Andhra HC (Pre-Telangana)
M/S.Jayanth Pharma Chem vs M/S.Kekule Pharma Ltd., on 28 January, 2013
Author: Sanjay Kumar
Bench: Sanjay Kumar
THE HON'BLE SRI JUSTICE SANJAY KUMAR COMPANY PETITION NO.93 OF 2012 28-01-2013 M/s.Jayanth Pharma Chem M/s.Kekule Pharma Ltd., <GIST: >HEAD NOTE: Counsel for petitioner: Dr.P.Bhaskara Mohan Counsel for respondent:Sri S.Ravi, learned senior counsel for Sri V.Kishore, learned counsel for respondent. ?CASES REFERRED: 1) (1994) 2 Mah LJ 1715 ORDER:
M/s.Jayanth Pharma Chem, Hyderabad, a registered partnership firm represented by its Managing Partner, Smt.Rambathri Hema, filed this petition under Sections 433(e) & (f), 434(1)(a) and 439 of the Companies Act, 1956 (for brevity, 'the Act of 1956') r/w Rule 95 of the Companies (Court) Rules, 1959, to wind up M/s.Kekule Pharma Ltd., Hyderabad, the respondent company.
It is the case of the petitioner firm that the respondent company entered into a trade contract with it under letter dated 08.04.2010, whereby it agreed to pay 1% on its net turnover (excluding taxes, duties, etc.) towards charges for the services rendered by it to the company. These services allegedly pertained to dealing with trade, import/export of pharmaceutical intermediaries, chemicals and allied products/services. The petitioner firm claims that, pursuant to the letter dated 08.04.2010, it had provided services to the respondent company by procuring raw-materials and selling the products of the company. These services were said to have been provided till 31.03.2011. The respondent company, by letter dated 09.07.2011, terminated the service contract with effect from 01.04.2011. According to the petitioner firm, the letter dated 09.07.2011 demonstrates that the respondent company admitted its liability to pay service charges to it at the rate of 1% on the net turnover from April, 2010 to March, 2011. The petitioner firm alleges that the net turnover of the respondent company for the financial year 2010-11 was Rs.48,24,56,839/- and its servicing charges, at the rate of 1% thereof, came to Rs.48,24,568/-. Out of this amount, a sum of Rs.17,94,000/- was said to have been paid by the respondent company. As per the statement of account produced by the petitioner firm, the respondent company was still due and liable to pay it a sum of Rs.23,11,990.50 ps. as on 31.03.2011, with interest thereon. The petitioner firm issued statutory notice dated 05.12.2011 under Section 434 of the Act of 1956 calling upon the respondent company to pay the said sum within three weeks. Having received the said notice, the respondent company replied under letter dated 18.01.2012 with a counter claim that the petitioner firm was due and liable to pay it the sum of money specified therein. As the respondent company did not pay the amount claimed by it, the petitioner firm filed the present petition seeking its winding up, alleging that it was unable to pay its debts.
Notice before Admission was ordered in the matter on 28.06.2012. Thereupon, Sri V.Kishore, learned counsel, entered appearance for the respondent company and filed a counter. Apart from other aspects raised therein on the merits of the matter, the crucial issue highlighted in the counter is that three out of the four partners of the petitioner firm, viz., Sri R.Muralidhar, Smt.V.Srilakshmi and Dr.K.Sridhar, served as the whole time Technical Director, Finance Director and Executive Director respectively of the respondent company at the relevant point of time. They were stated to have worked for the respondent company in that capacity during the financial year 2010-11. Pertinent to note, the Managing Partner of the petitioner firm, Smt.Rambathri Hema, is the wife of Sri R.Muralidhar, the whole time Technical Director of the respondent company. The respondent company contended that the so-called contract entered into by the petitioner firm and the respondent company, evidenced by the letter dated 08.04.2010, was hit by Section 297 of the Act of 1956, as the consent of the Central Government and the Board of Directors of the respondent company was not obtained prior thereto.
In her reply to this counter, Smt.Rambathri Hema, the Managing Partner of the petitioner firm, did not deny the aforestated facts.
Though Dr.P.Bhaskara Mohan, learned counsel for the petitioner firm, and Sri S.Ravi, learned senior counsel representing Sri V.Kishore, learned counsel for the respondent company, raised several issues touching upon the merits of the case during the course of their arguments, this Court finds it unnecessary to deal with or adjudicate upon the same.
Once it is admitted that at the point of time the so-called contract was entered into by the petitioner firm and the respondent company, three out of the four partners of the petitioner firm were Directors in the respondent company and the fourth partner was a near relative of one of such Directors, Section 297 of the Act of 1956 would come into play. The import of Section 297(1) is that a company cannot enter into a contract for sale, purchase, supply of goods, materials or services with a firm in which a Director or his relative is a partner unless the consent of the Board of Directors of the company is sought prior thereto. The proviso to Section 297(1) further states that in the case of a company having a paid up share capital of not less than Rupees One Crore, no such contract shall be entered into except with the previous approval of the Central Government.
In the present case, the issued, subscribed and paid up share capital of the respondent company was Rs.15,00,00,000/- during the financial year 2010-11, as is evident from its audited balance sheet. Therefore, not only was the prior consent of the Board of Directors required but the previous approval of the Central Government was also mandatory. Admittedly, both these requirements were not complied with in so far as the subject contract is concerned.
