Jewellery Pvt. Ltd vs M/S. K. A. Malle on 7 February, 2014

[Cites 8, Cited by 0]

Bombay High Court

Jewellery Pvt. Ltd vs M/S. K. A. Malle on 7 February, 2014

1. The petitioner claims that the respondent company, M/s. K A Malle Pharmaceuticals Limited. ("the Company"), is indebted to it the petitioner in the amount of Rs.52,82,59,398/-. It contends that as the Company has neglected to pay this amount without just cause and despite the service of a statutory notice under sections 433 and 434 of the Companies Act, 1956, the Company should be ordered to be wound up.

2. I have heard Mr. Khata, learned counsel for the petitioner and Mr. Sethna, learned senior counsel for the Company at some length. With their assistance I have gone through the record, the petition and the various affidavits filed. Having carefully considered the material and the rival arguments, I am not persuaded that this is a fit case for admission of this winding up petition against the Company. In my view the Company has a substantial and bona fide defence, not 2 of 14 ::: Downloaded on - 13/02/2014 23:13:54 ::: CP21-12-F.DOC one that can be said to be illusory and spurious. Indeed, it is the petition itself that I find to be lacking in bona fides.

3. Mr. Khata's submission is simplicity itself. In August 2008, the Company wanted to purchase gold jewellery from the petitioner. As the volumes being considered were large, the petitioner asked for an advance. The respondent agreed. It made advance payments of Rs.11.5 Crores on different dates. Following this, the petitioner supplied gold jewellery of the value of Rs.48,48,33,643/- to the Company. It raised three invoices dated 5th November 2008, 6th November 2008 and 11th November 2008. The petitioner claims that the Company accepted the deliveries of gold jewellery. There was no dispute about the quality, quantity, weight, rate or demurrage of these jewellery supplies. The invoices required the Company to make payment to the petitioner within 120 days from the date of delivery. The Company paid only Rs.6.20 Crores (Rs.1.50 crores on 11th November 2008, and Rs. 4.70 crores on 17th November 2008); making a total of Rs.17.70 crores inclusive of the Rs.11.5 crores paid earlier. The petitioner claims that the balance of Rs.30,78,33,643/-, though due, was not paid.

4. According to the petitioner, in its letter of 1st April 2009, Exhibit "C" to the petition, the Company admitted its liability. This admission was repeated exactly one year later on 31st March 2010 (Exhibit "E" to the petition) and again on 1st April 2010 (Exhibit-D to the petition).

5. As the Company did not pay the amount, the petitioner issued a statutory notice to the Company by its advocates' letter dated 24th September 2011. The Company received the notice. On 3 of 14 ::: Downloaded on - 13/02/2014 23:13:54 ::: CP21-12-F.DOC 31st October 2011, the Company's advocates replied to the petitioners' advocates. In this letter, the Company denied its liability. The petitioner describes the contents of the Company's reply as frivolous and frivolous. The petitioner's advocates responded, but the Company failed to pay the petitioner's demand. The Company has, the petitioners claim, without just cause, failed and neglected to pay that demand, and the Company is therefore indebted to the petitioner. Having failed to comply with the demand made in the statutory notice without just cause, the Company must be deemed to be unable to pay its debts. It should be ordered to be wound up.

6. Mr. Sethna's response presents a much more complex, and perhaps even sinister, picture of the petitioner's dealing. The response is based on three affidavits. The first is an affidavit in reply dated 4th July 2012. Then there is a voluminous sur-rejoinder dated 3rd December 2012 and, finally, is a further affidavit dated 29th July 2013. The Company claims that it is the victim of systematic fraud perpetrated by a director of the petitioner, one Jayesh Desai, in collusion with some officers of the Maharashtra State Trading Corporation ("MSTC"), and of the Pen Co-operative Urban Bank Limited ("Pen Bank"). The Company's version is this: It claims that in September 2008 it started a business relationship with MSTC. The business model or procedure was that the Company would purchase the gold jewellery locally. It would, in turn, sell these goods to MSTC in India. MSTC would then export the goods to buyers overseas, especially in UAE and Kuwait. However, the transhipment of these goods was the responsibility of the Company. As a result, the Company paid all shipping expenses, including insurance. All shipping documents stood in the name of the 4 of 14 ::: Downloaded on - 13/02/2014 23:13:54 ::: CP21-12-F.DOC Company "on account of MSTC". However, export invoices and bills of exchange were in MSTC's name. MSTC directly negotiated these documents with the foreign buyers' banks. MSTC did business in a similar manner with other entities as well, six in all. All these entities were described as "associates" of MSTC. Two of these entities were owned or controlled by Jayesh Desai, the petitioner's director. One of them is the petitioner itself. Another is named Bond Gems Private Limited. There are today arbitration pending between MSTC and these associates.

