Bombay High Court
Hdfc Bank Ltd vs Rohan Dyes And Intermediates ... on 19 July, 2016
Bench: B.P. Colabawalla
HDFC BANK CP320 OF 2013.docx
dik
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
COMPANY PETITION NO. 320 OF 2013
HDFC Bank Ltd. ...Petitioner
vs
Rohan Dyes & Intermediates Ltd. ...Respondent
.....
Mr. Zubin Behramkamdin a/w Ms F Behramkamdin, Ms Slesha Sheth, Mr.
Saahil Bijliwala i/b FZB & Associates for the Petitioner.
Mr. Rohan Cama a/w Ms Sapna Raichure i/b T.N.Tripathi & Co. for the
Respondent.
CORAM : B.P.COLABAWALLA, J.
Reserved On : 15 April, 2016.
Pronounced On : 19 July, 2016.
[JUDGEMENT]
1. This Company Petition has been filed by the Petitioner -
HDFC Bank Ltd. seeking to winding up the Respondent Company -
Rohan Dyes and Intermediates Ltd. on the ground that the
Respondent Company is unable to pay its debts. It is the case of the
Petitioner that the Respondent Company is indebted to the Petitioner
in the sum of approximately Rs.8.74 Crores which comprises of a
principal sum of Rs.8.19 Crores and simple interest of Rs.54.96 Lacs.
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The claim in the present Petition arises out of certain derivative
transactions that were entered into between the Petitioner Bank and
the Respondent Company, the details of which are narrated
hereinafter. I must mention here at the outset that it is not in dispute
that the Petitioner Bank is an authorised dealer in foreign exchange
and is in fact listed as an authorised dealer in Category - I as per the
Reserve Bank of India Guidelines.
2.
Before dealing with the facts of this case, it would be
necessary to mention here that this Company Petition was originally
heard by another Judge of this Court ( S. C. Gupte J. ), who by his
order dated 7 September, 2015 dismissed this Company Petition.
Being aggrieved by this order, the Petitioner Bank preferred an
Appeal before the Division Bench of this Court, who by its order dated
4 February, 2016 set aside the order dated 7 September, 2015 and
remanded the matter back to this Court for a fresh hearing. It is in
these circumstances that the present Company Petition has come up
for admission before me once again.
3. The brief facts giving rise to the controversy in the
present Petition are as follows:-
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(a) It is the case of the Petitioner that the Respondent
Company during the course of its business, export large
quantities of products and have a large annual turnover.
Apart from this, the Respondent Company also has a
substantial amount of imports. By virtue of this business
(Import and Export), according to the Petitioner, the
Company is therefore exposed to fluctuation risks in the
foreign currency market.
(b) With a view to hedge its foreign exchange fluctuation
risks, the Respondent Company approached the
Centurion Bank of Punjab ("CBOP"), in the year 2007 in
order to enter into certain derivative transactions. It
must be mentioned here that there is no dispute that
CBOP merged with the Petitioner Bank with effect from
23 May 2008. Consequently, all assets and liabilities of
CBOP vested in the Petitioner - Bank.
(c) Consequent to the discussions and negotiations between
CBOP and the Respondent Company, CBOP issued a
sanction letter dated 8 November, 2007 containing the
terms and conditions on which certain derivative
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transactions between CBOP and the Respondent Company
were to take place. Pursuant to this, the Board of
Directors of the Company passed a resolution on 14
November, 2007 inter alia authorizing the Company to
enter into an agreement with CBOP to transact spot and
forwards in foreign exchange and enter into interest rate
and foreign currency swaps, options and any derivatives
that may from time to time be used to hedge the
company's interest and foreign exchange exposure. The
said resolution also accepted and agreed to the terms and
conditions stipulated by CBOP in its sanction letter dated
8 November, 2007 and also authorized its Directors,
namely, Radheshyam Tarachand Agarwal and Rohan
Agarwal, jointly and severally to enter into the aforesaid
transactions for and on behalf of the Respondent
Company and execute all necessary documentation in
that regard.
(d) Accordingly, and as prescribed by the Reserve Bank of
India guidelines, CBOP and the Respondent Company
entered into an ISDA Master Agreement dated 15
November, 2007 along with the schedule thereto also
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dated 15 November, 2007 ("ISDA Agreement"). Under
this Agreement, CBOP and the Respondent Company
agreed to enter into various derivative transactions each
to be evidenced by a deal confirmation which would be
supplemental to, a part of and subject to the ISDA
Agreement and the Schedule thereto.
(e)
Along with the ISDA Agreement, the Company also
executed a Risk Disclosure Statement dated 15
November, 2007 in acceptance and acknowledgment of
its understanding of the risks involved in entering into
derivative transactions. It is not in dispute that the ISDA
Agreement as well as the Risk Disclosure Statement were
signed on behalf of the Respondent Company by persons
who were authorized in that regard as per the board
resolution dated 14 November, 2007.
