Punjab-Haryana High Court
Som Nath Jain vs Oswal Agro Mills Limited And Anr. on 7 March, 1996
Equivalent citations: [2000]100COMPCAS105(P&H)
JUDGMENT G.C. Garg, J.
1. This petition under Section 439 read with sections 433 and 434 of the Companies Act, 1956 (for short "the Act"), is by an individual for winding up of Oswal Agro Mills Ltd., respondent No. 1 as it has failed to pay the amount due to the petitioner being unable to pay its debts within the meaning of Section 434 of the Companies Act.
2. Respondent No. 1 is a public limited company incorporated under the Act and registered with the Registrar of Companies, Punjab. The facts giving rise to this petition may, in brief, be noticed. According to the allegations made, the petitioner entered into an agreement with the respondent-company for the purchase of shares and made the payment in the month of May, 1991, which payment is now being denied by the respondents. In a meeting which took place between the petitioner and respondent No. 2, it was agreed that the petitioner would purchase two lakhs equity shares in the company at the rate of Rs. 25 per share. The amount representing the value of two lakhs shares in the sum of Rs. 50 lakhs was to be paid through a demand draft in the name of the company and the shares were to be delivered within one week thereafter. A draft dated May 16, 1991, in the sum of Rs. 50 lakhs drawn on the Jammu and Kashmir Bank, Ludhiana favouring respondent No. 1 was delivered to J. P. Jain with a list of nominees in whose favour the shares were to be issued. A photocopy of the draft is annexure P-1 with the petition. According to the petitioner after repeated requests the respondents delivered one lakh equity shares in August, 1992, of Oswal Agro Mills Limited to the petitioner, though these shares were to be issued within a week of the payment. The petitioner in that behalf suffered a huge loss on account of the non-delivery of equity shares. The company became liable to refund the money on May 23, 1991, itself and the company by not returning the money to the petitioner has become a debtor and the petitioner has become a creditor to the extent of the amount of Rs. 50 lakhs along with interest at the rate of 24 per cent. Even if it be taken that one lakh equity shares of respondent No. 1 were delivered on August 20, 1992, the balance amount with interest remains payable, being an admitted debt. In September, 1993, one lakh shares of Bindal Agro Ltd., were delivered to the petitioner, which shares the petitioner never agreed to purchase. The petitioner agreed to purchase the equity shares of Oswal Agro Mills Ltd., only and as a consequence of the breach of the agreement, respondents became liable to return to the petitioner the entire sum of Rs. 50 lakhs along with interest at 24 per cent, per annum which amount stands duly accounted for in the bank statements and the account books of the company. Since the amount was not being paid by the respondents, the petitioner was compelled to issue notice under sections 433 and 434 of the Act. Notice dated April 19, 1994, is annexure P-3 and annexures P-4 to P-7 are the acknowledgment due receipts with the petition. According to the petitioner, the respondents are liable to pay a sum of more than Rs. 50 lakhs besides damages and interest. In the end, it is averred that the petitioner has now come to know that the respondent-company is unable to carry on its manufacturing function for want of funds and that it has also to pay huge amounts and thus it is unable to pay its debts and is, therefore, liable to be wound up under the provisions of the Act.
3. In response to the notice issued, the respondents put in appearance and have filed a reply. Initially both the respondents filed a joint written statement but later on the said written statement was treated as written statement on behalf of respondent No. 2 only and respondent No. 1 filed a separate written statement.
