Delhi High Court
International Caterers Pvt. Ltd. And ... vs Manor Hotel Pvt. Ltd. on 12 July, 2005
Equivalent citations: IV(2005)BC587, 122(2005)DLT20, [2007]79SCL234(DELHI)
Author: A.K. Sikri
Bench: A.K. Sikri
JUDGMENT A.K. Sikri, J.
1. These two petitions seek winding up of the same respondent company, namely, M/s Manor Hotel Pvt.Ltd.. CP No.107/2004 is filed by M/s International Caterers Pvt.Ltd. under Section 433(e) & (f) as well as Section 434 read with Section 439 of the Companies Act, 1956 (for short `the Act'). It is filed through Mr.Manmohan Singh, its authorized signatory and the petition is primarily founded on the allegation that the respondent company (hereinafter referred to as `the company) is indebted to the petitioner in the sum of Rs. 2,43,69,510/-, besides interest and it be deemed that the company is unable to pay the same.
2. CP No.110/2004 is filed by Mr.Manmohan Singh in his personal capacity seeking winding up of the company under Section 433(f) read with Section 439 of the Act on the ground that it is just and equitable, in the facts of this case, to wind up the company. He is a shareholder and director of the company and the case sought to be made out in this petition is that there is a complete deadlock in the functioning of the company which would justify its winding up.
3. A brief narration of the background facts leading to filing of the two petitions (which have large amount of commonality) as distilled from the petitions would be necessary to understand the controversy involved.
4. M/s TCG Developments (I) Pvt.Ltd. (arrayed as the respondent No.2 in CP No.110/2004) (hereinafter referred to as `TCG') entered into a Joint Venture Agreement (JVA) with Mr.Manmohan Singh. The object was to incorporate the company for running a hotel business. In fact Mr.Manmohan Singh is the owner of the property bearing No. 77, Friends Colony, New Delhi and the aspiration behind incorporation of the company was to run a hotel in the aforesaid premises of Mr.Manmohan Singh. The JVA also envisaged development of apartments on Plot bearing No.76, Friends Colony, New Delhi, another property owned by Mr.Manmohan Singh. This is stated in clause 2.3 of JVA.
5. The authorized capital of the company was to be Rs.10 lacs consisting of 1,00,000 equity shares of Rs.10/- each. As per the JVA dated 1st March, 1999, the shareholding of Mr.Manmohan Singh in the company was to be 40% and that of TCG, 60%. However, notwithstanding this differential in the extent of shareholding held by the two parties, it was agreed that they would have equal number of directors with equal voting rights and it was to be achieved by making 20% shares held by TCG as non-voting shares(Clauses 3.2 & 3.3 of JVA).
6. Clause 3.6 of the JVA provided the manner in which the capital requirements of undertaking the aforesaid venture were to be met. Cost in developing, designing, constructing the property to commercial operation was expected at Rs.4 crores and it was agreed that in addition to initial paid up capital, it would be the responsibility of TCG to arrange necessary funds required for this purpose. TCG was however, given liberty to bring an additional investor for providing this fund (Clause 3.6).
It is a different matter, though, that no third party has been involved till date for bringing the funds.
7. On the expiry of the term of JVA, TCG was to sell its entire shareholding, at par value, to Mr. Manmohan Singh and to facilitate this process, Clause 3.8 provided the following modus:
"3. 8 Sale of Shares It is hereby agreed that within thirty (30) days of the allotment of shares to the Parties, TCG shareholders shall enter into an agreement to sell with MMS to sell the entire shareholding at the par values, upon the expiry of the Term. In the event during the subsistence of this Agreement, the Shareholding of TCG is Transferred to an Affiliate. TCG shall ensure that such Affiliate also executes an agreement to sell with MMS, in respect of all, or a portion of Shareholding which is Transferred to such Affiliates. "
8. Article 9 which is the soul of the entire JVA, provides for Roles, Responsibilities and Obligations of both the parties in the following manner :
"ARTICLE 9 ROLES, RESPONSIBILTIES AND OBLIGATIONS:
9.1 MMS shall provide the Premises `A' and Premises `B' to the Company in terms of the lease deeds as contemplated in Schedule III & IV.
(b) International Caterers Pvt.Limited, a company nominated and controlled by MMS shall provide consultancy services to the Company, in respect of renovation, refurbishment, and its effective management. For providing the said consultancy services International Caterers Pvt.Ltd. will be paid a sum of Rs.5.4 lakhs per month, which sum shall be increased @ 5% every year in terms of SCHEDULE VI hereof. It is hereby agreed that the payments in terms hereof shall commence on April 1, 1998, or after the possession of Premises A has been handed over to the Company, whichever is later. The possession in respect of the residential house currently occupied by MMS which shall be handed over at a later date.
(c) MMS shall be entitled to retain, free of cost, one unit in Premises B for his personal use, as further described in Schedule V attached hereto, upon completion of construction of the apartments.
9.2 TCG
(a) TCG shall act as a co-developer and the renovation and refurbishment manager with respect to the Venture and shall be responsible for all designs, construction and marketing with respect to the joint venture, in consultation with MMS.
(b) TCG will take steps to arrange necessary financing, either by way of its own contribution or by third party debts including from financial institutions or other persons.
(c) In lieu of the development and management services provided by TCG, TCG will be paid a fee equal to the sum of five percent (5%) of the Total Venture Cost. In addition, an incentive fee of 1% of the gross revenues of the joint venture company would be payable to TCG.