7. A very curious circumstance stated by the Company in paragraph 10 of its affidavit in reply and explicitly accepted by Jayesh Desai in the affidavit in rejoinder is that Jayesh Desai was shown as the consignee of all the material exported from India by MSTC to UAE and Kuwait. This was done through the name of one RKM General Trading FZE. This is an entity also controlled by Jayesh Desai. Goods worth about Rs.500 Crores were routed in this manner by MSTC through RKM General Trading FZE, although its creditworthiness was negative. Thus Jayesh Desai not only controlled the petitioner which claimed to supply the gold jewellery locally to the Company, but was also the ultimate consignee after the Company resold the jewellery to MSTC for export.

8. The Company also points out that there is an unexplained delay of more than two years on the part of the petitioner in making its claim. This delay is all the more significant in view of the invoices' condition of payment being required to be made within 120 days. This submission is well-founded. The petitioners' invoices are all dated November 2008. The 120-days' period on those invoices 5 of 14 ::: Downloaded on - 13/02/2014 23:13:54 ::: CP21-12-F.DOC expired in March 2009. The petitioner made no claim till 2011 or even later.

9. The Company's allegations of collusion also cannot be said to be without substance. The circuitous movement and transfer of money and jewellery is ex-facie suspicious. It is under investigation by the CBI. It seems apparent that Jayesh Desai as a consignee never delivered the exported goods to any buyers abroad. The Company contends that Jayesh Desai in fact melted down the gold and sold it in the local markets in Dubai. The allegation is that Jayesh Desai received the proceeds of this illicit sale. The Company's case is that the money due to MSTC and therefore to the Company has thus been diverted to Jayesh Desai or his group, including the petitioner.

10. The petitioner's affidavit in rejoinder, made by very same Jayesh Desai, far from supporting the deceptive simplicity with which the petition is cast, only muddies the waters even further. There is, as I have noted, Jayesh Desai's admission that he was a MSTC's consignee through RKM. General Trading FZE. However, Jayesh Desai claims that it was the Company that had identified the foreign buyers. He claims to have delivered the goods to these buyers. There is, however, no answer to the Company's contentions regarding the investigations by the CBI into the role played by Jayesh Desai, the officers of MSTC and officers of the Pen Bank.

11. In its affidavit in rejoinder, Company amplifies on the case set up in the affidavit in reply. In paragraphs 4(a) to 4(d) of the affidavit in rejoinder the Company claims that an amount of Rs.29.87 Crores (the invoice value in question of about Rs.48 crores less the payments made of Rs.17.70 crores) was transferred at the instance of 6 of 14 ::: Downloaded on - 13/02/2014 23:13:54 ::: CP21-12-F.DOC the petitioner from the Company's Cosmos Bank account to the Company's account with the Pen Bank. The Company claims that it was asked by the petitioners not to actually transfer the amount to the Company's own account (with the Pen Bank), but to leave it with the Pen Bank; i.e., presumably in a suspense account. The reason the Company was asked to do this, it claims, was to assist one Shishir Dharkar and the Pen Bank to tide over some temporary monetary difficulties. Believing that it was in no way prejudiced by this, the Company did not officially ask the Pen Bank to transfer this amount to the Company's own Bank account. In the meantime, investigations by the CBI showed that there was collusion between Jayesh Desai, Shishir Dharkar, one Prem Kumar Sharma of Pen Bank and some officials of MSTC. The amount of Rs.29.87 Crores was thus moved from the Company's Cosmos Bank and was utilised by the Pen Bank. CBI enquiries showed also that the petitioner had substantially recovered the sale proceeds of the jewellery exported by MSTC as Jayesh Desai was the consignee of those exports.