4. Respondent No. 1 in its written statement has taken a preliminary objection namely that as per the settled law the provisions of the Act could not be used as a tool or instrument for the recovery of debts. By another preliminary objection, it has been pleaded that the petitioner has not approached the court with clean hands. It has been averred that the petitioner himself is liable to pay a sum of Rs. 1,62,00,000 to his creditor namely Diana Properties, a close business associate of respondent No. 1 and the petition has been filed with a view to pressurise respondent No. 1 to exert pressure on Diana Properties to forgo its claim. The petitioner himself negotiated with Diana Properties for the purchase of shares and has not paid the full consideration even after the lapse of three years. Again the petitioner negotiated for the purchase of one lakh equity shares of Bindal Agro Ltd. with Diana Properties. He, therefore, in the process owed a sum of Rs. 1,62,00,000 with interest. The further stand of respondent No, 1 is that no agreement took place between the petitioner and the respondent-company for the sale of shares and any petition based on a contract in violation of law is not enforceable. The petitioner by filing this petition is trying to avoid his liability qua Diana Properties. Respondent No. 1 cannot hold shares and, therefore, it could never contract with the petitioner for the sale of shares and if respondent No. 2 had undertaken to arrange for sale of shares of the company in favour of the petitioner, the claim only lies against respondent No. 2 and not respondent No. 1. Execution of the agreement for the sale of shares on behalf of respondent No. 1 has been denied. It is further the case of respondent No. 1 that in order to cultivate relations with the management of the respondent-company, which has extensive trade and industrial activities, the petitioner agreed to provide an interest free loan to the tune of Rs. 55 lakhs to the respondent-company repayable after ten years and the respondent has not denied to pay the said amount which was provided to it through two drafts, one for Rs. 50 lakhs and the other for Rs. 5 lakhs. On the merits, it is stated that respondent No. 1 could not negotiate for the sale of shares and the petitioner owes a huge amount to Diana Properties on account of the transfer of shares of the respondent-company and the petitioner is trying to avoid the payment to the said company. No document was signed on behalf of respondent No. 1 with the petitioner for the purchase or sale of shares and that J.P. Jain is not an employee or representative of the company and is thus not authorised to take any decision on behalf of the company and that the transaction/dealings, if any, are illegal and void ab initio. The existence of any agreement was denied. It is the further case of respondent No. 1 that the question of payment for the shares and interest free loan are separate and distinct transactions and the petitioner is trying to mislead the court by trying to confuse and merge the two issues and the notice was served by the petitioner with a view to create evidence and to avoid the payment of his liabilities. Respondent No. 1 received a sum of Rs. 55 lakhs from the petitioner as interest free loan and this amount is payable after ten years as agreed. It has been denied that the respondent-company is having a financial crunch.
5. The written statement earlier filed on behalf of the respondents and which was later on treated as written statement on behalf of respondent No. 2 is nothing but a copy of the written statement filed on behalf of respondent No. 1.
6. The petitioner filed separate replications to the written statements of respondent No. 1 and respondent No. 2. By way of replication, it was denied that the petitioner owes an amount of Rs. 1,62,00,000 to Diana Properties and he in order to avoid the payment has resorted to the filing of the present petition. It is reiterated that the amount was advanced to respondents Nos. 1 and 2 who approached the petitioner for the sale of shares at the agreed rate and the amount was paid through a demand draft. The question of cultivating business dealings did not arise and that it is unimaginable that a person would advance an amount of Rs. 55 lakhs for ten years free of interest. The amount was advanced by way of draft. The allegations made by the petitioner in the petition have been reiterated and the corresponding allegations made in the written statement have been denied. It is stated that J.P. Jain was acting for and on behalf of respondent No. 1 and was not acting on his own behalf and it is he who took the draft which was delivered to the respondent-company and thus the respondent-company cannot say that the said J. P. Jain was not authorised. If respondent No. 1 was not to deliver the shares as agreed, there was no occasion for the petitioner to advance such a huge amount and that too, interest free, and for a period of ten years. It is averred that the very fact that two lakh shares, one lakh of respondent No. 1 and one lakh of Bindal Agro Limited had been given to the petitioner after the receipt of Rs. 55 lakhs, goes to show that the amount was paid by the petitioner for the sale of shares. The allegation about the liability of the petitioner towards Diana Properties has been denied. It is further stated that it was beyond imagination that Diana Properties would transfer the shares in favour of the petitioner without receiving any consideration. It obviously means that respondents Nos. 1 and 2 must have directed Diana Properties to transfer the shares in favour of the petitioner and others, as respondent No. 1 had received Rs. 55 lakhs. The replication to the written statement of respondent No. 2 is also in identical terms.
