In Re: Fancy Corporation Limited, ... vs Unknown
2007 Latest Caselaw 180 Bom

ORDER

V.C. Daga, J.

1. This petition is filed by the petitioner bank under Section 433(e) of the Companies Act, 1956 ("Act" for short) seeking winding up of the respondent- company.

The Facts:

The case as stated in the petition is as follows:

2. The petitioner is a co-operative scheduled bank having its head office at Chembur, Mumbai. The respondent is a public limited company having its registered office at 16, Mumbai Samachar Marg, Fort, Mumbai and engaged in the business of manufacturing and export of embroidered garments and other material.

3. The petitioner, in the course of their banking business, had extended financial assistance from time to time in the form of bill discounting facilities to their constituents Rasiklal Ratilal Trading Private Limited and M/s. Rasiklal Ratilal (jointly referred to as "RR Group") on the terms and conditions mutually agreed upon.

4. Rasiklal Ratitlal Trading Pvt. Ltd. had sold, supplied and delivered to the Company items of various fabrics and had raised, issued and delivered to the Company their 7 invoices for the aggregate sum of Rs. 77,12,001.00. The said 7 bills had fallen due for payment during the period 24th April, 2003 to 10th June, 2003.

5. M/s. Rasiklal Ratilal had also sold, supplied and delivered to Company items of various yarns as ordered by them and, subsequently, raised, issued and delivered to the Company 8 invoices for an aggregate sum of Rs. 80,65,929.00. The said 8 bills had fallen due during the period 24th April, 2003 to 25th June, 2003.

6. The RR Group, thus, claims to have raised the aforesaid 15 (7+8) bills of exchange for the value received thereunder by Company, the details of which are given in paras-8 and 9 of the petition. The RR Group has availed bill discounting facilities extended by the bank and discounted aforesaid 15 bills which were drawn and duly accepted by the Company by endorsing their acceptance on the said bills.

7. The Company had issued 15 cheques of various dates and amounts, details of which are to be found in para-12 of the petition towards the payment of the aforesaid amount due and payable under the aforesaid 15 bills raised by RR Group. All the said cheques were returned, dishonoured by the Company's bank with remarks "refer to drawer"/ Fund Insufficient".

8. The petitioner through their notices dated 25th June, 2003 and 3rd July, 2003 recorded the aforesaid facts and called upon the Company to pay the amount of the aforesaid dishonoured cheques. Despite receipt of the said notices, the Company failed and neglected to pay the amount demanded. The proceedings under Section 138 of the Negotiable Instruments Act, 1881 ("N.I.Act") in respect of dishonoured cheques were initiated and the same are pending in the criminal courts.

9. The petitioner having failed to recover their dues filed two recovery applications under Section 101 of the Mah. Co-op.Societies Act against two establishments of RR Group for the recovery of sum of Rs. 63,95,815/-and Rs. 83,31,551/-with interest thereon and obtained recovery certificates against them to recover their dues.

10. According to the petitioners, in both the recovery applications, the said RR Group had, inter alia; taken a defence amongst others that the bills of exchange drawn by them, which were duly accepted by the Company herein, were payable without recourse to them and as such they did not have any liability in respect of the the said bills of exchange and that the petitioner should only look towards the Company; who alone are responsible for payment of the moneys due under the said bills of exchange.

11. The petitioner claims to have adjusted and appropriated term deposits of RR Group aggregating in the sum of Rs. 49,58,774/-and these appropriations have been duly reflected in the statement of accounts annexed to the recovery applications. In other words, the liability of the Company to that extent came to be reduced.

12. The aforesaid recovery certificates appear to have been challenged by RR Group under Section 154 of the Co-op. Societies Act before the Divisional Joint Registrar on payment of 50% of decretal dues, which the petitioner- bank claims to have kept in suspense account. The petitioner also claims to have recovered Rs. 7,92,999.90/ from the sale of the pledged securities which were in the form of shares and sum of Rs. 1,00,000/- in cash in the execution proceeding and claims to have given credit to the extent of the amount recovered.

13. The petitioner-bank claims that even after adjusting recoveries effected from time to time, still they have pending recovery in the sum of Rs. 99,26,156.10 which the Company has repeatedly acknowledged by their letters dated 10th March, 2003; 21st May, 2003; 5th June, 2003 and had issued cheques in discharge of their liability towards the petitioner- bank, which have also been dishonoured. In the circumstance, the company's liability towards the petitioner has been duly acknowledged and admitted. It is, thus, contended that the company's subsequent refusal to make payment is mala fide and an after thought.