12. There are as many as five separate proceedings between some or all of the various entities involved in these transactions. MSTC has invoked arbitration against the Company. The Company has filed a counter claim. The Company has filed a criminal complaint against the Pen Bank. It has also filed a civil suit for recovery of the amount of Rs.29.87 Crores. The petitioner has filed a summary suit against the Company, and this is pending. There is arbitration between MSTC and the petitioner and this seems to have resulted in an award against the petitioner.

13. The Court's jurisdiction under Sections 433 as and 434 of the Companies Act, 1956 is a summary jurisdiction. It does not lend 7 of 14 ::: Downloaded on - 13/02/2014 23:13:54 ::: CP21-12-F.DOC itself to the minute scrutiny and examination of evidence that is possible in a regular civil proceeding. The Company's defence shows that its alleged liability to the petitioner is very seriously disputed. It claims to have been made the victim of a vast conspiracy and fraud. There is, in my view, considerable merit in this. The petitioner itself is, through one of its principal officers ( Jayesh Desai), involved in these murky and illicit transactions. This is not a simple case of goods sold and delivered, their price unpaid without just cause. This is a story yet unravelling of tangled webs of fraud, deceit, illegality, diversion of funds and exports. Government officials are involved. Criminal investigations continue. It is impossible to hold that the Company has neglected to pay the petitioner's claim without just cause. If the Company is correct in its submission, then it is very clearly the victim of a very well thought out fraud and conspiracy.

14. Indeed, this is a petition that ought never to have been filed. What it reveals is merely interesting; what it conceals is vital. It is only in affidavits filed much later that the petitioner accepts, while attempting a further concealment, some of what the Company says in its reply. This includes the material factor of the petitioner's own Jayesh Desai being intimately involved in the export transactions. Now this was two steps removed from the Company's dealings. The Company bought jewellery from the petitioner. It sold that jewellery to MSTC for export. Though it had to take care of all the shipping, the Company was not the shipper. The export invoices and bills of exchange were in MSTC's name. The petitioners' director, Jayesh Desai, was the consignee of MSTC's exports. He received all the exports made by MSTC in the name of another company he controlled, RKM General Trading FZE. In other words, the goods 8 of 14 ::: Downloaded on - 13/02/2014 23:13:54 ::: CP21-12-F.DOC sold by the petitioner -- of which Jayesh Desai is a director -- ultimately found themselves in the hands of RKM General Trading, an entity that is also, on his own admission, controlled by Jayesh Desai. In other cases, the petitioner itself, and its sister concern, Bond Gems Pvt. Ltd., were directly involved in the routing of gold jewellery through MSTC to Jayesh Desai at RKM General Trading. The total value of the petitioners' invoices is about Rs.48 crores. Of this, part payment has been made of Rs.17.70 crores. The remaining amount, or a substantial part of it, Rs.29.87 crores was diverted to the Pen Bank, and here again there is the involvement of Jayesh Desai, officers of MSTC and of the Pen Bank. The transfer of Rs.29.87 crores was made on 6th December 2008 at the instance of the petitioner. The petitioner is credited with the payment of this amount in the Company's books. On these facts, it is impossible to hold that the Company is indebted to the petitioner in an undisputed amount, or that it has withheld payment without just or sufficient cause. The Company's defence is not illusory. It is not specious, spurious or speculative. It is substantial.

15. For these reasons, I am unable to accept Mr. Khata's submissions. He relied on the decision of the Supreme Court in Svenska Handelsbanken v M/s Indian Charge Chrome & Ors.1 to contend that it is not open to this Court to look into any material other than the invoices, and that there is no material to support the Company's allegations of fraud; these are, Mr. Khata said, only unsubstantiated allegations. I do not believe Mr. Khata is correct in this submission. Svenska is a decision in the context of an application for an injunction against the invocation of a bank guarantee, not in winding up proceedings. The Supreme Court 1 (1994) 1 SCC 502 9 of 14 ::: Downloaded on - 13/02/2014 23:13:54 ::: CP21-12-F.DOC found that the High Court did not notice the clear findings of the trial court, but arrived at a conclusion against the 4th defendant in that case only on a reading of the plaint. The present case is very different, and very different considerations apply. This is not a civil suit. It is not a case where there is no material on record other than the invoices. There are admissions by the petitioner itself regarding the involvement of its director, Jayesh Desai. There is material to show that criminal investigations have been launched into the very same transactions. This is a case where the contention of the Company is that it has, from the start, been systematically defrauded.