(d) TCG shall also be paid a maximum lumpsum fee of twelve percent (12%) of the actual cost of construction, furnishing, fixtures for all designs, engineering and specialized design, consultancy. TCG would provide adequate supports in respect thereof. The actual sums payable would be determined, based on the cost estimates as provided to and finalised amongst the Parties. Such payments may be made either to TCG or directly to consultants, sub-contractors or engineers as nominated by TCG, from time to time.
(e) TCG or any of its designated Affiliates shall be responsible for the operation and management of the Venture, for the term of this Agreement. In this regard, TCG or its Affiliate shall be paid a management fee of four per cent (4%) of the gross revenues of the Company.
(f) TCG shall also provide consultancy services to the Company for which TCG shall be paid Rs. 8.25 lakhs per month as consultancy fees in terms of Schedule VII hereof, provided, however, that this consultancy fee shall become due and payable only when the Company makes a profit, after having paid to International Caterers Pvt.Ltd.in terms of 9.1 (b) above.
(g) It shall be responsibility of TCG to ensure adequate cash flows in the Company to ensure payments to International Caterers Pvt.Ltd.in terms of Article 9.1(b)
(h) It is hereby agreed that MMS and TCG shall make all reasonable efforts to obtain necessary Governmental Approvals for carrying out development activities on Premises B. However, in the event the Governmental Approvals are not obtained within six (6) months hereof, the Terms of this Agreement would be extended by six (6) months. However, if the Approvals are not obtained within eighteen (18) months hereby TCG, in its sole discretion, may intimate MMS of its inability to carry out any further activities on Premises B. Thereafter, TCG shall always have the right to first refusal with respect to any developments on Premises B, during the Term of this Agreement.
(i) TCG shall be entitled to retain, free of cost, one unit in Premises B, as further described in Schedule V attached hereto upon completion of construction of the apartments.
9. JVA also provided that Mr.Manmohan Singh through its company M/s International Caterers Pvt.Ltd.(IPCL) [petitioner in CP No.107/2004) would provide consultancy services to the company in respect of the renovation, refurbishment and its effective management and in consideration thereof IPCL was to get remuneration of Rs.5.4 lacs per month with an increase at the rate of 5% every year in terms of schedule VI to JVA. These payments were to commence from 1st March, 1998 or after handing over the possession in respect of 77, Friends Colony, New Delhi, whichever is later. On the other hand, TCG was to act as co-developer and the renovation and refurbishment manager with respect to the venture. It was responsible for all designs, construction and marketing with respect to venture in consultation with Mr.Manmohan Singh. In lieu of the development and management services provided by TCG, it was to be paid paid a fee equal to sum of Rs.5% of the total Venture cost. In addition, an incentive fee of 1% of the gross revenues of the company was also payable to TCG. TCG was also to get a maximum lumpsum fee of 12% of the actual cost of construction, furnishing, fixtures for all designs, engineering and specialized design consultancy. TCG was also responsible for the operation and management of the venture for which it was to get management fee of 4% of the gross revenue of the company. TCG was to provide consultancy services to the company as well and consultancy fee of Rs.8.25 lacs per month was payable to it in terms of Schedule VII of JVA. However, payment of this consultancy fee was contingent upon the company earning a profit, and having surplus after making payment to the IPCL of its consultancy fee. It was also the responsibility of TCG to ensure adequate cash flow in the company to ensure consultancy fee to IPCL and in the event of shortfall TCG was under obligation to make contribution by way of interest free loans to the company so as to enable the payments to IPCL.
10. Article 4 provides for Corporate Governance and delineates the extent of say of both the parties in the governance of the company. It gives equal right to both the parties in the management of the company in the official meetings of the shareholders. The quorum provided is `two shareholders or their legal proxies such that at least one representative each of TCG and MMS is personally present. "(MMS refers to Mr.Manmohan Singh). It is also provided that if at least one representative of each TCG and Mr.Manmohan Singh does not attend a meeting then those attending shall adjourn the meeting to a later date and time. Similarly, equal representation is provided vide clause 4.3, to both the parties. Chairman is to be appointed by rotation amongst the parties for a period of one year. However, the Chairman is not given any second or casting vote. The quorum for any meeting of the Board of Directors is at least two directors provided that there shall be no quorum for any meeting of the Board unless one director nominated by each group is present. For transacting business in the meeting of the Board, it is further specifically provided that for any decision, the affirmative vote of at least one director nominated by each party would be required.
11. On the understanding recorded in the JVA, the two parties got the company incorporated with the name M/s Manor Hotels Private Limited. In the Articles of Association of this company, the arrangement provided in the JVA was taken care of by inserting necessary provisions to give effect thereto. The renovation and refurbishment of property at 77, Friends Colony, New Delhi was undertaken and the company started running a hotel therein. Likewise, property at 76, Friends Colony , New Delhi was also developed. Possession of these properties was given by Mr.Manmohan Singh to the company. However, it appears that the company could not run the hotel venture with any success. ICPL was paid its consultancy fee sporadically, in tits and bits, and full amount on regular basis in accordance with the JVA could not be paid to it. This became a sour point in the relationship between the parties and ICPL demanded the payment of consultancy fee which, as per its version, had become due to it. Sometime in the year 2003, the company entered into a contract with Guardian International Pvt.Limited (hereinafter referred to as `Guardian') under which it allowed the Guardian to run and manage the hotel at 77, Friends Colony, New Delhi and also allowed to occupy the said premises. This also offended Mr.Manmohan Singh as, according to him, it was done illegally and without his consent. He asked for holding of the Board meeting but no solution could be found. According to Mr.Manmohan Singh, it resulted in deadlock and he terminated JVA on 31st October, 2003. Thereafter, these two petitions are filed seeking winding up of the company.