14. The petitioner- bank has also brought on record that the Company is in the process of disposing of their properties as set out in para-44 of the petition, that the company was the owner of trade mark "HAKOBA" and that the company has sold their trade mark along with some of their assets and have encashed large sums of money to the detriment of its creditors. It is also alleged in the petition that the petitioner has learnt that the Company is trying to liquidate its assets in favour of its directors and also sold two flats situated in "Woodland Building" at Pedder Road, Mumbai and one vacant plot at Borivli to Mahanagar Telephone Nigam Ltd. and are further trying to sell their embroidery factory situated at Borivli along with the plant and machinery to one M/s.Pioneer Embroidery which demonstrates that the Company is, prima facie; commercially insolvent and is unable to pay its debts. It is also brought on record that the Company is persistently sustaining huge losses in the Embroidery Garment Market and apprehension is expressed that by the time this petition is decided, nothing would be left for the creditors to recover from the Company in respect of their dues.

15. The statutory notice was issued on 29th December, 2005 to the Company. The same was received by the Company. It was replied by it vide its advocate's letter dated 17th January, 2006 denying the debts of the petitioner-bank. Hence this petition.

16. On being noticed, the Company appeared and filed its counter affidavit/ reply. The substance of the respondent's plea is that the concerned bills of exchange are merely accommodation bills issued and accepted to enable the RR Group to raise and receive finance from the petitioner bank. At no point of time the said RR Group ever sold and delivered to the company any goods of whatsoever nature. That RR Group simply raised invoices for discounting the same with the petitioner-bank for availing of and raising finance thereunder. That such bills of exchange are without any consideration of whatsoever nature. The Company denied to have acknowledged their liability to pay the alleged outstanding dues, due and payable by them.

17. It is further stated in defence that the dispute between the RR Group and the Company is sub judice and pending in the arbitration proceedings. With respect to the allegations leading to the disposal of the properties except denial there is no specific reply to the allegations made in the petition. The contention is, thus, raised that there being a bona fide dispute with regard to the subject debts, the winding up petition is not maintainable. Submissions:

18. Mr. B.K. Saraf, leaned counsel for the petitioner, after narrating factual aspects and transactions would submit that in case of bill of exchange after acceptance thereof primary liability to pay is that of the acceptor. The drawer is liable to pay only as a surety. He further submits that the liability of the company is joint and several with that of RR Group.

19. The learned Counsel for the petitioner relying upon Clause (g) of Section 118 of the N.I. Act, went on to contend that the terms 'holder' and 'holder in due course' are defined in Sections 8 and 9 of the N.I. Act respectively. He urged that a holder in due course is presumed to have paid the consideration and that the respondents are estopped from disputing the liability of the bank and denying to make payment thereof.

20. The learned Counsel further submits that there is no counter claim of the Company against the bank. Acceptance of the bills of exchange by the Company is not in dispute. Issuance of 15 cheques in discharge of their liability is also not in dispute. It is also not in dispute that those cheques were not honoured by Company's banker for want of funds. That the amounts realised from time to time from RR Group has been given credit of and to that extent the liability of the Company is reduced.

21. Per contra, Mr. S.H. Doctor, learned senior counsel appearing for the Company took me through the various paragraphs of the petition and tried to find fault with each pleading of the petitioner. He urged that nowhere in the petition the petitioner- bank has urged that they are the "holder" or "holder in due course" of the subject negotiable instruments and, therefore, they are not entitled to claim any amount from the Company. He further contends that all these subject bills being accommodation bills, they do not create any liability. According to him, these bills were issued only to enable the RR Group to raise and receive finance from the petitioner- bank. At no point of time the said RR Group sold and supplied any goods of whatsoever nature and that the bills of exchange are without any consideration of any nature whatsoever and as such the Company is not under any legal obligation to pay the alleged outstanding dues of the petitioner- bank.

22. Mr. Doctor further urged that the petitioner-bank has already filed a suit in the Debt Recovery Tribunal against the Company and the same is pending for final adjudication. He further urged that the pleadings in the petition are lacking as it does not give any account as to which bills are adjusted against the recovery made from RR Group from time to time and which of them are discharged. According to him, it was necessary for the petitioner to plead and give details of discharged bills in view of Section 82(c) of N.I. Act.