Dr.P.Bhaskara Mohan, learned counsel, fairly conceded that the exclusionary clause in Section 297(2) of the Act of 1956 would have no application to the case on hand. Sub-section (3) of Section 297 of the Act of 1956 permits the execution of a contract without obtaining the consent of the Board, for goods, materials or services in excess of value of Rupees Five Thousand but posits that the consent of the Board should be obtained at a meeting within three months of the entering into the contract. Sub-section (4) of Section 297 of the Act of 1956 mandates that the consent of the Board required under the Section shall be by way of a resolution passed at a meeting of the Board and not otherwise. Such consent must therefore be given before the contract is entered into or within three months thereof. Sub-section (5) of Section 297 of the Act of 1956 provides that in the event consent is not accorded under the said Section anything done in pursuance of the contract would be voidable at the option of the Board of Directors of the company.
This being the legal environment, as three out of the four partners of the petitioner firm were the directors of the respondent company and the fourth and last partner was no other than the wife of one such Director, the very status of the contract becomes a preliminary issue. Admittedly, the consent of the Board of Directors of the respondent company was not obtained prior to the entering of the contract and even if Section 297(3) of the Act of 1956 is to be relied on, no consent was obtained from the Board within three months of the entering into the contract. Further, as the paid up share capital of the respondent company is far in excess of Rupees One Crore, the proviso to Section 297(1) of the Act of 1956 would be attracted and the previous approval of the Central Government becomes essential to validate the contract. This being the case, Section 297(5) of the Act of 1956 would not come to the rescue of this contract. Had it been a case of mere failure to obtain the consent of the Board of Directors, the petitioner firm may perhaps have relied upon Section 297(5) of the Act of 1956. But in the light of the application of the proviso to Section 297(1) of the Act of 1956 to the case on hand, the previous approval of the Central Government was mandatory and in the absence thereof, the contract cannot be said to be voidable at the option of the Board of Directors of the respondent company. It is rendered void for want of compliance with the proviso to Section 297(1) of the Act of 1956.
Dr.P.Bhaskara Mohan, learned counsel, contended that failure to obtain the previous approval of the Central Government would not render the contract void. He relied upon Section 629-A of the Act of 1956 and argued that as no specific penalty was provided for non-compliance with the proviso to Section 297(1), the company and every officer of the company in default of such compliance would only be punishable with fine. He contended that the status of the contract would not be adversely affected by the mere fact that previous approval of the Central Government was not obtained and such non-compliance would only entail penal consequences in terms of Section 629-A of the Act of 1956. However, perusal of Section 629-A demonstrates that in cases where such contravention is not penalized elsewhere in the Act of 1956, the contravention of any provision of the Act of 1956 or of any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption has been accorded, given or granted in relation to any matter, the company and every officer of the company who is in default thereof would be punishable with fine. The contravention, be it of any provision of the Act or of any condition, limitation or restriction, which formed the basis of any approval or sanction given or granted in relation to any matter, would constitute an independent offence for which provision is made under Section 629-A, in the event such contravention is not penalized elsewhere in the Act. This provision does not have the effect of wiping out the illegality of the contravening action. It is only supplementary in nature and visits penal consequences on the offender. The explicit language used in Section 297(1) proviso that no such contract as detailed in Section 297(1) 'shall' be entered into except with the previous approval of the Central Government, in the event the paid-up share capital of the company is not less than Rupees One Crore, puts it beyond doubt that a contract executed in violation thereof has no sanctity in the eye of law. This Court is not persuaded to read down the import of the word 'shall' used in Section 297(1) proviso. In consequence, compliance therewith is mandatory.
As such, this Court finds that the subject contract which forms the basis for the claim put forth by the petitioner firm is in violation of the statute. Once the contract itself is rendered illegal, any claim based thereon would also be tainted. The debt claimed by the petitioner firm on the basis of the said contract cannot therefore be said to be a 'legally recoverable debt'. Section 433(e) of the Act of 1956 provides for a company being wound up by the Company Court if it is unable to pay its debts. Debts, in this context, would inevitably mean and constitute 'legally recoverable debts'. Once a debt is rendered unrecoverable owing to its illegal status, Section 433(e) of the Act of 1956 cannot be pressed into service for the winding up of a company on the ground that it did not pay such an illegal and unrecoverable debt.
In this context, reference may be made to the decision of the Bombay High Court in DABHOLKAR ENTERPRISES v. PADMA ALLOY CASTINGS (P) LTD.1. Therein, the Bombay High Court held that in a petition for winding up on the ground that the company had not paid the debt of the petitioner in spite of notice under Section 434 of the Act of 1956, the petitioner must establish that the debt alleged against the company is a debt which is legally recoverable. It was further held that if the remedy of the creditor was barred under any law it would render the debt unrecoverable and the same could not be considered a 'debt' for the purpose of a company petition for winding up under Section 434 of the Act of 1956.
Viewed thus, the very foundation of this company petition stands demolished as the debt claimed by the petitioner firm as due and payable by the respondent company is rendered illegal owing to contravention of the proviso to Section 297(1) of the Act of 1956. The company petition filed for winding up of the respondent company on the basis of such a debt therefore does not warrant consideration by this Court.
The Company Petition is accordingly dismissed. Company Application No.724 of 2012 shall stand dismissed in consequence. In the circumstances, there shall be no order as to costs.
____________________ SANJAY KUMAR, J.
28TH JANUARY, 2013