12. After stating the case of the petitioners in general terms, let me now state the averments made in each of the petition specific to the grounds on which these are founded:
CP No. 107 of 200413. As noted above, Schedule VI of the JVA dated 1st March, 1998 the ICPL was to be paid, in consideration of providing consultancy services, fee of Rs. 5,40,000/- per month which was to be increased at the rate of 5% every year. For the first year of contractual relationship i.e. for the period June, 1998 to May, 1999 the company tendered to ICPL a sum of Rs. 52,95,615/- against its liability of Rs.67,61,000/-. According to the petitioner/ICPL , the company's explanation for the shortfall in making the aforesaid payment was paucity of supply of adequate funds from TCG which, however, assured the petitioner that the shortfall would be made good as soon as the requisite funds were made available by TCG. After adding 5% annual escalation in the consultancy charges, the consultancy fee was payable as under:
With effect from Amount (Rs)
01.06.1999 5,67,000/-
01.06.2000 5,93,350/-
01.06.2001 6,25,117.50/-
01.06.2002 6,56,373.30/-
01.06.2003 6,89,192/-
14. Payment were not made every month in the manner stipulated in the JVA but random and irregular payments were made and the amounts payable being treated as running account between the parties. The petitioner has given the statement as Schedule A as per which amount outstanding as on the date of filing of the petition is Rs.3,39,41,236/-. Mr.Manmohan Singh sent a notice of default dated 30th October, 2002 under Article 8 of the JVA to TCG. Thereafter, he requisitioned a meeting of the Board of Directors for 25th November, 2002 and the agenda of the said meeting specifically provided for consideration of the notice of default sent by him. The said meeting was postponed to 26th November, 2002. In the meeting held on 26th November, 2002, Mr.S.Chander of TCG admitted the liability and stated that he was confident that it would be able to make up the shortfall. However, that turned out to be an empty assurance. Accordingly, the petitioner was forced to send a statutory notice dated 4th June, 2003 under Section 434 of the Act calling upon the company to pay to the petitioner a sum of Rs.2,43,69,510/- and interest at the rate of 16% per annum thereon for delayed payments within three weeks of the service of the notice. Instead of making the payments, the company sent reply dated 7th July, 2003 denying the right of the petitioner to claim the amount. According to the petitioner, the denial is mala fide and malicious and further events leading to deadlock (which although stated in this petition as well, would be taken note of in CP No.110/2004) would amply demonstrate the inability of the company to pay this debt.
15. On the aforesaid premise, the petitioner avers that the company is unable to pay the debt and it does not have any financial prowess to do so. It is also stated that perusal of the balance sheet would reveal that it is running into enormous cumulative losses of Rs.8,00,35,517.48 paise . Winding up of the company is prayed for on this ground.
CP No. 110 of 200416. The ground mentioned herein is the deadlock. It is stated in the petition that the starting point of mutual distrust was non-payment of consultancy charges to ICPL viz. the company controlled by Mr.Manmohan Singh and in fact the company found it impossible to settle the dues of ICPL in the absence of funds having received from TCG although as per the provisions of the JVA, TCG had agreed to provide the necessary funds to the company. Thus the very purpose of understanding between the parties vitiated. The situation so occurred led the deadlock within the Board. According to the petitioner, sine qua non for the smooth functioning of the company was the co-operation between the petitioner and TCG in view of the shareholding pattern.
Further, the very foundation of the JVA was shaken and rather demolished by the company by entering into an illegal contract with Guardian which was without the approval and consent of Mr.Manmohan Singh and no such agreement could be entered into with Guardian without there being an agreement between both the shareholding groups. Although Mr.Manmohan Singh sent letters dated 27th August, 1st September and 2nd September, 2003 to the members of the Board representing TCG for requisitioning of the meeting with agenda to resolve the issues, the said directors of the company sought to requisition the Board meeting with their own agenda and in the process, deliberately and mala fidely ignoring all the crucial and fundamental issues raised by Mr.Manmohan Singh. They wanted agenda of the meeting to be restricted to actual accounts and audit report of the accounts of the company which also was by force of circumstances as audited accounts of the company were required to be passed and submitted with the Registrar of Companies as per the mandatory requirement of the provisions of the Act. Not only this, the said Directors wanted the venue of the meeting to be Mumbai even when the registered office of the company is in New Delhi and it was an obvious attempt to isolate him in order to arm-twist him into consenting to their terms. Mr.Manmohan Singh, thus, issued an email dated 9th September, 2003 to Mr.S.Chander of TCG voicing his protest against the patently mala fide conduct of the Board members represented by TCG. Finally the meeting took place on 12th September, 2003. Following issues were discussed in the said meeting:
a. Discussion on the functioning of the Joint Venture Dated 01.03.1998 as per its salient features including Article 2, 4 & 9 of the JVA. Confirmation of the Minutes of the Board Meeting held on 26th November, 2002;
b. Detailing in clear and explicit terms of the obligations of TCG with respect to MHPL as per the Joint Venture Agreement;
c. Discussion on the illegality of the Management Agreement executed between M/s Manor Hotel and M/s Guardian International Private Limited dated 16th April, 2003 without the consent and approval of Mr.Manmohan Singh;
d. Discussion on the legality of allowing Guardian International Private Limited, the use and occupation of 77, Friends Colony, New Delhi which was leased only to MHPL and to discuss the steps required to be taken to rectify the illegalities;
e. Discussion on the Note of Demand under Section 433 of the Companies Act, 1956 dated 04.06.2003 issued by International Caterers Private Limited seeking winding-up of MHPL in the event of default and to discuss the response of M/s K.V.Balakrishnana, Advocates, issued on behalf of M/s MHPL.
f. Discussion on the formulation of a Scheme to settle all the dues of International Caterers Private Limited inter alia under the Joint Venture Agreement.
g. Approval of the drawings, as per plans submitted on 29th April, 2002.
h. Discussion on the accounts and the finalization thereof for the period 2002-2003.
