Delhi High Court
Smt. Sharda Mahajan vs Maple Leaf Trading International (P) ... on 26 March, 2007
Equivalent citations: [2007]139COMPCAS718(DELHI), (2007)2COMPLJ455(DEL), [2007]78SCL367(DELHI)
Author: Sanjiv Khanna
Bench: Sanjiv Khanna
JUDGMENT Sanjiv Khanna, J.
1. The present petition for winding up under Sections 433(e), 433(f) and 439 of the Companies Act, 1956 (hereinafter referred to as the Act) has been filed against Maple Leaf Trading International (P) Ltd., (hereinafter referred to as the Respondent Company), by Smt. Sharda Mahajan, (hereinafter referred to as the petitioner).
2. After filing of the present petition notice was directed to be issued to the respondent company vide order dated 3rd December, 2004 for 16th March, 2005. On 16th March, 2005, the respondent company did not enter appearance and this Court passed a detailed order admitting the company petition, inter alia, holding that the petitioner had made payment of Rs. 60,000/- for purchase of gold coins but the said amount has not been repaid inspite of service of notice and there were adverse reports about illegal activities of the respondent company in violation of various statutory provisions. It was also held that the provisions of Section 433 (f) of the Act were attracted in view of seizure of property by the Enforcement Directorate and as commercial operations of the respondent had come to a standstill.
3. Provisional Liquidator was also appointed to take into his possession, the assets and records of the respondent company and file his report.
4. The provisional liquidator has filed his report giving names and addresses of the directors of the company and stated that the registered office was found to be locked. It was further stated that directors Mr. Deepak Sipani and Mr. S. Malhotra had resigned and had furnished a copy of Form 32 filed with the Registrar of Companies, Delhi and Haryana.
5. Subsequently, the respondent company filed an application CA 895/2005 stating, inter alia, that respondent was not aware of the present petition and facts have been concealed. It was further stated that the petitioner is a business partner and not a customer and various communications exchanged between the parties had not been brought on record. Lastly, reliance was placed upon the orders passed by the Appellate Tribunal for Foreign Exchange. It was stated that this order has been upheld by this Court in appeal. Reliance was also placed on the order passed by this Court dated 3rd November 2003 quashing criminal prosecution against the directors of the respondent company under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978.
6. The court vide order dated 8th July, 2005 had directed that the official liquidator shall not take further steps in pursuance to the order dated 16th March, 2005. This order has continued thereafter. The respondent company, in the meanwhile, has also filed reply to the company petition and rejoinder to the same has also been filed and both are on record. Similarly, reply has been also filed to the application for appointment of provisional liquidator.
7. I have heard Learned Counsel for the parties on the applications CA 895/2005, 1456/2005 and CP 394/2004.
8. It is admitted case of the parties that the petitioner had made payment of Rs. 60,000/- (Rs.15000/- each under four separate contracts) to the respondent company on 5th May, 1999. These payments have been made under a document called agreement for contract of sale of Maple Leaf Gold Coins. It is stated in the agreement that the respondent company is engaged in the business of sale and distribution of Canadian gold coins and the petitioner is interested in purchasing the said gold coins available on sale in accordance with the terms of the marketing plan of the respondent. There is no dispute about the amount received. There is also no dispute that the gold coins have not been supplied.
9. Thus, money paid by the petitioner is admitted by the respondent. However, it is the case of the respondent company that the petitioner has entered into a business transaction under the aforesaid contract. It is the case of the respondent company that the gold coins can be supplied after the petitioner has complied with the terms of the contract. In this regard reference and reliance is placed upon Clauses 5, 15 and 18 of the contract dated 5.5.1999 as well as 9 other pages allegedly containing the details of the marketing plan. It was also argued that the provisions of winding up are not attracted to the present case as it is neither a case of admitted liability nor inability to pay.
10. In order to decide the controversy in issue it is necessary to reproduce below the relevant clauses of the agreement dated 5.5.1999:
Agreement For Contracts of Sale x x x x x x x Whereas The Seller is inter alia engaged in the business of sale and distribution of Canadian gold coins (Maple Leaf) which are hereinafter referred as the 'gold coins'.
And Whereas The Purchaser is desirous of entering into an agreement for sale of gold coins in accordance with and in terms of the Marketing Plan of the Seller.
And Whereas The Seller and the Purchaser have agreed to enter into this Agreement for a minimum of four (4) contracts of sale of gold coins amounting to Rs. 49,300/- each.
1. x x x x x x
2. The purchaser makes a down payment of Rs. 15,000/- towards each contract of sale amounting to a total of Rs. 60,000/-. The balance of the purchased price is deemed to have been paid by the purchaser the moment fourteen (14) new contracts of sale have linked up with the contract of sale in question, as fully described in detail in the 'Marketing Plan' of the seller, Phase I, which is Schedule I to this Agreement.