7. From the above pleadings of the parties what clearly emerges is that the petitioner paid a sum of Rs. 55 lakhs to respondent No. 1 and respondent No. 2 has clearly admitted the receipt thereof but has taken a stand that the amount was advanced by the petitioner to it as interest free loan for a period of ten years and the said amount is repayable, after a lapse of this period without interest. It is further clear that there is no written document evidencing the interest free loan for ten years. There is also no agreement executed between the parties regarding the purchase of shares. The petitioner and others have received one lakh shares of Oswal Agro Mills Limited, respondent No. 1 and another one lakh shares of Bindal Agro Limited. According to the petitioner, the delivery of shares is a part of the agreement entered into between him and the respondents whereas according to the respondents there was no agreement for the delivery of shares and in fact the purchase of these shares had been negotiated by the petitioner directly with Diana Properties and the petitioner is liable to pay the value thereof to Diana Properties, for which Diana Properties has already filed a suit for the recovery of money, which is stated to be pending in the court of the Subordinate Judge at Chandigarh.
8. The question that arises in this case is whether any amount is due from the respondent-company to the petitioner and is it liable to pay but has failed to pay the same despite notice. It needs mention at this place that notice dated April 19, 1994, annexure P-3, was issued by the petitioner but the respondent did not reply to the same despite the same having been received by it.
9. As regards the dispute between Diana Properties and the petitioner, it is not for me to comment on the merits or demerits of that litigation in these proceedings. That matter is to be decided on its own merits by the court where the proceedings are already pending. The respondents on the strength of the suit filed by Diana Properties cannot, in my opinion thwart these proceedings by submitting that there is a bona fide dispute between the parties regarding the amount in question. The admitted case of the respondents is that they have not delivered or transferred any share, either of Oswal Agro Mills Ltd., or of Bindal Agro Ltd., in favour of the petitioner or his associates. The respondents in clear terms, however, admitted that they are liable to pay to the petitioner a sum of Rs. 55 lakhs, which they received through demand drafts, after a lapse of ten years and that too without interest. Thus in the facts and circumstances of this case, it is not for this court and especially in these proceedings to go into the question whether the petitioner is liable to pay to Diana Properties a sum of Rs. 1,62,00,000 for the sale and purchase of two lakh shares of Oswal Agro Mills Limited and of Bindal Agro Limited.
10. The simple case of the petitioner that remains is that a sum of Rs. 55 lakhs was paid to the respondents which stands admitted and the respondents have failed to deliver the shares or to return despite notice dated April 19, 1994, and that no probable defence has been raised to retain the amount due to the petitioner, which the petitioner is entitled to receive along with interest at the rate of 24 per cent, per annum. The respondents having failed to reply to the notice, a presumption deserves to be raised that the claim of the petitioner has been admitted by the respondents. Mr. Suri learned counsel for the petitioner submitted that in a petition under sections 433 and 434 of the Act, the company in order to defeat the claim made is required to show firstly that the defence raised is in good faith and one of substance and secondly, the defence taken is likely to succeed in point of law and thirdly, the company adduces prima facie proof of the facts on which the defence depends. Mr. Suri in the above context submitted that the defence of the respondents is not likely to succeed and there is no prima facie proof of the fact that the amount was advanced as interest free loan for a period of ten years and there is no document in support of the above assertion. According to learned counsel if that had been the situation, the respondent-company on receipt of the notice, annexure P-3 would have immediately replied in the above terms. The petitioner was kept in the dark till the filing of the written statement so as to enable the respondent to take such defences as these may suit them at a given point of time. According to Mr. Suri the respondents have further to show that the defence taken is in good faith and one of substance. According to learned counsel, the claim of Diana Properties, allegedly a business associate of respondent No. 1, has been introduced with a view to confuse the entire issue. The factum of receipt of the demand drafts and its liability to pay having been admitted, respondent No. 1 is liable to be wound up in terms of the provisions of sections 433 and 434 of the Companies Act as it has failed to pay on demand.