17. However, the Board could not arrive at any conclusion and a complete deadlock ensued. This forced Mr.Manmohan Singh to terminate the JVA vide letter dated 31st October, 2003. According to the petitioner, accounts of the year 2003-2004 were never discussed or passed and yet these accounts were unlawfully lodged with the Registrar of Companies regarding which Mr.Manmohan Singh issued a letter dated 26th March, 2004 to the Registrar of Companies bringing to its notice the non-compliance of law by the company. Thereafter the present petition was filed on 1st May, 2004.
18. Highlighting the aforesaid aspects of the pleadings, Mr.Sundaram, learned senior counsel appearing for the petitioners submitted that payment of the consultancy fee was the sine qua non of the JVA. In fact Mr.Manmohan Singh, who owned both the properties, agreed to give those properties to the company for running the Venture and essence of the JVA was to give payments of consultancy fee to Mr.Manmohan Singh and/or his company. He submitted that had the JVA worked well, it would have been to the advantage of both the groups. However, due to the failure of the JVA, as per expectations, only loser is the land owner, namely, Mr.Manomohan Singh. Both of his properties are stuck. He also submitted that reading of clauses 9.1 and 9.2 would clearly suggest that consultancy fee to the ICPL was mandatory in all circumstances and eventualities and this was the minimum return assured to Mr.Manmohan Singh and/or his company. That is why Article 19 also provided that for this purpose even if the company did not have sufficient funds, TCG was under obligation to fill in the deficiency. In contrast, as far as fee payable to TCG is concerned, it was dependent upon the availability of surplus funds with the company. This is so provided in clauses 55 & 56 of the Memorandum and Articles of Association as well and if TCG could not comply with the same and committed default, there is no option but to wind up the company as providing of funds goes to the root of the formation of the company and in the absence thereof the substratum of the company is lost. He submitted that the defense of the company that fee was not payable as the petitioner did not provide any consultancy services was totally sham. Its plea that the hotel could not perform well in the absence of liquor license was a subterfuge and in any case would tantamount to admitting that the company is facing problems in running the hotel. Furthermore, entering into an agreement with Guardian to run the hotel clearly shows incapacity of the JVA to run the said hotel which was the entire basis of the JVA as would be clear from Article 1.1 thereof and it can be safely concluded that the company had lost the substratum. He further submitted that since Mr.Manmohan Singh had not given his consent for entering into agreement with Guardian, to cover this illegality, fabricated board meeting was shown to have been held on 16th April, 2003 wherein purported decision was taken to enter into agreement with Guardian for running the hotel. As per the minutes of the alleged meeting, Mr.Manmohan Singh had attended the meeting while on that date he was not even in India. Even the minutes of the Board meeting dated 12th September, 2003, which Mr.Manmohan Singh attended, were distorted and did not truly reflect the proceedings. Mr.Manmohan Singh pointed out the same immediately vide his letter dated 18th September, 2003. He further submitted that the voting rights of two groups were equal; number of the directors who had to represent on the board of directors of the two groups were to be same; no decision could be taken without the cooperation of other group; quorum of the meetings of the shareholders as well as board of directors provided representation of both the groups and, therefore, no such meeting could take place and no decision could be taken in the absence of other group. Therefore, when differences had arisen between the parties it was situation of complete deadlock. The only defense of the company could be that such a deadlock is created by the petitioner which is not so in the present case. The company is also a loss making company and, therefore, grounds for winding up of the company in both the petitions were made out.
19. The case of the company is that as per the JVA the role of the TCG was to renovate and refurbish the hotel which was already in existence. As TCG was having expertise in the same, this obligation was duly discharged by TCG by providing necessary funds. Further as per the Article 3.6 of the JVA a sum of Rs.4 crores was to be brought by TCG and even this fund was provided. However, TCG is not having any expertise in running a hotel as it is not hotelier. Therefore, the consultancy services for this purpose were to be provided by Mr.Manmohan Singh and/or his company, IPCL. The JVA stipulated long term arrangement as it was not expected to get immediate return. However, IPCL failed to provide consultancy services and, therefore, it was not entitled to the consultancy fee. Mr.Rajiv Sawhney, learned senior counsel appearing for the company as well as TCG argued that there was not even an averment in the petitions that such consultancy services were provided and, therefore, IPCL did not become entitled to any consultancy fee for not providing the services. He further submitted that whatever consultancy services were provided, invoices therefore were raised which were duly paid. For the amount now claimed, no invoices were raised obviously, as even IPCL knew that no more payments were due. Further, no such outstanding payment is reflected in the books of accounts of the company although Mr.Manmohan Singh is also the signatory to the balance sheet of the company. He also submitted that false plea of `running account' is introduced. No such running account was maintained and the payments were made on the basis of bills raised. Otherwise most of the claims were time barred and not payable even on this ground. He also submitted that all the allegations in CP No.107/2004 were against the TCG but no averments are made that services were provided, bills raised and, consequently the amount became payable. It is also submitted that in any case whether consultancy services were provided and if provided, the same were to the satisfaction of the company were the disputes between the parties and these disputes had to be settled first before IPCL could lay claim for the purported balance payment of consultancy services as demanded in the petitions. He also pointed out that Article 11.1 of the JVA contained an arbitration clause and disputes could be resolved through arbitration as this was an alternate remedy provided which should be availed of first before resorting to winding up of the company as required by Sub-section (2) of Section 443 of the Act.
