confirmation that was duly stamped was not signed by the Pg 49 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx Respondent Company but the signature of the authorised signatories of the Respondent company can be found only on the duplicate of the Deal confirmation which was not duly stamped. In other words, it was the case of Mr Cama that there is a variance between the two Deal Confirmations and which would give rise to a bonafide dispute and hence a bonafide defence to the winding up petition.
31. To my mind, this argument is made only to be rejected. I have carefully gone through the deal confirmation annexed at Exh.'K' to the Petition (page 84 of the paper-book) as well as Exh.'F' to the affidavit in rejoinder dated 24 March, 2014 (page 246 of the paper-
book). Both the aforesaid documents are one and the same deal confirmation and are identical in its terms. The only difference between the two is that the duplicate of this deal confirmation has been signed by the Respondent - Company (through its authorised signatories) whereas the stamped deal confirmation is unsigned by the Respondent Company. Reading these two documents together, I find absolutely no merit in the submission of Mr Cama that there is any variance between the two documents. In any event, this defence is taken for the first time in this Company Petition and was never raised by the Respondent Company at the time when it disputed its liability on the expiry of the relevant options under the Deal Pg 50 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx Confirmation dated 26 June, 2008. I therefore find that this defence is neither in good faith nor bonafide which would persuade me to dismiss this Company Petition on this ground. If in fact, it was the case of the Respondent Company that it was not a signatory to the Deal Confirmation which in turn did not give rise to any liability, such a fundamental defence would have been taken up by the Respondent Company at the very first instance and would not find place for the first time only in the affidavit in reply filed to contest the contentions raised by the petitioner Bank. This being the position, I unhesitatingly reject this argument.
32. For all the aforesaid reasons, I find that there is no bonafide defence that has been raised by the Respondent Company.
The liability incurred by the Respondent Company to the Petitioner -
Bank is on the basis of a written contract (the Deal Confirmation) entered into between them which the Respondent Company has, without sufficient cause, failed to honour. The liabilities are far in excess of an amount of Rs.500/- as contemplated under section 434(1)(a) of the Companies Act, 1956. This, to my mind, would entitle the Petitioner to seek an order of admission of this Company Petition. In these circumstances, the following order is passed :-
Pg 51 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 ::: HDFC BANK CP320 OF 2013.docx
(i) The Company Petition is admitted and made returnable on 3rd October, 2016.
(ii) The admission of this Company Petition shall be advertised in two local newspapers viz. (i) Free Press Journal (in English) and (ii) Navshakti (in Marathi) as also in (iii) Maharashtra Government Gazette. Any delay in publication of the advertisement in the Maharashtra Government Gazette and any resultant inadequacy of notice shall not invalidate such advertisement or notice and shall not constitute non-compliance with this direction or with the Companies (Court) Rules, 1959.
(iii) The Petitioner shall, on or before 27th August, 2016 deposit a sum of Rs.10,000/- towards publication charges with the Prothonotary and Sr. Master of this Court, under intimation to the Company Registrar, failing which the Petition shall stand dismissed for non-prosecution without further reference to the Court. After the advertisements are issued, the balance, if any, shall be refunded to the Petitioner.
( B. P. COLABAWALLA J. ) Pg 52 of 52 ::: Uploaded on - 19/07/2016 ::: Downloaded on - 19/07/2016 23:59:17 :::