(f) As mentioned earlier, on 23 May, 2008 CBOP merged
with the Petitioner Bank under a Scheme of
Amalgamation duly sanctioned by the Reserve Bank of
India vide its letter dated 20 May, 2008. Under the said
scheme, the Petitioner took over all the rights and
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liabilities of CBOP and stepped into the shoes of CBOP in
respect of all pending transactions entered into by CBOP,
one of which was under the ISDA Agreement and all
derivative transactions entered into by the parties
thereunder.
(g) After the aforesaid merger of CBOP with the Petitioner
Bank, on 26 June, 2008 a deal confirmation was entered
into between the Petitioner Bank and the Respondent
Company for the purposes of entering into USD/INR
options transaction comprising of a series of options, the
expiry / maturity of which, were spread over a period of
one year from 27 June, 2012 to 29 May, 2013. This deal
confirmation was entered into for modifying and hedging
certain other derivative transactions entered into by
CBOP with the Respondent Company on 20 November,
2007; 23 November, 2007; 19 December, 2007 and 22
January, 2008. This deal confirmation records that it
evidenced a complete and binding agreement between the
Petitioner and the Respondent Company as per the terms
of the transaction to which the confirmation related. The
particular options transactions to which the deal
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confirmation relates were as follows:-
Option Reference No. 86228HM
The Counterparty: ROHAN DYES & INTERMEDIATES LTD.
Option Style : EUROPEAN
Expiration Time: TOKYO CUT 15:00:00
Trade Date: 06/25/08
Ref Num Eff Option Call Call Put Put Amount Expiry Dt. Settlement Strike
Date Buyer Ccy
ig Amount Ccy Date Price
86228HM 25JUN- COUNTER INR 21,575,000 USD 500,000 27JUN-12 29JUN-12 43.1500
08 PARTY
86229HM 25JUN- HDFC USD 800,000 INR 34,520,000 27JUN-12 29JUN-12 43.1500
08 BANK LTD
86230HM 25JUN- COUNTER INR 21,575,000 USD 500,000 27JUL-12 31JUL-12 43.1500
08 PARTY
86231HM 25JUN- HDFC USD 800,000 INR 34,520,000 27JUL-12 31JUL-12 43.1500
08 BANK LTD
86232HM 25JUN- COUNTER INR 21,575,000 USD 500,000 29AUG-12 31AUG-12 43.1500
08 PARTY
86233HM 25JUN- HDFC USD 800,000 INR 34,520,000 29AUG-12 31AUG-12 43.1500
08 BANK LTD
86234HM 25JUN- COUNTER INR 21,575,000 USD 500,000 26SEP-12 28SEP-12 43.1500
08 PARTY
86235HM 25JUN- HDFC USD 800,000 INR 34,520,000 26SEP-12 28SEP-12 43.1500
08 BANK LTD
86236HM 25JUN- COUNTER INR 21,575,000 USD 500,000 29OCT-12 31OCT-12 43.1500
08 PARTY
86237HM 25JUN- HDFC USD 800,000 INR 34,520,000 290CT-12 31OCT-12 43.1500
08 BANK LTD
86238HM 25JUN- COUNTER INR 21,575,000 USD 500,000 28NOV-12 3ONOV-12 43.1500
08 PARTY
86239HM 25JUN- HDFC USD 800,000 INR 34,520,000 28NOV-12 3ONOV-12 43.1500
08 BANK LTD
86240HM 25JUN- COUNTER INR 21,575,000 USD 500,000 27DEC-12 31DEC-12 43.1500
08 PARTY
86241HM 25JUN- HDFC USD 800,000 INR 34,520,000 27DEC-12 31DEC-12 43.1500
08 BANK LTD
86242HM 25JUN- COUNTER INR 21,575,000 USD 500,000 29JAN-13 31JAN-13 43.1500
08 PARTY
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86243HM 25JUN- HDFC USD 800,000 INR 34,520,000 29JAN-13 31JAN-13 43.1500
08 BANK LTD
86244HM 25JUN- COUNTER INR 21,575,000 USD 500,000 26FEB-13 28FEB-13 43.1500
08 PARTY
86245HM 25JUN- HDFC USD 800,000 INR 34,520,000 26FEB-13 28FEB-13 43.1500
08 BANK LTD
86246HM 25JUN- COUNTER INR 21,575,000 USD 500,000 27MAR-13 29MAR-13 43.1500
08 PARTY
86247HM 25JUN- HDFC USD 800,000 INR 34,520,000 27MAR-13 29MAR-13 43.1500
08 BANK LTD
86248HM 25JUN- COUNTER INR 21,575,000 USD 500,000 26APR-13 30APR-13 43.1500
08 PARTY
86249HM 25JUN- HDFC USD 800,000 INR 34,520,000 26APR-13 30APR-13 43.1500
08 BANK LTD
86250HM 25JUN- COUNTER INR 21,575,000 USD 500,000 29MAY-13 31MAY-13 43.1500
86251HM
PARTY
25JUN- HDFC
BANK LTD
USD
ig 800,000 INR 34,520,000 29MAY-13 31MAY-13 43.1500
(h) The counter party referred to above is the Respondent
Company and HDFC Bank Ltd is the Petitioner before me.