3. x x x x x
4. x x x x x x
5. The Purchaser declares that he has read and understood the terms and conditions which are above and on the reverse of this Agreement.
IN WITNESS WHEREOF the parties have put their hands the day and year first hereinabove written.
Applied for in (Town) New Delhi (date) 05/05/99 (Purchaser) Signature of Purchaser Signed, accepted, delivered and drawn up in triplicate (Town) N. Delhi (date) 11/5/99 (Seller) Maple Leaf Trading International Pvt. Ltd.
The Agreement has a transitional period whereby the Purchaser can cancel this Agreement within eight days of the Agreement being accepted by Maple Leaf Trading International Pvt. Ltd. Cancellation shall be effected by the way of a registered letter. It is best for the Purchaser to dispatch the signed letter within six days to the above mentioned address so that it arrives within the appointed time.
Dear Sir/Madam, I herewith use the transitional period for cancellation and dissolution of the aforementioned Agreement.
(Town) ________ (date) ________________ signature __________.
6. to 13. x x x x x
14. Delivery of the gold coins is effected at the current rate according to the current 'spot price' taking into account the costs of mining the coins, the brokerage fees, the selling expenses and the relevant applicable taxes. In the instance as a result of the current rate of the value of gold coins purchased cannot be entirely supplied in gold coins, the remaining balance will then be paid out in the form of a crossed cheque or cash.
15. If in the period of one (1) year no new contracts of sale in conformity with the 'Marketing Plan' have linked up in Phase I, the purchaser has the option to pay the remaining balance of the purchase price to then receive a completed gold delivery. In that case the purchaser must pay an administration cost of Rs. 5,625/- per contract of sale. This entitlement will exist for a period of four (4) weeks to be calculated from the date of the afore mentioned period of one (1) year has expired.
16. x x x x x x
17. x x x x x x
18. The Purchaser declares.
I. that the contents of this Agreement have been explained to him and have been read by him and are fully understood by him and that upon acceptance by the Seller, the Agreement referred to in the heading of this document will be concluded and that the aforementioned arrangements will have binding force upon both parties.
II. that the Purchaser's decision to purchase gold coins and to continue his contract in the 'Marketing Plan' is not based on the promise to attain the purchase price via commission or other income which third parties have held out the prospect to him.
III. that the Purchaser is aware of the fact that he is neither to be entitled to a repayment of the aforementioned down payment in Phase 1 of Rs. 15000/- per contract of sale referred to in Article 1, nor to be applicable down payments that are entered as such in Phase II and Phase III and consequently irrevocably relinquishes these.
IV. that the 'Marketing Plan' was once again explained to him and that he has received a copy thereo f. The 'Marketing Plan' is an integral part of this Agreement.
11. A bare perusal of the aforesaid contract and the terms and conditions mentioned therein show that the respondent company had invited offers from public for purchase of gold coins as per the scheme floated by it. The heading and the nature of the scheme itself suggests that the respondent company was engaged in the business of sale and distribution of gold coins and the petitioner like others who were desirous of entering into an agreement for purchase of said coins were invited to join on the terms and conditions of the respondent company. The nature of scheme required the purchaser to enter into four agreements and deposit Rs. 15,000/- under an agreement for purchase of gold coins. Thus in all Rs. 60,000/- was paid by the petitioner like other purchasers to the respondent company. The, petitioner was required to enroll new members for the respondent company who were also required to enter into similar contracts and deposit Rs. 60,000/- with the respondent company. As per the respondent company this payment of Rs. 60,000/- was advance payment that fructifies and culminates into the right to get gold coins on the customer like petitioner enrolling further members. The scheme and its nature has been considered in the subsequent part of the judgment.
12. The terms and conditions of the scheme were said to be hit by Prize Chits and Money Circulation Scheme (Banning) Act, 1978 and a FIR was registered against the directors of the said company. This was challenged and questioned in this Court in Crl. M(M) No. 2194 of 2003. The respondent including its directors made reference to the scheme and interpreted various clauses whereof. It was case of the respondent company in the said proceedings, that the scheme itself envisaged various safeguards. Four safeguards were highlighted by the respondent company and its directors. These were:
1) Customers had option to cancel the contract and withdraw from the scheme within two days after he attends business training and thereafter decide whether they want to go ahead with the agreement.
2) After entering into the agreement the customers again had eight days time to reconsider their decision;
3) A customer not desirous of continuing with the business can sell/transfer their contracts to third persons;
4) A customer not successful in procuring further contracts has the option to pay the balance amount by cheque or bank draft and take delivery of gold coins as per Clause 15 of the agreement.
13. Safeguard no.4 as explained and admitted by the respondent company in the said judgment is reproduced below:
SAFEGUARD NO. 4Finally in case a customer is not successful in his efforts to sell gold coins for the company, and consequently, is not able to earn commissions to fulfill his contract, he has the last option to pay the balance amount by cheque or bank draft, and take delivery of his gold coins, as per Clause 15 of the Agreement.