11. Section 433 of the Act provides that the company may be wound up by the court after the company is unable to pay its debts. Section 434 provides that a company shall be deemed to be unable to pay its debts if a creditor to whom the company is indebted in a sum exceeding Rs. 500 then due, has served on the company, by registered post or otherwise, a demand under his hand requiring the company to pay the same and the company has for three weeks thereafter neglected to pay the sum, or to secure, or compound for it to the reasonable satisfaction of the creditor. Section 439 provides for moving an application to the court for winding up of a company in the situation as detailed therein. Section 434 introduces a fiction when it provides an instance of "deemed inability" where the company fails to pay a debt within the requisite period of receipt by it of a notice of demand requiring the company to pay. Ordinarily mere failure to pay a debt would not be inability to pay a debt, but Section 434 introduces the fiction of deemed inability to pay even when the company may be solvent and able to pay its debts. Presumption of inability to pay would arise when a notice is served upon the company making a demand of debt exceeding Rs. 500 and requiring the company to pay the same and the company has for a period of three weeks neglected to pay the same or to secure or compound for it to the satisfaction of the creditor. It is in the above background to be seen whether this petition is liable to be admitted or not.
12. Mr. Sibal learned counsel appearing for the respondents submitted that even if the allegations as made by the petitioner in paras. 3 and 4 of the petition are admitted and the amount of Rs. 55 lakhs in favour of Oswal Agro Mills was paid in pursuance of the oral agreement, the contract being void, the claim under sections 433 and 434 of the Act is not enforceable and even otherwise any amount paid under a void agreement is not recoverable. According to learned counsel an agreement to sell shares by a company is a void agreement in view of the provisions of Section 77 of the Act which provides for restrictions on purchase by a company of its own shares or holding its shares. According to learned counsel the company cannot hold any of its shares and the question of transferring its shares, therefore, does not arise and in fact there is a specific bar in that behalf contained in the above provisions. The agreement being void cannot be enforced. Learned counsel in support of his submission referred to a Full Bench judgment of the Allahabad High Court in Nutan Kumar v. Second Additional District Judge, AIR 1994 All 298, wherein it was held as under (headnote) :
"An agreement offending a statute or public policy or forbidden by law is not merely void but it is invalid from nativity. It cannot become valid even if the parties thereto agree to it.
The concept that an agreement may be void in relation to a specified person and may be valid or voidable between the parties thereto is not applicable to an agreement the very formation whereof law interdicts, or which is of such a character that, if permitted, it would frustrate the provisions of any law, or is fraudulent, or opposed to public policy. Neither party can enforce the said agreement. No legal relations come into being from an agreement offending a statute or public policy."
13. The other cases cited by learned counsel in that behalf may also be noticed.
14. In Universal Plast Ltd. v. Santosh Kumar Gupta, AIR 1985 Delhi 383, an agreement to sell spindles was entered into without the prior permission of the Textile Commissioner in spite of prohibition against sale of spindles without such permission contained in a control order issued under the Essential Commodities Act. In this situation it was held that the agreement being illegal could not be enforced and the buyer who had paid advance in pursuance of the agreement would not be able to recover.
15. In Nathmal Bhaironbux and Co. v. Kashi Ram, AIR 1973 Raj 271, it was held as under (headnote) :
"Export licence or quota paper granted under the export control order is a personal privilege granted to a party. It is not property where the principal has allowed the agent to sell the export licence to a third party by resorting to subterfuges employed by them, thereby circumventing the provisions of the export control order, the transaction is illegal and against public policy. The parties being in pari delicto, the principal cannot recover from the agent the price realised by him from such sale. The case would thus fall within the ambit of the rule ex turpi causa itself and the court will not lend its help to a person who bases his claim upon an immoral or illegal act."