16. Mr. Khata contended that the filing of a civil suit and the pendency of arbitral proceedings are matters wholly irrelevant to this petition. Where the company has not complied with a demand made in the statutory notice, it must be deemed to be unable to pay its debts. That is a submission that is only partly correct. Where the Company has a bona fide defence and denies its liability, it cannot be said to be indebted to the petitioner at all, and no question of its neglect to pay arises. Mr. Sethna also does not suggest the petition be dismissed merely because a civil suit has filed. His contention is that there are issues here that cannot be possibly be decided in a summary jurisdiction. They demand that evidence be taken. Much of this, Mr. Sethna claims, and, in my view rightly, is already the subject matter of multiple parallel investigations. There is no reason why the Company Court should, in exercise of summary jurisdiction prefer an approach that completely overlooks the enquiries and investigations being carried out in parallel elsewhere. The fact that a summary enquiry does not permit a microscopic scrutiny does not mean that it requires no scrutiny at all. It requires an overall 10 of 14 ::: Downloaded on - 13/02/2014 23:13:54 ::: CP21-12-F.DOC assessment of all factors. It cannot be in the kind of blinkered, isolated fashion that Mr. Khata seems to suggest. At its simplest, Mr. Sethna's case is this: the jewellery his clients bought from the petitioner seems to have been diverted. It -- or, at any rate, its value

-- seems to have found its way by means circuitous, clandestine and suspicious, though not known with certainty, into the hands of the petitioners' director, Jayesh Desai, and possibly the petitioner itself.

A very substantial amount of the Company's funds seem also to have been diverted, and again at the instance of the petitioner, to another entity (the Pen Bank), with which the petitioner/Jayesh Desai had dealings. The amount so diverted corresponds too exactly with the petitioners' present claim to be mere coincidence or sheer happenstance. Criminal investigations have been launched. Viewed from any perspective, it is not, I think, possible to consign this formulation of the defence to oblivion as Mr. Khata would have me do.

17. Two judgments relied on by Mr. Khata in Karpara Project Engineering v Ballarpur Industries Ltd. 2 and IBA Health India Pvt. Ltd. v Info-Drive Systems Sdn.Bhd.3 are, in my view, against him. In Ballarpur, a learned single Judge of this Court set out at length the principles enunciated by the Supreme Court in relation to Sections 433 and 434 of the Companies Act, 1956 in Mediquip Systems Pvt. Ltd. v Proxima Medical System GmBH.4 There, the Supreme Court cited with approval the decision of this Court in Softsule (P) Ltd.5 A fundamental principle set out in these decisions militates against the acceptance of Mr. Khata's case. Where there is a bona fide dispute, 2 2008 (Supp) Bom.C.R. 39 3 (2010) 10 SCC 553 4 (2005) 7 SCC 42 5 [1977] 47 Com Cas 438 11 of 14 ::: Downloaded on - 13/02/2014 23:13:54 ::: CP21-12-F.DOC there cannot be a "neglect to pay" within the meaning of Section 434(1)(a) read with Section 433(e). A winding up on the ground that the company is unable to pay its debts is, in such cases, unjustified.

18. It is not accident that Mr. Sethna has, too, relied on the decision in IBA Health India. Whether the defence of the Company is prima-facie bona fide, substantial and cannot be said to be specious or spurious, nor intended to deceive genuine creditor, a winding up petition ought not to be entertained. Mr. Sethna is also, in my view, justified in relying on the recent decision of Gupte J, in Summons for Judgment No.314 of 2012 in Summary Suit No. 1201 of 2012.