Hence under no circumstances does the customer stand to lose his advance. The Agreements do not have any provision for the forfeiture of the advance payment, and nor is there any provision for return of the advance amount. Finally, there is no dependence on any contingency or chance, and there is no offer of any gift or prize.
The advance payments are just that - advances for the purchase of products. They are not an investment. The Company does not have any "members" and has not undertaken any responsibility for generating returns on advances received by it. There is no element of any speculation or risk, and customers' earnings depend only on their sales performance.
14. It was on the basis of the statements made and the explanation given with regard to the safeguards that the Crl.M. (M) No. 2194/2003 was allowed and prosecution under the Prize Chits and Money Circulation Scheme (Banking) Act, 1978 quashed.
15. After the petitioner entered into these agreements news reports were published in the month of July, 1999 stating that the directors of the respondent company had been arrested for violation of the Foreign Exchange Regulation Act, 1973 etc. Pursuant to these news reports the petitioner wrote several letters asking for refund of the amount paid. In response to these letters the respondent company wrote back stating that necessary action would be taken as soon as the accounts of the respondent company were defrozen by the statutory authorities. Reference in this regard may be made to letter dated 23rd March, 2000, 18th May, 2000, 1st June, 2000 and 20th October, 2000 and other letters. In the letter dated 18th May, 2000 the respondent company had stated:
We reiterate that once the company accounts are defrozen, all those who would like to withdraw from their contracts will get full refund without deduction of any administrative charges in case no gold delivery has been received. This information has already been conveyed to those of you who have been to the office. I have been overwhelmed by your concern about our well being and your offers of voluntary support and good wishes for the company. If you are one of those who have not yet visited the office, we invite you to do so now.
16. Similarly advertisements were inserted by the respondent company informing the investors and the relevant portion of one such insertion is reproduced below:
However in order to prove the bona fides of the company and the sincerity and integrity of the management, this offer is now being made to all business partners who have not yet benefited by receiving gold from the company's multi-level gold marketing programme. Such business partners can, if they so desire, withdraw from the business and get refund of their down payment, subject to deduction of necessary administrative charges, and after the bank accounts are de-frozen by the concerned authorities.
17. It is clear from the above letters and the advertisements published by the respondent that they had agreed to refund entire amount received from the purchasers like the petitioner. However, it was stated that the payment stands post-phoned and would be made only after the accounts are de-frozen.
18. It may be relevant to state here that this Court while quashing the criminal prosecution under the Prize Chits and Money Circulation Scheme (Banning) Act, 1978 noticed the plight and suffering of the purchasers like the petitioner and had observed:
21. However the obligation on the part of the petitioners in not refunding the amount within eight days is required to be discharged by the petitioner. To project the bona fide and the absence of oblique motives in floating the scheme the petitioners have given the undertaking that they would even refund the money to those who are not able to either perform phase-I of the marketing plan or phase-II or phase-III of the marketing plan, if any of them so desires and formally writes to the company.
22. In order to be fair to the petitioners as well as investors a letter of this intention shall be sent to all such subscribers besides being published at least in five Daily National Newspapers. The payment of the money to the said purchasers who entered into the agreement for sale shall be made through the frozen account as the amount which was frozen was towards the bank account in which the money received from the purchasers was deposited. However, at the first instance the petitioners shall make written request for making the refunds from the frozen account. The modus operandi of such payment will be as under:
Whosoever responds to the letters sent through registered post/AD and to the advertisement to be published in at least five national dailies information of such person shall be given to the Government Agency and cuts and cheques in the amount shall be given by the company and "handed over to the subscriber and the money shall be released pursuant to the cheques to the customers.
19. The clauses of the agreement clearly reveal that the petitioner was interested in purchasing gold coins and had made payment of Rs. 15000/- under four separate contracts, the total amount being Rs. 60,000/-. The petitioner was given to understand that the money was secured and that even if the petitioner was not able to procure and get new contracts, he will be entitled to get gold coins on payment of the balance amount and payment of administrative charges. This right could be exercised within a period of 4 weeks after expiry of one year from the date of the contract i.e. 5.5.1999. This stipulation in Clause 15 of the contract could not be adhered to and complied with by the respondent company. The reason is obvious that in July, 1999 it's directors were arrested by the Enforcement Directorate for violations of FERA and other statutory enactments. The accounts of the respondent company were also frozen and it's business activities came to a standstill. In these circumstances, the respondent company decided to relax Clause 15. The respondent company agreed to refund the entire amount collected whenever a request was made by the depositor/investor like the petitioner for refund. The petitioner had already made request for refund of the amount paid.