16. Reference in this behalf was also made to Bhaskarrao Jageshwarrao Buty v. Smt. Saru Jadhaorao Tumble, AIR 1978 Bom 322. However, in my opinion it is not necessary to develop further on this point as it is not the admitted case of the parties that an agreement for the purchase and sale of shares was entered into between the parties. According to the petitioner he paid a sum of Rs. 50 lakhs for the purchase of shares whereas according to the respondents the amount of Rs. 55 lakhs was paid by the petitioner in order to cultivate business relations with the respondent-company and the said amount was paid as interest free loan for a period often years and the respondents are liable to return this amount after ten years without interest. Thus there is no agreement between the parties for the purchase and sale of shares. If the respondents had taken a definite stand that the agreement was entered into as alleged by the petitioner and the amount was paid under an agreement which was void or against public policy, it may have been open to the respondents to contend that the petitioner is not entitled to the amount and the amount being disputed, the petition under sections 433 and 434 of the Act was not a proper remedy. As already noticed the respondents admitted the receipt of payment but denied the agreement as alleged by the petitioner. Thus in a situation like this, it cannot be said that there is an agreement between the parties which is a void agreement or an agreement against public policy and, therefore, the petitioner is not entitled to recover the amount. In this context the judgments relied on by learned counsel for the respondents have no application to the facts of this case.
17. Faced with the above situation learned counsel for the respondents submitted that the amount is a disputed debt and it is only a pressure tactics to recover the amount which is payable after ten years without interest. The amount has not become payable to the petitioner and it will become payable only after ten years and the proceedings under Section 433 can only be resorted to after the amount becomes due. In support of his submission learned counsel placed reliance on Registrar of Companies v. Ajanta Lucky Scheme and Investment Company Private Ltd, [1973] 43 Comp Cas 314 (Punj) and Registrar of Companies v. Suraj Bachat Yojna Private Ltd. [1973] 43 Comp Cas 343 (Punj). In these cases the Registrar of Companies filed a petition under Section 433(e) of the Companies Act on the ground that the financial position of the company was found unsatisfactory on a scrutiny of the balance-sheet. It was held that "debt" means an amount which is due and can be claimed by the creditor, but if a debt has not yet accrued due, no demand can be made and the liability which will accrue in future did not lead to the conclusion that the company will be unable to meet its liabilities at that time. What has been tried to be projected by reference to the above cases, is that the amount is not yet due.
18. Again, the contention, in my view, has no merit. Undisputedly the parties are not related to each other nor is there a business dealing between them. It is unimaginable that a person will pay a sum of Rs. 55 lakhs to a company as interest free loan for a period of ten years simply to cultivate business relationship. No document is forthcoming in support of the plea of the respondents that the amount was advanced to it as interest free loan for a period of ten years and is not repayable before the expiry of the period. Even if it be taken for the sake of argument that the amount was given as a loan to the respondent-company, in the absence of any document, it can be recalled at any time unless it is shown that it cannot be recalled before the expiry of a definite period. The petitioner served a notice dated April 19, 1994, requiring the company to pay the amount with interest and the respondent having failed to pay the amount and to reply to the notice, it has to be taken that the petitioner is a creditor and the company is liable to pay its debts, which became due immediately on the demand being made.
19. The amount as already observed, has been admitted but the only defence is that it is repayable after ten years and is thus not due at the moment. It is an argument of despair. It is only an oral assertion and is neither supported by a plausible explanation nor by any evidence, documentary or otherwise which may prima facie show the defence to be plausible. In the situation it cannot be said that the amount is a disputed debt or is not due on the date of filing the petition. As already observed any dispute between Diana Properties and the petitioner cannot be taken advantage of by the respondents, who allege that it is a pressure tactics on the part of the petitioner to forestall the recovery of the amount by Diana Properties.