23. Mr. Doctor further urged that the alleged debt is seriously disputed by the Company and if the debt is disputed then the petitioner is not entitled to maintain winding up petition as it is not a legitimate means of seeking to enforce payment of debt which is bonafide disputed by the Company. He placed reliance on the judgment of the Karnataka High Court in the case of M.R. Sriniwas v. Golden Green Farms (2002) 112 Comp. Cases 445 and Chellaradh and Co. Ltd. v. M.V.K. Sundaram AIR 1955 Mysore 122 in support of his contentions and went on to urge that winding-up petition against the Company is filed with a view to enforce payment of a disputed debt and, thus, it is nothing but an abuse of process of the court. He also placed reliance on another judgment of the Karnataka High Court in the case of Divya Export Enterprises v. Producin Pvt. Ltd. (1991) 70 Comp.Cases 692 and urged that the present petition is liable to be dismissed.

24. In rejoinder, learned Counsel for the petitioner urged that only defence taken in the counter affidavit is bills in question were accommodation bills and no goods were actually given to the respondent and, therefore, invoice numbers which were mentioned in the bills do not exist at all. He submits that even if the case of the respondent is accepted in toto, it is clear that the respondent- company is a party to the transactions of creation of documents to accommodate the said RR Group. In the circumstances, it cannot be said that the defence put up by the respondent is an honest defence. He, thus, urged that the defence of the respondent should not be accepted as bona fide. He relied upon judgment of the learned single judge in Summary Suit No. 1192/1999 (case of Canara Bank v. Hames Enterprises) decided on 18th March, 2002 (unreported). He, thus, submits that the entire stance is nothing but a mala fide defence.

25. Mr. Saraf further urged that pendency of the arbitration dispute between the Company and RR Group has nothing to do with the recovery of the petitioner-bank since the subject outstanding dues are due and recoverable from the Company itself. He, thus, submits that looking to the intention of the Company to dispose of their properties from time to time, a provisional liquidator needs to be appointed during the pendency of this petition.

Legal Backdrop:

26. Having heard rival contentions, it is well settled that winding up petition should not be allowed to be taken as a means to recover debt from a Company. It is not a legitimate way to enforce payment of debts which are bona fide disputed by a Company and cannot be used as a weapon to pressurise and coerce a company to make payments. But it is also equally well settled that when the debt is undisputed and the defence is not bona fide and genuine, the Court will not act upon such defence. The creditors will, in such case, be entitled to a winding up order, which is clear from the following observations of the Apex Court in the case of Madhusudan Gordhandas and Co. v. Madhusudan Woollen Industries Pvt. Ltd. , wherein the principles are stated in the following words:

The principles on which the court acts are first that the defence of the company is in good faith and one of substance, secondly, the defence is likely to succeed in point of law and thirdly the company adduces prima facie proof of the facts on which the defence depends.

27. When can a dispute be termed as a bona fide one? When it is to be treated as substantial? These questions can only be answered after taking into account the facts and circumstances of each case in light of the settled principles of law recognised by the various High Courts and reiterated by the Apex Court.

28. A detailed examination of the merits will be necessary if the petition for winding up has to be considered after advertising the petition. At this stage, the Court has to examine whether this petition deserves to be advertised. In other words, the question is whether the petitioner has made out a prima facie case and whether the Company has a bona fide and substantial defence against the petitioner's claim.

29. Before examining the merits of the rival contentions, it is necessary to take a glance at the statutory provisions of the N.I. Act governing the subject dispute.

30. The entire controversy revolves around the provisions of the N.I. Act. Section 7 defines "drawer", "drawee" and "acceptor". Section 8 defines "holder". Section 9 defines "Holder in due course" and means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorse thereof, if payable to order before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect exist in the title of the person from whom he derived his title.

31. The perusal of the above provisions would make it clear that the maker of a bill of exchange is the drawer; the person thereby directed to pay is called the drawee; after the drawee had signed his assent upon the bill he is called the acceptor. In the absence of any contract to the contrary, the acceptor, before maturity of a bill of exchange, is bound to pay the amount thereof at maturity according to the acceptance the amount thereof to the holder on demand.