20. Thus, liability to pay to the depositor or the customer like the petitioner was admitted by the respondent company. In view of the above it has to be held that the respondent company is a debtor of the petitioner. The said letters written by the respondent company and it's stand in the legal proceedings clearly show that it has admitted it's liability and the debt due and payable by it to the petitioner.
21. In the present case after a reading of the agreement it can be seen that the purchasers were initially required to make an investment by entering into minimum of four contracts for sale of gold coins with a down payment of Rs. 15,000/- towards each (clause 2). As per Clause 15 if the purchaser was unable to "link" new contracts within a period of one year in conformity with the "Marketing Plan" then he had the option to pay the remaining balance to receive gold delivery. The respondent company was unable to perform its obligation and make supply gold after one year, therefore the respondent company agreed to refund the money paid.
22. A perusal of the advertisement and the letters as quoted above shows that the payment of the amount was sought to be postponed till the time the accounts of the respondent company were defrozen. This is also clear from the statement made on behalf of the respondent company by its directors as noticed and recorded in Crl. M(M) No. 2149/03.
23. The question is whether this condition that the refund shall be paid after accounts are defrozen, legal and binding on the petitioner. Under Clause 15, gold worth the value of the contract was to be delivered to the petitioner on payment of balance amount of the contract and payment of administrative charges. This option vested with the petitioner and could be exercised after one year. The respondent company could have certainly given concession and relaxed the obligation of the petitioner and other investors under Clause 15 to make balance payment and refund the amount paid but the respondent company could not have unilaterally imposed the condition that payment to the petitioner and others would be refunded after it's accounts are de-frozen. The respondent company could not have compelled the petitioner to agree to payment of refund being contingent upon a future event that may or may not happen. Payment became due to the petitioner when the respondent company agreed to refund the amount paid and in terms of Clause 15 one year after the contract i.e. 5.5.2000. Admittedly the amount has not been paid even after 5.5.2000. Therefore it is an admitted debt due and payable. It is also not difficult to understand the reason why the respondent company agreed to relax the obligation of the petitioner under Clause 15. The respondent company was aware that they cannot comply with it's obligations.
24. Debt for purposes of Section 433 (e) and 434 (1) (a) of the Act means a money owed and existing obligation to pay a certain amount or a sum of money due, from one person to another. However, the term debt has been explained in J. Jermons v. Aliammal , as
14. The word debt is used in the order/notice issued under the Income Tax Act in the same meaning in which it is used in Section 60 CPC. Ordinarily, debt means money that is owed; an existing obligation to pay a certain amount; a sum of money due from one person to another. Debts can be classified, having regard to the criteria for payment, into three categories:
(i) debt which has become due and is payable at present ( debitum in praesenti ) e.g. in monthly tenancy, rent becomes due after the expiry of each month like rent for the month of January becoming due and payable on February 1;
(ii) debt which has become due but is payable at a future date ( debitum in praesenti solvendum in futuro ); in the above example if under an agreement of tenancy rent is payable on the 15th of the following month, the rent for January becomes due on February 1, but is payable on February 15; and
(iii) contingent debt which becomes payable on the happening of a certain event which may or may not occur; in the above instance the rent for the month of January will not be a debt in the preceding month of December for the tenant may or may not reside in the next month.
25. In the case of Union of India v. Raman Iron Foundry , it has been held that the word debt is applicable not only to money that is now due and payable but also sum of money which has been promised to be paid at the future date. When a money is payable at a future date it is "debt owed" but when the obligation is to pay a sum in praesenti it is "debt due." Therefore, the respondent has admitted the debt and the said debt became due one year after the date of the agreement. Under Section 433 (e) of the Act winding up of a company can be directed when the said company is unable to pay it's debt. Section 434 of the Act further explains and also incorporates deeming provisions when a company can be deemed to be unable to pay it's debt. Under Clause (a) of Sub-section (1) a company is unable to pay it's debt when it neglects to pay the debt due within the stipulated period after service of notice.
26. I need not dwell further on this aspect as in view of Section 56 read with Section 65 of the Contract Act, a debt is due and payable by the respondent company to the petitioner. Arguments in the present case were heard on 18th July, 2006. Thereafter, the counsel for the respondent company had appeared in court and stated that they were interested in settling the matter. Accordingly, the matter was listed on 22nd August, 2006. On the said date the Learned Counsel for the parties were called upon to address arguments on the following:
(i) Whether Section 434 (1) (c) of the Companies Act, 1956 is applicable?
(ii) Whether Section 56 and 65 of the Contract Act are applicable?
27. Section 56 of the Contract Act reads as under:
56. Agreement to do impossible act.- An agreement to do an act impossible in itself is void.
Contract to do act afterwards becoming impossible or unlawful.- A contract to to an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.
Compensation for loss through non-performance of act known to be impossible or unlawful.- Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisedid not know, to be impossible or unlawful, such promisor must make compensation to such promisefor any loss which such promisesustains through the non-performance of the promise.