20. In so far as second petition is concerned, he submitted that since non-payment of consultancy fee was the reason for alleged deadlock, it was a `fabricated deadlock' created by the petitioner just to blackmail the company. He also pointed out that TCG had invested huge amount and even it had to recover its fee as per the JVA. Justifying the agreement of the company with Guardian, his submission was that when the petitioner could not provide consultancy services to run the hotel effectively, both the parties had agreed that Guardian be brought in to manage the hotel which was in fact done at the instance of the petitioner himself. He submitted that meeting dated 16th April, 2003 in fact took place. The petitioner had earlier given no objection and, therefore, the minutes were rightly recorded. The attendance of Mr.Manmohan Singh was shown as is done in such cases taking into account the manner in which such closely held companies function. However, the company had not taken any undue advantage by recording the attendance of Mr.Manmohan Singh. In fact, Mr. Manmohan Singh was trying to take undue advantage. Otherwise he neither challenged genuineness of the meeting dated 16th April, 2003 in his statutory notice nor made any averment in the petitions in this behalf. Additional affidavit dated 18th February, 2005 is filed explaining this aspect in detail. He submitted that even Mr.Manmohan Singh wanted the hotel to be run by Guardian and the whole attempt was to drop TCG and thereafter continue with the arrangement with Guardian for running the hotel. Thus, according to the respondents, therefore, both the petitions were mala fide and should be dismissed.
21. Facts of both the cases are inextricably mixed and interwoven. Therefore, one has to take holistic view of the matter keeping in view the pleadings in both the petitions.
22. It is clear from the JVA, which paved way for the incorporation of the company, that the basis was a partnership between the two groups. Mr.Manmohan Singh, petitioner in one petition, who is also controlling ICPL
23. Petitioner in other petition, is the owner of the properties bearing Nos. 76, 77, Friends Colony, New Delhi. Property at 77 was already run as a hotel. However, it required renovation and refurbishment. Likewise the property at 76 was to have apartments. The genesis of JVA was that Mr.Manmohan Singh shall provide these premises to the company in terms of the lease deed as contemplated in Schedule III and IV of the JVA. Vide Lease Agreement dated 26th May, 1998 property at 77, Friends Colony, New Delhi was demised to the company at a monthly rent of Rs.9,999/-. This property comprised a total area of 3317 sq.yrds. with structure thereon. Obviously, the rent agreed was not the true repository of the of the market rental value of the property in question. Presumably for this reason it was agreed that the company would pay a sum of Rs.5,40,000/- per month to ICPL, a company nominated and controlled by Mr.Manmohan Singh. It was also to be increased by 5% every year. Of course, this payment was in consideration of consultancy services to be provided by ICPL to the company in respect of renovation, refurbishment and its effective management. Renovation and refurbishment of the hotel had been done. TCG was also to provide consultancy services and it was to get Rs.8,25,000/- per month as consultancy fee. The obvious understanding, in respect of this feature in the form of quasi partnership was that the petitioner should be able to get Rs.5,40,000/- per month with progressive increase at the rate of 5% every year and TCG's share was fixed at Rs.8,25,000/- per month. Both were to take part in the effective management by providing consultancy services which was an obvious expectation from both the partners for running the hotel. However, there is a contrasting difference in the manner in which the two parties were to be paid the consultancy fee. The consultancy fee of the petitioner was ensured in all circumstances. Even if the company did not have adequate funds for making payment to the petitioner , responsibility was cast upon TCG to ensure cash flow to enable the company to make payments to ICPL. [Vide Article 9.2 (g)]. On the other hand, consultancy fee to TCG became due and payable only in the event of the company making profits and after making payment of consultancy fee to ICPL. This striking feature cannot be glossed over. Thus, while TCG as partner could get its share only when there were sufficient surplus funds and from out of profits, that too after payment to ICPL, ICPL on the other hand was to get its fee in any event. Irrespective of the company making any profits or not. Rather, TCG had ensured that such a payment to other partner would be made in any eventuality. The basis and intention of this agreement can, therefore, be found in Article 9 Mr.Manmohan Singh agreed to part with two valuable properties and also agreed to enter into JVA only on getting this minimum return. On providing the consultancy service, this payment was insured in all circumstances. No contingency stated in JVA providing for moratorium. It is for this reason the TCG assumed responsibility for making payment even at that time when the company was not possessed of sufficient funds. It almost appears to be the foundation-heart and soul- of the understanding between the parties. Unless this payment part is honoured, it would be insipid arrangement for the petitioner.