That is a very recent decision of 21st January 2014 between the petitioner and one Ushma Jewellery Private Limited. Ushma Jewellery was yet another of MSTC's associates. In that order Gupte, J. categorically held that serious triable issues arise, and granted unconditional leave to defend.

19. Mr. Sethna also relied on the Supreme Court decision in Mediquip. He is justified in his contention that jurisdiction of Company Court under Section 433 is discretionary. The debt claimed under Section 433 must be determined or definite. A winding up petition is not a legitimate mode of debt recovery. Where there is a bona fide dispute, there cannot be a neglect to pay. The other decisions cited by Mr. Sethna are all to the same effect; I do not think it is necessary to discuss each one. 6 6 IBA Health India, supra; Asim Pharmachem Industries v Nilsin Ultrachem Ltd., [2013] 176 Com Cas 460 (Guj); M/s Shubham Constructions v M/s MVD Auto Components Pvt. Ltd. & Anr., Company Petition No.322 of 2012 (Delhi High Court), decided on 13th September 2013, MANU/DE/3182/2013; Reliance Infocomm Ltd & Anr. v Sheetal Refineries P. Ltd., [2008] 142 Com Cas (AP) 12 of 14 ::: Downloaded on - 13/02/2014 23:13:54 ::: CP21-12-F.DOC

20. I do not believe that the petitioner can be said to have established the Company's liability to it in the amount claimed. The suppressions in the petition are many, and they are critical. It is only in the rejoinder that some sort of an explanation is offered. To my mind, there are two determinative factors. The first is the petitioner's acceptance of the Company's averment that Jayesh Desai or an entity he substantially controls was MSTC's consignee and that this resulted in a circular routing of money and goods. The second aspect is the Company's case regarding the transmission of funds to the Pen Bank. In the further affidavit dated 29th July 2013, the Company has set in copious details how these transactions were effected. Again, there is no cogent answer from the petitioner. Then there is a matter of the petitioner's extraordinary delay in making its claim, despite its contention that its invoices were payable no later than within 120 days. Finally, there is a matter of the enquiries and investigations by the CBI. I do not suggest that these investigations are necessarily proved or will result in a conviction. Yet, they are powerful indicators that there is much more to the petition than met the eye. For these reasons, it is not possible to accept Mr. Khata's submission. The petition must be dismissed.

21. What remains is the question of costs. The conduct of the petitioner and in particular of its director Jayesh Desai leaves much to be desired. Neither has been candid with the Court. Vital material has been kept out of the petition. The petitioners are themselves involved in one capacity or another in multiple litigations relating to substantially the same subject matter. They have concealed the fact that Jayesh Desai was personally involved at different stages in the transactions in question, raising serious doubts about the petitioners' bona fides. It seems to me clear that this petition is an 13 of 14 ::: Downloaded on - 13/02/2014 23:13:54 ::: CP21-12-F.DOC example of a party taking its chances with the Court. That should never be permitted. This is not a case of a defence being found to be specious, illusory, spurious or speculative. Those are descriptions apt of the petition, not the defence. The Company Court should not be allowed to be misled in an action that, in its inception, lacks any semblance of bona fides and carries with it only the fetidness of mala fides, deceit and duplicity. In such a case, the petition must meet its nemesis not only in a mere dismissal. That would be to permit such a petitioner to leave without suffering any consequences for having brought such an action in the first place. That cannot be permitted.

The failure of this petition is inevitable. But it must be accompanied by consequences that are both real and palpable. Received wisdom tells us that Court should be gentle in the award of costs. Indeed they should, when a party earns that clemency. It is not in every case that costs are awarded, and fewer still where the costs imposed are significant. But where the amounts are as high as they are here, where mendacity is writ large in the petition itself, there is no room for leniency.

22. The petition is, therefore, dismissed with costs quantified at Rs. seven lakhs. Costs to be paid on or before 24th February 2014.

Mr. Khata's request for a stay on the order of payment of costs is, given the facts of this case, refused.

23. In view of the order on the Company Petition, Company Application No.535 of 2012, filed by two workmen of the Company, seeking intervention to support the Company, does not survive. The Company Application is dismissed as infructuous.

(G.S. Patel, J.) 14 of 14 ::: Downloaded on - 13/02/2014 23:13:54 :::

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