28. We are concerned with the second clause of Section 56 of the Act in the present case. The said provision has been interpreted by the Supreme Court in number of cases. In Satyabrata Ghose v. Mugneeram Bangur and Company and Anr. , it was held that when there is an event or change in circumstance which strikes at the root of the contract as a whole, the event or change being fundamental, the contract is treated as frustrated and as having come to an end. What is required to be examined is whether the changed circumstance had destroyed altogether the basis of the agreement and the underlying object. The Supreme Court observed that unlike English law, Section 56 of the Contract Act enacts a rule of positive law. The word "impossible" as used in Section 56 is not to be read in a literal sense but practically. Once a court comes to the conclusion that there is a supervening impossibility or illegality, the contract frustrates under Section 56 of the Act.
29. In Alopi Parshad and Sons Ltd. v. Union of India , it was held that a contract stands frustrated under Section 56 of the Contract Act when circumstances show that a fundamentally different situation had emerged unexpectedly. In such cases the contract ceases to be binding at that point. The Supreme Court in the Naihati Jute Mills Limited v. Khyaliram Jagannath reported in AIR 1968 SC 522, observed that Courts cannot shut their eyes to harshness of the situation in cases where performance becomes impossible by causes which could not have been foreseen and which were beyond the control of the parties. The Court noticed distinction between Section 32 and Section 56 of the Contract Act. Section 32 of the Contract Act relates to implied or express terms of the contract but Section 56 of the Contract Act applies when due to subsequent "impossibility" the Court finds that the whole purpose and basis of the contract stands frustrated by intrusion or occurrence of an unexpected event or change in circumstances which were not contemplated by the parties on the date of the contract. It may be emphasized here that Section 56 of the Contract Act applies when performance of a contract becomes impracticable or useless having regard to the object and purpose the parties had in mind. In Industrial Finance Corporation of India Ltd. v. Cannanore Spinning and Weaving Mills Ltd. , the Supreme Court held that three conditions are required to trigger off doctrine of frustration under Section 56 of the Contract Act. Firstly, there should be a subsisting contract, secondly, some part of the contract is still to be performed and thirdly, after the contract is entered into it becomes impossible of performance. In this case the Supreme Court quoted with approval some English decisions in which it has been held that frustration occurs without default of either party because of circumstances beyond control of the parties. In such circumstances performance becomes impossible as performance would require the parties to perform something radically different from that which was undertaken in the Contract.
30. In a subsequent decision MD, Army Welfare Housing Organisation v. Sumangal Services Pvt. Ltd. it was held that an injunction order by a statutory authority can cause frustration of a contract. It may be noted that a similar view was taken by the Supreme Court in Shanti Vijay and Co. v. Princess Fatima Fouzia reported in AIR 1980 SC 17. In this case because of the injunction order passed restraining transfer of property by the trustees and subsequent order on appeal directing status quo, it was held that the contract for sale of the property was frustrated. It may be relevant to state here that in this case it was also observed that a contract gets frustrated if it cannot be performed within a reasonable time due to intervening circumstances. In MD, Army Welfare Housing Organisation (supra) reference was made to Cheshire, Fifoot and Furmston- Law of Contracts and Treitel - Law of Contracts wherein it is stated that a party guilty of negligence or responsible for an event or circumstances cannot plead frustration.
31. Reading of the above decisions shows that when contractual obligations become practically impossible of performance due to intervening circumstances, the contract stands frustrated. This is because the unexpected event or change in circumstance was not postulated by the parties, thereby the contract as a whole becomes practically and commercially impossible. In such cases the parties are released from their obligations. Delay beyond reasonable time which is abnormal and unexpected also frustrates a contract if it causes fundamental breach. Once the very purpose and object of the contract is frustrated, the parties are not under any obligation to perform the same. What is required to be seen is whether fundamental assumption on the basis of which contract was entered into has ceased to exist due to intervening events which has led to a radically different situation. The intervening circumstances should change the basis on which the parties had rested their bargain. When the circumstances change drastically and the altered circumstances were never visualized or contemplated, the contract becomes ex facie unenforceable. The doctrine non haec in foedera veni (it was not this that I had promised to do) is applicable. The Courts accept that a contract which is impossible of performance in practical sense need not be performed.