24. Judging from this angle, the defense of the company for not payment the consultancy fee does not appear to be bona fide. The company did not address any communication to the petitioner alleging that it was not providing any consultancy services. Furthermore, what is important is that some payments are made from time to time, though for lesser amount. If the consultancy services were not rendered, how and under what circumstances the company was making these payments at lesser rate. Further, even if it is presumed (though denied by the petitioner) that lesser amount was payable, liability to make this payment at lesser rate is not denied. On the contrary, Mr.Vinay Kapoor of TCG had written a letter dated 29th March, 2001 making the following request:
"As per our discussions I appreciate your accepting my request to defer a part of the monthly payments due to you. As agreed, international caterers will invoice Manor Hotel at a lower rate of Rs. 2.62 lacs per month which would be in line with the payment coming in from Piaggio. I can assure you that we are confident of improving our cash flows, once the liquor license issues are fully resolved, at which point we will be in a position to make up the balance and resume payments as per JVA. "
25. In this letter, there is a request to defer part of the monthly payments due to the petitioner. Request is also made to raise the bills at the rate of Rs.2.62 lacs per month for time being and assurance is given that on the improvement of cash flow, once the liquor license is issued, the shortfall would be made up by making balance payment. Assurance is also given that at that time payments of consultancy fee to the petitioner shall be resumed as per JVA. This letter lends credence to the argument of the petitioner that all invoices of lesser amount were raised at the instance of the company as the company was not in a position to pay the agreed monthly consultancy fee at that time. As late as in March, 2001, the company had nowhere stated that ICPL had not provided any consultancy services and, therefore, was not entitled to the fee therefore. Mr.Vinay Kapoor had written another letter dated 26th April, 2001 pointing out that cash flow position had not improved. Therefore, the contention of the company that the invoices were raised only for the services provided and the amount as per these invoices was paid and that no further amount is due, cannot be accepted. Further contention that the amount allegedly payable to the petitioner is not shown as due in the books if accounts of the company is met by the report of M/s Luthra & Luthra, Chartered Accountants and Statutory Auditors of the company. In their letter dated 25th August, 2003 addressed to the Board of Directors they have specifically stated that as per JVA, Rs.1,15,93,325/- has not been provided in the books of accounts on account of consultancy charges payable to ICPL. Out of this, Rs.69,60,763/- relates to the previous years.
26. The defense of the company that even TCG is entitled to the payments would be of no avail and rather would be an indicator that the company is not in a position to make the payments to its creditors. This belief would further be strengthened from the balance sheet which shows accumulated losses of Rs. Rs.8,00,35,517.48 paise . It is trite law that notwithstanding arbitration agreement between the parties, winding up petition is still maintainable and petition relating to winding up cannot be referred to arbitration. [See Haryana Telecom Ltd. Vs. Sterlite Industries (India) Ltd.
27. The company would be entitled to press the existence of arbitration clause as an alternate remedy only when it is established that there is a if bona fide defense. In that case the arbitration would be an efficacious and proper remedy. Where the defense is mala fide and moonshine, arbitrable disputes would not exist in actuality and winding up petition would be maintainable. [See: Prime Century City Development Pvt.Ltd. Vs. Ansal Buildwell Limited I (2003) DLT 445].
28. When a petition seeking winding up on the ground of inability to pay the debt is filed under the provisions of Section 433(e) of the Act, the conditions which are to be kept in mind while dealing with such cases are culled out by this court in the case of NEPC India Ltd. Vs. Indian Airlines Limited reported as in the following manner:
i. If there is a bona fide dispute and the defense is a substantial one, the Court will not wind-up the company.
ii. Where the debt is undisputed the Court will not act upon a defense that the company has the ability to pay the debt but the company chooses not o pay it.
Iii. Where the defense of the company is in good faith and one of substance, and the defense is likely to succeed in point of law, and the company adduces prima facie proof of the facts on which the defense depends, the petition should be rejected.
iv. The Court may consider the wishes of creditors so long as these appear to be justified.
v. The machinery of winding-up should not be allowed to be utilised merely as a means of Realizing its debts.
[For the above propositions see Pradeshiya Industrial and Investment Corporation of Uttar Pradesh v. North India Petro-Chemical Ltd. and Another (1994) 2 Comp. L.J. 50 (SC), in which the observation in Amalgamated Commercial Traders (P) Ltd. v. Krishnaswami (1965) 35 Comp. Cas. 456 (SC) and Madhusudan Gordhandas and Co. v. Madhu Woollen Industries (P) Ltd. (1972) 42 Comp. Cas. 125 (SC), have been paraphrased].
vi.If the stance of the adversaries hangs in balance it is always open to the Company Court to order the respondent company to deposit the disputed amount. This amount may be retained by the Court and be held to the credit of the suit, if any is pending, or likely to be filed in the immediate future. [See Civil Appeal No. 720 of 1999 arising out of SLP Â(c) No. 14096 of 1998--M/s. Nishal Enterprises v. Apte Amalgamations Ltd., decided by the Hon'ble Supreme Court on February 5, 1999].
It appears to me that the following point may be added to the foregoing considerations.
vii.Generally speaking, an admission of debt should be available and/or the defense that has been adopted should appear to the Court not to be dishonest and/or a moonshine, for proceedings to continue. If there is insufficient material in favor of the petitioners, such disputes can be properly adjudicated in a regular civil suit. It is extremely helpful to draw upon the analogy of a summary suit under Order xxxvII of the Code of Civil Procedure. If the Company Court reaches the conclusion that, had it been exercising ordinary original civil jurisdiction it would have granted unconditional leave to defend, it must dismiss the winding-up petition. "
29. Even `just and equitable' ground contained in Section 433(f) of the Act on which second petition is filed appears to have been established. Admittedly, in this case the two groups are having equal say in the management and equal shares having voting rights. If they are not able to along well, situation of deadlock is inevitable. Black's Law Dictionary defines deadlock as under:
"Deadlock, , 1. A state of inaction resulting from opposition or lack of compromise. 2, Corporations. The blocking of corporate action by one or more factions of shareholders or directors who disagree about a significant aspect of corporate policy. "
30. The parties have not been able to resolve the impasse. Moreover, the very raison d'etre of the JVA has evaporated by parting with the management of the hotel to the Guardian. The company itself was formed for the purpose of running the hotel. By handing over the management to the Guardian it has proved its ineffectiveness, nay, incapacity to undertake this Venture. The wedge between the parties grew deeper. Mr.Sundaram would be right in his submission that if the hotel was to be given to a third party, his client could have done so directly and there was no necessity to form a joint venture company for this purpose.