32. The "holder" is that person who in his name is entitled to possess the instrument, whereas the "holder in due course" is a person who is possessor of an instrument even when it is payable to bearer. Under the Indian law, a holder, to be a holder in due course, must not only have acquired the bill, note or cheque for valid consideration but should have acquired it without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. An endorsee for consideration can be a holder in due course means any person who gets possession of the negotiable instrument for consideration without being an endorsee. A mere reference to Section 9 of the N.I. Act makes it clear that "holder in due course" means any person who for consideration became the possessor of a promissory note, bill of exchange, if payable to the bearer, or payee or endorsee thereof. He has right to sue on the instrument in his own name [see D.M. Battar v. State Bank 2002 Cr.L.J. 4851 (Bom)].

33. In case of bill of exchange, after acceptance the primary liability is that of the acceptor and the drawer is liable only as a surety and the drawer can file suit for compensation against the acceptor only if he has made payment to the payee and obtained bill of exchange in his favour as held by the Division Bench of this Court in Ramnarain Pvt. Ltd. v. State Trading Corpn. 1988 Bank Journal 265 (Bom).

34. Under Section 37 of the N.I. Act, the maker of a note and the drawer of a cheque is the principal debtor, and all other parties to the instrument are liable as sureties. But in the case of bill, until acceptance, the drawer is the principal debtor, and the other parties are liable as sureties. The bill, once accepted, the acceptor is considered in all cases as the party primarily liable on the bill. He is to be treated as the principal debtor to the holder, and the other parties as sureties are liable on his default-Fentum v. Pocock (1813) 5 Taunt 192.

35. Section 41 of the N.I. Act provides that the acceptor of a forged bill of exchange, already indorsed, is not relieved from liability by reason that such endorsement is forged, if he knew or had reason to be believe the endorsement to be forged when he accepted the bill. The exception provided in Section 41 to the general rule of law is presumably based on two principles; viz; (i) the doctrine of estoppel under which the acceptor would be prevented from challenging the validity of such endorsement; and (ii) the acceptor could also be regarded as a party to the fraud as he accepted a forged endorsement either knowing or having reason to believe it to be forged. As such, he cannot be allowed to take advantage of his own fraud.

36. It is also necessary to have a look at the concept of accommodation bills. In the case of a bill drawn for the accommodation of another party, the actual position differs from that appearing on the face of the instrument. The acceptor is only surety for the party accommodated, so that he is entitled to be indemnified by him, and if a holder has recovered part of the amount due from the party accommodated, he can only recover the balance from the acceptor as held by the Apex Court in the case of American Express Bank Ltd. v. Calcutta Steel Co. (1993) 76 Comp.Cases 768. Consideration for Admission:

37. Having taken prima facie survey of the legal provisions around which the subject transactions revolve, having given my anxious and careful consideration to the facts and circumstances of the case, I, prima facie; find no merit in the contention raised by the Company which runs, thus, that the subject bills of exchange are merely accommodation bills to enable the RR Group to raise and receive finance from the petitioner-bank. Let me now consider the strength of this plea.

38. It is pertinent to note here that the Company did not dispute the signatures on the documents of bills of exchange. The defence of the respondent, if accepted, would mean that to accommodate the said RR Group, the respondent signed those documents knowing that the documents were capable of being used by the said RR Group for withdrawing money from the bank. Thus, even if the case of the Company is accepted in toto, it is clear that the Company is a party to the transaction of creation of documents with the RR Group. In such circumstances, can it be said that the defence put up by the respondent is an honest defence? The answer has to be in negative. It is not in dispute that the Company has accepted bills of exchange and, thus, the Company is an "acceptor". It is, thus, clear that the Company is primarily liable to the petitioner- bank. It is not in dispute that the petitioner- bank is in possession of bills of exchange as the same were presented by the petitioner to the Company for payment, which is clear from the endorsement of the Notary Public. Hence, bank is "holder in due course". The Company, thus, prima facie; cannot escape its liability to discharge bank's debt as acceptor of the bills.

39. It is rightly contended by the petitioner that the bill of exchange being in the nature of request from the maker to a particular person, no one can be made liable on it but the person to whom it is addressed as the person to accept the bill. As has been stated, the acceptance of a bill is the signification by the drawee of his assent to the request of the drawer and such acceptance must be regarded as acknowledging that he is a drawee and acceptor of the bill and the acceptor of the bill is liable to discharge the liability of the holder and/or holder in due course.