32. The facts of the present case show that Section 56 of the Contract Act is applicable. The petitioner had entered into contract in 1999 with the respondent. Immediately, thereafter in 1999 itself after raids by the Enforcement Directorate and criminal prosecution initiated against the Directors, the respondent-company's, accounts were frozen and the money lying in the bank accounts was seized. The contract envisaged recruiting and duplication of new members by existing members like the petitioner, which was impossible because of search, seizure and commercial activities of the respondent company coming to a stand still. Neither was it possible for the respondent company to comply with the terms of the contract and enroll new members. It was practically impossible for the respondent company to comply with their obligations in view of the action taken by the Enforcement Directorate and freezing of accounts. The respondent company has not been able to carry on business for last nearly eight years. In fact the respondent company admitted frustration of contract in the advertisements informing the investors like the petitioner that they shall be repaid the entire amount deposited/paid by them though with a rider that repayment will be made after accounts are de-sealed. It is clear from twhe judgments referred above that for Section 56 of the Contract Act to apply, it is irrelevant whether the intervening circumstances making the contract impossible of performance had not occurred due to default of any of the parties.Therefore, even if it is presumed that the respondent company was not responsible for the seizure of bank accounts and the injunction orders passed, doctrine of frustration of contract is still applicable. The delay and laches also results in frustration of contracts and therefore the above contract has ceased to be binding. The contract stands frustrated.
33. It is equally well settled that once a contract is frustrated then under Section 65 of the Contract Act, principle of restitution applies and the consideration received must be repaid. (Refer Bombay Dyeing and Mfg. Co. Ltd. v. State of Bombay ) wherein it has been held that when a contract becomes void or frustrates, any person who has received any advantage under such agreement or contract is bound to restore it to the person from whom he had received it.)
34. The contention of the Learned Counsel for the respondent that the respondent company is not to be blamed and the action of the statutory authorities is illegal and void does not in any way effect operation of Section 56 of the Contract Act. It is admitted by the respondent company that the petitioner and the other investors cannot be blamed and are not responsible for frustration. It is well settled that frustration of contract under Section 56 of the Contract Act can take place because of actions by third parties. It is only a party which is guilty of wrongful conduct and frustration that cannot rely upon Section 56 of the Contract Act.
35. The petitioner like several other investors have waited for eight long years. The petitioner cannot wait indefinitely. Her rights ought to be protected and the money paid, restituted and paid back.
36. In view of the above it is held that conditions of Section 433(e) of the Act are satisfied in the present case and the respondent company is unable to pay it's admitted debt due to the petitioner and is liable to be wound up.
37. The second question is whether the respondent company is also liable to be wound up under the "just and equitable" clause. It is well settled that the words "just and equitable" are not to be read as ejusdem generis with the other grounds available for winding up of a company. The said clause gives wide discretion to the courts. The term "just and equitable" it has been held is not capable of precise definition and can be invoked in a variety of circumstances. An order of winding up can be passed when subject matter of the company has disappeared or the object for which it was incorporated has substantially failed or when it is impossible to carry on business except at a loss. Suspension of business for a substantial period is usually taken as an indication of absence of intention to carry on business and a ground justifying winding up order under the "just and equatable" clause. An order of winding up can also be passed when it is in public interest. Investor protection can be a ground to justify winding up of a company.
38. The terms and conditions of the contract or the scheme reveal that it is a marketing plan in the nature of a pyramid scheme. The respondent company represented to the public that on becoming a member, a person is likely to earn substantial income through a process of multiplication or duplication by recruiting other members into the scheme. The new members so recruited have to recruit others and benefit of this geometric growth of layers of members/purchasers is enjoyed by the earlier participants/members. Such multilevel marketing schemes or pyramid schemes normally fail and are regarded as illegal as the scheme for its success requires constant geometric growth of layers of members. Once a saturation point is achieved there is break down. The chain at some point is bound to fail. The essential characteristic of a pyramid scheme is categorised by payment of money by the participants in return for right to receive rewards in return for recruiting new participants. Most of the schemes of this nature are misleading and deceptive. The marketing plan as per the respondent company involved payment of Rs. 60,000/- by a member (consisting of four contracts of Rs. 15,000/- each) which entitled each member to four contracts of face value of Rs. 49,300/- each or Rs. 1,97,200/- for the four contracts. However, the gold of value of Rs. 49,300/- was not sold. On securing further membership of three persons for each contract (or 14 contracts), each original member moved to the second phase of the scheme with Rs. 37,500/- being treated as the initial down payment towards the second phase. The original member after successful recruitment of three members per contract (or 14 contracts) was entitled to gold of value of Rs. 11,800/- out of each contract of Rs. 49,300/- and the balance amount of Rs. 37,500/- was transferred to the second phase. On further recruitment of stipulated number of new members (or contracts) in the second phase by the new members in the first and second phase, the original member became entitled to gold of value of Rs. 29,500/- and Rs. 75,000/- was transferred to the third phase. Again on new recruitment by the subsequent members, the original member became entitled to gold of value of Rs. 2,35,000/-. It is apparent that the key to the scheme was unlimited recruitment of members. The original member was required to recruit new members and the new members recruit further members. At the initial stage even after recruitment (or 14 new contracts) the original member was entitled to gold of value of Rs11,800/- as against down payment of Rs. 15,000/- made by him. In addition he was also liable to pay certain administrative charges. It was only on further recruitment by the new members down the line as stipulated in the scheme that the original member recoups and earns over and above his original investment in phase II and phase III.