20. Learned counsel for the respondents submitted that the petition raises disputed questions of fact and, therefore, resort to the present proceedings in a situation like this, is not warranted. The contention has no merit. The simple case as has already been noticed is that the respondent has received a sum of Rs. 55 lakhs as interest free loan and is liable to pay after the expiry of ten years but no document has been produced in support thereof. There is nothing to show even prima facie that the defence is in good faith. The respondent has not even prima facie tried to show or bring on record the facts, which are alleged to be disputed and on which the defence depends or on the strength of which it may be concluded that the petition raises disputed questions of fact.
21. In the end Sibal, learned counsel for the respondent, submitted that the respondent-company is solvent and is a going concern and, therefore, in the facts and circumstances of this case, the petition deserves to be dismissed. This contention again cannot be accepted in view of the provisions of sections 433 and 434 of the Act whereby a company by deemed fiction has been held to be unable to pay its debts, even if it is a going concern. Moreover, it can be noticed with advantage that prior to the service of notice, annexure P-3, by the petitioner requiring the respondents to pay the amount due to him, Diana Properties raised no dispute regarding repayment of the amount in dispute by the respondent to the petitioner or its right to recover a sum of Rs. 1,62,00,000. Notice annexure P-3 is dated April 19, 1994. The respondent-company did not reply to the said notice and did not at any point of time between May 16, 1991, and April 19, 1994, write to the petitioner or bring to his notice that the amount paid by the petitioner was taken as an interest free loan for a period of ten years in order to cultivate business relationship between the parties. Diana Properties for the first time served a notice on the petitioner in July, 1994, after the filing of the present petition, which was filed in May, 1994, and filed a suit against the petitioner thereafter. Thus, in my opinion, the respondents are trying on the one hand to take advantage of the proceedings initiated by Diana Properties against the petitioner and on the other hand, are trying to confuse the issue by saying that the loan was an interest free loan for a period of ten years. It is not understood as to how a company would sell shares worth about a crore of rupees, as per the company, to a stranger without getting the payment and will remain silent for a period of about two/three years for that amount and only file a suit after the present petition is filed. Thus, in my opinion, the suit has been filed by Diana Properties at the instance of the respondents so as to pressurize the petitioner to withdraw the petition seeking winding up of the respondent-company or not to press the same.
22. In the facts and circumstances of this case, I am clearly of the opinion that respondent No. 1 has defaulted in the payment of the amount claimed by the petitioner along with interest. At no stage prior to the filing of the written statement did the company dispute its liability to pay the amount. Even in the written statement, liability to pay the amount is admitted but the only defence, as already noticed, is that it is liable to pay after the lapse of ten years and that too, without interest, which plea has not been accepted being not supported by any material at all. Nothing has been shown, even prima facie to suggest that the amount was paid to respondent No. 1 as interest free loan for a period of ten years. Notice under Section 434 of the Act was not even replied to. Thus it can safely be presumed that the plea sought to be raised by the company is only an afterthought and a convenient way to wriggle out of its liability to pay the admitted amount. It appears that the company has no intention to pay the huge amount due to the petitioner and the present pleas have been taken in the written statement only with a view to avoid its liability to pay the amount. The defence raised by the company cannot, therefore, be said to be bona fide and for these reasons I hold that the respondent-company is unable to pay its admitted debts. The amount advanced by the petitioner has not been disputed. According to the respondent-company, a sum of Rs. 55 lakhs is due to the petitioner and it was paid to it on May 16, 1991. The amount due to the petitioner from respondent No. 1 is admittedly more than Rs. 500 which the company has neglected to pay the petitioner even after the receipt of a notice dated April 19,1994, and has also neglected to compound for the same to the satisfaction of the petitioner. In the situation it is held that the company is unable to pay its admitted debts.
23. In the result the petition is admitted. Notice of the winding up order is ordered to be advertised not less than 14 days before the next date of hearing in the Official Gazette of the State of Punjab and in one issue each of the Indian Express and the Daily Tribune (Punjabi edition).
24. To come up for further proceedings on April 18, 1996.