31. At this stage, let me deal with the resolution passed in the Board meeting held on 16th April, 2003. It may be mentioned that when during arguments it was pointed out by the petitioner that minutes of the Board meeting held on 16th April, 2003 are fabricated as Mr.Manmohan Singh, whose attendance is shown in the said meeting was not even in India and the passport in original with copy thereof was produced in support of this plea, Mr.Sawhney had conceded that if that was true it may amount to a serious act of impropriety on the part of the company to file such minutes. He wanted to probe into the matter and, therefore, asked for some time to take instructions. After taking few adjournments, additional affidavit is filed. The company has accepted that Mr.Manmohan Singh did not attend the meeting on 16th April, 2003. In fact the company had no choice in this matter but to accept this position. However, to cover up this illegality, ingenious and contriving explanation has surfaced that since the company was being run on a quasi partnership basis, things were done in a casual manner and that is what happened in the instant case. According to the company, the Guardian was in fact introduced by the petitioner and both the parties agreed that the management of the hotel be given to the Guardian. Even possession was handed over to the Guardian on 1st April, 2003 although documents were prepared later. When such arrangements were done and papers prepared, in order to validate the move, meeting of 16th April, 2003 was shown to have taken place without realizing that Mr.Manmohan Singh was not in town on that date. Otherwise, this move had the blessings of Mr.Manmohan Singh. This explanation is nothing but an afterthought and prevaricated plea of the company to cover up this serious illegality. This calumny in the affidavit is unacceptable. No doubt the company is in the nature of quasi partnership. However, that may be relevant for determining the inter se relationship as well as obligations of the parties. Even when such a company is to conduct its affairs, it has to be in strict compliance with the provisions of the Act. It is unfortunate that there is brazen breach of these provisions. It was necessary to have a genuine meeting and physical presence of directors in the said meeting. Decisions cannot be taken in a casual manner and then given legal hue by pretending the semblance of a meeting. This is not what the good governance should be. It is unfortunate that when serious irregularity of this kind is brought to the notice of the court, such insolent explanation is given though at the same time admitting that no meeting had, at all, taken place and it is expected that the purported decision should be treated as genuine and given stamp of approval by this court. Therefore, it can be concluded, without any hesitation or fear of contradiction, that the Board meeting dated 16th April, 2003 did not take place and what is reflected therein was not the decision of the Board of directors. Otherwise there is no decision of the company to give the hotel to the Guardian for which the agreement has been entered into. Even the events and circumstances which took place immediately thereafter would show that this move of the company or TCG was not palatable to Mr.Manmohan Singh who not only objected to the same but sought to requisition the board meeting to resolve these issues. However, the parties failed to come to any amicable settlement and this resulted in deadlock. In the given scenario, it cannot be said that the petitioner is responsible for this deadlock.
32. It would be of interest to note that as per the agreement with the Guardian, the Guardian has to make the payment of Rs.60 lacs per annum to the company and that would not be sufficient to pay up even the consultancy fee of the petitioner, what to talk of fee payable to TCG. This would also show that substratum of the company has gone. It also cannot be denied that the constituents of the JVA have lost faith in each other. The company has also, in reply to legal notice as well as in reply to the petitions, made tacit admission of deadlock situation. The differences do not show any signs of detente. Therefore, conditions stated in clause (f) of Section 433 are prima facie satisfied.
33. In the case of Seth Mohan Lal and another Vs. Grain Chambers Ltd. and others reported as (1968) 38 Comp.Cas.543, the Supreme Court laid down the parameters which are to be borne in mind while making an order under this provision. It held:
"In making an order for winding up on the ground that it is just and equitable that a company should be wound up, the court will consider the interests of the shareholders as well as of the creditors. Substratum of the company is said to have disappeared when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities. "
34. No doubt, in the case of Hind Overseas P.Ltd. Vs. Raghunath Prasad Jhunjhunwalla and another reported as (1976) 46 Comp.Cas.91, the Supreme Court emphasized that relief under Section 433(f), based on just and equitable clause, is in the nature of a last resort when other remedies are not efficacious enough to protect the general interests of the company and it is not a proper principle to encourage hasty petitions for the winding up of a company without first attempting to sort out the dispute and controversy between the members in the domestic forum in conformity with the Articles of Association. However, at the same time the court accepted that in case the company is based on the principle of quasi partnership, principles of dissolution of partnership shall apply and their application would depend upon facts in a given case recognizing that generally application in a particular case or in all cases creates problems and difficulties. It noted with approval the principles laid down by an English Court In Re. Yenidje Tobacco Company Ltd., reported as (1916) 2 Ch. 426 and other cases where aforesaid judgment is followed, laying down the proposition that in applying the principles of dissolution of partnership to companies, the following factors were important:
(1) equal shareholding.
(2) complete deadlock in the administration of the company.
(3) lack of probity and mismanagement in the conduct of affairs of the company.