39. A noteworthy fact mentioned in the petition which has not been denied by the respondent company in the reply is that the method employed by the company in the trading and distribution of the gold coins is multi-level marketing or network marketing. This method of trading offers it's members an opportunity to earn commission in form of gold of the value specified. The basis of such earning being recruitment of the new members who make investment.
40. The respondent company was also called upon to file an affidavit stating the total number of investors who had entered into contracts and the total amount received from the investors by the respondent company. In the Order dated 10th October, 2006 it was recorded that the respondent company had not been able to file list of investors and the amount received from the investors and the effect thereof and non-compliance of the order, shall be considered and examined at the time of passing of the final order. It may also be relevant to state here that the respondent company had filed an application stating that they had been able to locate a third person who was ready and willing to buy contracts from the petitioner and others who had filed Form No. 10. Certain directions in this regard were issued vide Order dated 10th October, 2006 giving option to the third person to deposit the amount in the Court and thereafter he shall be treated as substituted or the transferee owner. The order was not complied. Non-compliance of the Order dated 22nd August, 2006 directing the respondent company to furnish details of the total number of investors and the amount received from them is an indication that all is not well. The respondent company is concealing facts.
41. The shut down and failure to resume business for over eight years is sufficient to destroy the essence of the business transactions entered into by the respondent company with the investors. It is an admitted fact that the respondent company is unable to abide and fulfilll it's obligations. No fresh enrollment has taken place after 1999 and the respondent company has not been able to even find purchasers who are ready to pay the principal amount paid more than 7 years back by the petitioner and others, who have filed form No. 10, even without interest. Enrollment of new members was possible only if the respondent company had goodwill, acceptance in the market and was doing business. Since 1999 considerable time has gone by and the petitioner and other investors have been deprived of right to get their promised returns. This is not what the investors had bargained for. The fundamental assumption on the basis of which the investment was made has ceased to exist. The respondent company has failed to function and conduct business operations for the last eight years. It's bank accounts are frozen and it's goodwill has evaporated pursuant to actions taken by statutory authorities. Lack of confidence and inability of the respondent company to protect investor's interest is apparent.
42. The investment made by the public must be protected. The assets of the respondent company consists of the investment made by public. It is apparent that the respondent company does not have any substantial asset other than the investments made by the general public which now stands seized and is in custody of the Enforcement authorities. During the last nearly eight years the company has stopped functioning and doing any business. Its accounts have not been audited. It is apparent that the substratum of the company and the object and purpose for which it was established stands frustrated. The agony, pain and endless wait suffered by hundreds of investors, who had on the basis of representations made by the respondent company deposited their money, must be brought to an end and should not be prolonged. Therefore, I feel it is "just and equitable" to pass a final winding up order in the present case. The investors have some hope as the amount seized by the Enforcement Authorities is still available and can be distributed. It is the larger public interest of the investors which has to be taken into consideration.
43. However, I must deal with the judgments relied upon by the Learned Counsel for the respondent company. The contention raised by the Learned Counsel for the respondent company is that any dispute relating to interpretation of an agreement cannot form basis for action of winding up. The broad proposition as canvassed has to be rejected. What has been repeatedly held by the Courts is that a petition for winding up under Section 433(e) read with Section 434(1)(a) of the Act is not maintainable for enforcement of payment of a disputed debt. Once a debt is bonafidely disputed by a company, the parties have to be relegated to civil proceedings. However, debt which is not bonafidely disputed by a company can become subject matter of a winding up petition under Section 433(e) r/w Section 434 (1)(a) of the Act. In Banaras Beads Ltd. v. Prashant Glass Works Pvt. Ltd. reported in 2002 (111) Comp. Cases 339, learned Single Judge of Allahabad High Court referred to Section 434(1)(a) of the Act and the words "neglected to pay" and held that where a bonafide dispute is raised by the company and where the debt is not substantiated, there is no neglect to pay. In the present case the findings are to the contrary. Karnataka High Court in the case of N.R. Srinivas v. Golden Green Farms and Resorts Pvt ltd (2002) 112 Comp. Cases 445 has again reiterated the above principle holding, inter alia, that where there is a serious dispute whether a debt is payable by the company, the Company Court should not entertain a winding up petition by converting itself to a Civil Court. However, if the defense put up by the company is a sham and not a substantial defense, a winding up petition is maintainable.
44. this Court in Major N. Radhakrishnan (Retd.) v. A.C.M.E Décor India Pvt Ltd (2005) 123 Comp. Cases 127 referred to an earlier judgment of this Court in the case of Charanjit Singh Grewal v. Trilleniun Technologies Ltd (2003) 6 AD (Delhi) 637 wherein the following propositions were laid down:
(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 to 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.
(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.