40. So far as the second defence sought to be put up by the respondent that the arbitration dispute is pending between the respondent and the RR Group is concerned, the same is hardly of any relevance so far as the liability towards the bank is concerned. In any way, the petitioner- bank is not a party to the said proceedings. As "holder" or "holder in due course", the bank is entitled to recover its money from the acceptor who is a principal debtor being the acceptor of the bills of exchange. The petitioner- bank is a holder of the documents and, therefore, is entitled to set up its claim against the respondent-company. Therefore, dispute between the drawer and drawee is hardly of any consequence so far as the petitioner-bank is concerned. The petitioner bank has already parted with valuable consideration relying on the signature of the acceptor who has accepted the bills without any reservation.

41. The learned Counsel for the petitioner is also right in contending that the dues of the bank are acknowledged and admitted by the respondent by issuing cheques. When the cheques are issued, the presumption is that they are issued for valuable consideration. It is not in dispute that the petitioner-bank has parted with money as such it is futile to contend that the bills of exchange are without any consideration. The plea in this behalf is also untenable and by no stretch of imagination it can be accepted by any judicial mind.

42. Now, let me turn to the conduct of the respondent to find out as to whether the dispute is bona fide. The petitioner- bank was asked by the respondent- company not to put the cheques for encashment and assured them of payment of their dues. In two letters written by them to the petitioner-bank, there is absolutely no whisper disputing their liability. On the contrary, tenor of the letters would show that the respondent wanted time to make arrangement since one of their directors was in hospital.

43. When the bills were presented, Mr.Bipin H. Kapadia, Executive Director of the respondent company, who is party to the counter affidavit filed before this Court, stated before the Notary as under:

... My company is not paying because my company does not owe and apart there are many litigations pending in various courts such as High Court of Bombay and Metropolitan Magistrate Courts in Mumbai

The litigations are pending in the Court between the drawer and drawee and not against the petitioner- bank. Consequently, the reason sought to be given is absolutely untenable in law. It also did not lie in the mouth of the Executive Director of the Company to say that the company is not paying the dues because the company did not owe anything to the petitioner- bank. As sketched hereinabove, the legal position is absolutely clear that the Company is, prima facie; liable to pay outstanding debts of the petitioner-bank acceptor of the bills. The transactions of this nature are not unknown in banking business. They are an act of trust with full faith to facilitate free flow of trade and commerce in national and international trade or business. It is an obligation of the acceptor of Hundi to honour the hundi.

44. Let me again examine the defence of the Company, that the bills were accommodation bills from different angle. As held by the Apex Court in the case of American Express Bank Ltd. (supra), in the case of a bill drawn for the accommodation of another party, the acceptor becomes a surety for the party accommodated so that he is entitled to be indemnified by him and if the holder has recovered part of the amount due from the party accommodated, he can only recover balance from the acceptor. In the present case, assuming that the defence put up by the Company can be accepted in toto (which the petitioner did not accept), even then the status of the Company would be that of the surety. In law, action against surety without joining principal borrower is tenable as held by the Apex Court in the case of State Bank of India v. Saksaria Sugar Mills Ltd. . Therefore the petitioner-bank is entitled to proceed against the Company alone for recovery of their debts.

45. At this juncture, it will be relevant to mention that during the course of hearing the Company was asked whether they would be willing to deposit the amount claimed by the bank or any part thereof to show their bonafide so that the parties can be left to work out their rights in the proceedings pending before the Debt Recovery Tribunal which the petitioner- bank has filed to save loss of limitation. To this, the answer came in negative. In this backdrop, if the allegations made by the petitioner in para 44 are perused in the light of mere denial to those allegations without specific denial, one has to reach to the conclusion that the respondent company does not want to discharge its admitted liability and in the process wants to dispose of its properties. As such, petitioner would be entitled to claim interim relief in terms of prayer Clause (c) Therefore, one has to conclude that the defence taken by the Company is frivolous moonshine which on the face of it cannot be accepted and it clearly being an afterthought, the same cannot be termed as raising bona fide dispute. The petitioner has made out a prima facie case for admission of the petition. It, therefore, needs to be admitted.

46. In the result, petition is admitted. It is to be advertised in Indian Express and Navshakti. Petition is made returnable on 27th March 2007. Petitioner to deposit Rs. 10,000/ with the Prothonotary and Senior Master within four weeks from today towards cost of publication.

47. There shall be interim relief in terms of prayer Clause (c) of the petition.

48. At this stage, Mr. Doctor, learned senior counsel for the Company prayed for stay of this order for two weeks. The said prayer is opposed by the learned Counsel for the petitioner. However, in the interest of justice, the operation of this order is stayed for a period of two weeks from today.