35. The court also agreed with the principles laid down by the House of Lords in the case of Ebrahimi Vs. Westbourne Galleries Ltd. (1973) AC 360 wherein after reviewing all the earlier cases it was held as follows:
"The foundation of it all lies in the words `just and equitable' and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.... The Superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements:-
i) an association formed or continued on the basis of a personal relationship, involving mutual confidence- this element will often be found where a pre-existing partnership has been converted into a limited company;
ii) an agreement, or understanding, that all, or some (for there may be 'sleeping' members), of the shareholders shall participate in the conduct of the business;
iii) restriction upon the transfer of the members' interest in the company-so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere. "
36. The court also noted that in Ebrahimi' case (supra), the House of Lords had allowed the petition for winding up bearing in mind the following features:
" (1) There was a prior partnership between the only two members who later on formed the company.
(2) Both the shareholders were directors sharing the profits equally as remuneration and no dividends were declared.
(3) One of the shareholder's son acquired shares from his father and from the second shareholder, Ebrahimi, and joined the company as the third shareholder-director with two hundred shares (one hundred from each).
(4) After that, there was a complete ouster of Ebrahimi from the management by the votes of the other two directors, father and son.
(5) Although Ebrahimi was a partner, Nazar had made it perfectly clear that he did not regard Ebrahimi as a partner but regarded him as an employee in repudiation of Ebrahimi's status as well as of the relationship.
(6) Ebrahimi through ceasing to be a director lost his right to share in the profits through director's remuneration retaining only the chance of receiving dividends as a minority shareholder. "
37. In the present case, facts are more akin to Ebrahimi (supra) than the factual position which prevailed in Hind Overseas P.Ltd.(supra) which influenced the Supreme Court in disagreeing with the Division Bench of the High Court and restoring the judgment of the Single Judge who had dismissed the petition.
38. It may also be of benefit to note that the Calcutta High Court in the case of Modern Furnishers (Interitor Designers) (P) Ltd. In re, and others reported as (1985) 58 Comp.Cas. 858 carried the aforesaid principle further while holding that in case of deadlock it would not of use to invoke provisions under Sections 397 and 398 of the Act before filing the winding up petition. Following observations made in the process are very pertinent:
"If there is a genuine and irreconcilable difference of opinion between petitioner No. 1 and petitioner No. 2 on the one hand and respondents Nos. 2 and 4 on the other, over the management of the company, then the classic position of a deadlock in management has arisen as the shareholding of the two groups are equal. Proceedings under ss. 397 and 398 of the Companies Act cannot be resorted to for solving a genuine deadlock in the absence of any established misfeasance or malfeasance by one group to the prejudice of the other. If the parties have lost all confidence amongst them and it is not possible for them to carry on business jointly or provide for an acceptable management, the only way out seems to be to wind up the company and if necessary in the instant case to dissolve the existing partnership. The assets, if any left, will be available to the parties for distribution.
On the facts of this case, the dispute in the management of the company cannot be solved in the domestic forum inasmuch as the two opposing groups hold equal shares. The court also cannot through its officers continue to manage the company for all times to come. The petitioners have also not been able to make out a case of substantial injustice which can be set right by the court invoking the principles laid down in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp. Cas. 743; . "
39. In the case of O.P.Basra s/o Guari Shanker and others Vs. Kaithal Cotton and Generall Mills Co.Ltd. reported as , the court laid down the tests to find out whether the substratum of the company had been lost. These test can be found in para 6 of the judgment which reads as under:
"The usual tests for determining whether the substratum of the company has disappeared are when (a) the subject-matter of the company is gone, or (b) the object for which it was incorporated has substantially failed, or (c ) it is impossible to carry on the business of the company except at a loss which means that there is no reasonable hope that the object of the trading at a profit can be attained, or (d) the existing and probable assets are insufficient to meet the existing liabilities, vide In re Cine Industries and Recording Co. Ltd. AIR 1942 Bom 231. Failure of any one of these tests is deemed a good ground for winding up of the company. There seems to be no reasonable hope that this company will be able of carrying on its business, for which it was formed, profitably. Looking at the entire history of this concern, I am satisfied that its substratum is gone and it is just and equitable that it should be wound up. "
40. In the case of Nestle S.A.and others Vs. I.D.Kansal and others reported as , this court opined that when there were difference between the parties with regard to very basics as to the management of production in factory of the company and on account of these differences deadlock occurred inasmuch as after agreeing to certain terms on the basis of which amended joint venture agreement was prepared and signed by the petitioner, the respondent declined to sign the agreement, it was proper to wind up the company.
41. Consequently, these petitions are admitted. However, CP No.110/2004 shall be treated as the lead petition. The petitioner in the said petition shall get the citations published in Statesman (English) and Jansatta (Hindi) for 16th September,2005.
CA No.508/2004 in CP No.110/2004 CA No. 488 489 &, 490/2004 in CP No.107/2004
42. The Official Liquidator attached to this court is appointed as the Provisional Liquidator who shall take charge of the assets and records of the company. Since the Guardian is managing the hotel, it shall be allowed to do so, for time being and till further orders, but shall manage the affairs of the hotel under the supervision of the Provisional Liquidator. In case of difficulty, the Provisional Liquidator shall be entitled to approach the court for necessary directions. Guardian shall also deposit the arrears of assured annual amount of Rs.60 lacs with the Provisional Liquidator and continue to deposit the same with him for future period as well. Since the properties belong to Mr.Manmohan Singh and are leased out to the company, it would be open for Mr.Manmohan Singh to file appropriate application seeking possession of these properties and as and when such applications are filed, the same shall be dealt with in accordance with law. The Official Liquidator shall submit his report by the next date of hearing.
43. These applications stand disposed of.