(vii) Generally speaking, an admission of debt should be available and/or the defense that has been adopted should appear to the court to be dishonest and/or moonshine, for proceedings to continue. There is insufficient material in favor of the petitioners. The disputes appear to be essentially between the petitioners and respondents Nos. 2 and 3, and 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 37 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.
45. Ultimately what has been held is that where a debt is bonafidely disputed, a winding up petition shall not be maintainable. But where the defense is dishonest or moonshine, a winding up petition should not be dismissed.
46. The Punjab and Haryana High Court in National Investors Forum v. Golden forest (India) Ltd. (2004) 118 Comp. Cases 587 has observed that even if a winding up petition is admitted, as a broad statement it cannot be accepted that a final winding up order would be passed. Admission of a petition is prima facie proof of the admitted liability but this by itself alone is not conclusive to direct final winding up order. Court has discretion even after admission of winding up to decide whether or not to pass a final winding up order. In the said case keeping in view the assets of the company and after reasons, the Court did not pass the final winding up order. However, the Court issued certain directions to protect the interest of the investors by directing the provisional liquidator to take control and sell the movable and immovable properties so as to fetch the maximum price. Several directions were issued. The above judgment hardly supports the case of the respondent company.
47. Lastly, the Learned Counsel for the respondent relied upon Greenhills Exports (Pvt) ltd. and Ors. v. Coffee Board (2001) 106 Comp.Cases 391. In the said case the question involved was whether a claim for damages on account of breach of contract is a debt due and payable which can be made subject matter of a winding up petition under Section 433(e) r/w Section 434(1)(a) of the Act. Division Bench of Karnataka High Court held that a winding up petition is not a recognised mode to recover a debt, if the company is solvent and the debt is bonafidely disputed. A winding up petition should not be actuated by interior motive as a device to pressurize the company to submit to an unjust claim. It was held that the term "debt" refers to an ascertained and definite amount due and does not refer to a claim for compensation or damages which requires assessment by a Court before it becomes due and payable. The word "debt" does not include a claim for payment of damages. The Court noted with approval judgment of Bombay High Court in Iron and hardware (India) Company v. Firm Shamlal and Brothers wherein the terms "debt" and "damages" were distinguished. The word "debt", it was held by the Bomaby High Court, signifies existing liability which may be due immediately or may be due in future but obligation to pay the debt due must be there. The obligation to pay will also arise even if the debt requires ascertainment by a mechanical process or by taking of accounts. But what is necessary is that the obligation to pay must exist. In the said case it was held that it is not correct to say that a person who commits breach of contract incurs pecuniary liability. No pecuniary liability arises till the claim for damages is adjudicated and ascertained. Reference was made to Union of India v. Raman Iron Foundry it has been held that a claim for unliquidated damages does not give rise to a debt unless liability is adjudicated and a decree or order is passed. Breach of contract does not result in Eo Instanti pecuniary obligation. A party complaining of breach of contract only has right to sue. Ultimately, the Court held that the word "debt" means a sum of money which is now payable or becomes payable in future by reason of present obligation. The existing obligation to pay a sum of money is sine qua non of a debt. But claim for damages based on breach of contract on is not debt till it is adjudicated. The claim of the petitioner is not based on right to claim damages. Amount payable by the respondent company is ascertained.
48. As noticed above Section 434(1) incorporates a deeming provision for the purpose of Section 433(e). Section 434(1) has three separate clauses. The decision referred to above is in relation to Section 434(1)(a). Section 434(1)(c) also incorporates a deeming provision which refers to commercial insolvency. While deciding a case under Section 434(1)(c) of the Act, the total liabilities of the company including contingent and prospective liabilities have to be taken into consideration.
49. In the light of the findings given above, it is, inter alia, held as under:
(I) The respondent company is liable to be wound up on the ground of its inability to pay its debt under Section 433(e) of the Act for the following reasons:
(a) the contract between the petitioner and the respondent company stands frustrated under Section 56 of the Contract Act and the respondent company is liable to refund/restitute the amount received.
(b) Even otherwise, conditions of Section 433(e) r/w. Section 434 (1)(a) of the Act are satisfied. Admittedly, Rs. 60,000/- was received from the petitioner by the respondent-company. The respondent-company had agreed to refund/repay this amount received from the petitioner. Refund has not yet been made. The obligation to pay is admitted. For the reasons mentioned above, it is held that the respondent-company is liable to pay the debt due to the petitioner.
(II) It is just and equitable to wind up the respondent company for the reasons set out above.
50. In view of the above, the respondent company Maple Leaf Trading International (P) Ltd. is directed to be wound up. The Official Liquidator is directed to take steps to take into his custody and possession assets of the respondent company and also take steps to protect interest of the investors. In terms of the above Order the Company Petition and all pending applications are disposed of.
51. List before the regular bench for further proceedings on 17th April, 2007.