The strike price agreed to was Rs.43.150000. To put it
simply, as per this deal confirmation, on the relevant
expiry dates, if the USD traded below Rs.43.15 per US
Dollar then the Respondent Company would sell
US$500,000/- to the Petitioner Bank @ Rs.43.15 per US
Dollar. Similarly, on the relevant expiry dates, if the USD
traded above Rs.43.15 per US Dollar, then it was agreed
that the Respondent Company would sell US$800,000/- to
the Petitioner @ Rs.43.15 per US Dollar. After entering
into the aforesaid deal confirmation, the Respondent
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Company on 16 July, 2008 also provided details of the
underline business transactions for which said deal
confirmation was entered into.
(i) Under this deal confirmation, a Mark to Market ("MTM")
and margin condition was also agreed upon between the
Petitioner Bank and the Respondent Company. It was
agreed between the parties that any time after six
months from the trade date (25 June, 2008) till the
expiry / maturity of the deal, if negative MTM of the
options transaction exceeded Rs.5 Crores, the Petitioner
Bank would be entitled to make a margin call on the
Company for excess of the negative MTM over the
amount of Rs.5 Crores. In accordance with this
agreement the Company also furnished a post-dated
cheque for an amount of Rs.5 Crores that was to be
encashed by the Petitioner Bank only after the margin
call arising under the aforesaid options transactions was
not complied with and the Respondent Company failed to
make alternative arrangements within 30 days from the
date of demand. It is the case of the Petitioner that since
the Company failed to comply with the margin call arising
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under the aforesaid options transactions despite expiry of
30 days from the date the Respondent Company was
called upon to do so, the Petitioner presented the said
cheque on 4 December, 2012 which was dishonoured for
the reason "insufficient funds".
(j) One such incident of negative MTM took place on 26
December, 2008 that is six months after the date of
execution of the said options transactions due to
fluctuations in the foreign currency exchange rates. The
MTM value in respect of said options transaction
exceeded its limits of Rs.5 Crores and touched the value
of Rs.10 Crores. In this view of the matter, the Petitioner,
vide their letter dated 30 December, 2008 issued a
margin call in terms of the deal confirmation. Since,
there was no reply, the Petitioner Bank addressed
another letter dated 13 May, 2009 to the Respondent
Company, once again making a margin call and requested
the Respondent Company to comply with its obligations
under the deal confirmation.
(k) The Respondent Company vide its letter dated 20 May,
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2009 expressed its inability to comply with the margin
call made by the Petitioner Bank citing the reason that
due to cash constraints, global slowdown in the market
and prior business commitments, it was unable to cater to
the margin call made by the Petitioner Bank. However,
what is important to note is that in this very letter the
Respondent Company expressed its intention to continue
with the options transaction entered into with the
Petitioner Bank and expressed its commitment to clear
all dues and outstanding at the relevant expiry -
settlement dates under the deal confirmation. I must
mention here that the Respondent Company has raised a
dispute with reference to this letter dated 20 May, 2009
inter alia contending that the same has not been issued by
the Respondent Company and the same is not signed by
its authorized signatory. I will deal with this contention
later in the judgment.
(l) Be that as it may, the Petitioner once again, by its letter
dated 15 July, 2009 called upon the Respondent
Company to comply with the margin call made by the
Petitioner, which at that point of time was Rs.4.03 Crores.
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In reply thereto, the Respondent Company once again
vide its letter dated 22 July, 2009 reiterated their earlier
request not to insist on any margin call and reiterated
that they intend to continue with the transaction entered
into between the Petitioner Bank and the Respondent
Company. The Respondent Company further stated that
they were hopeful that the Rupee was going to appreciate
in the short term as well as in the long term and,
therefore, in a short while, the MTM would be below the
sanction limit of Rs.5 Crores. Looking to the longstanding
and healthy relationship of the Respondent Company
with the Bank, the Company urged the Petitioner Bank to
kindly not insist for further margin call against the
options transaction. I must mention here that this letter
of 22 July, 2009 is also disowned by the Respondent
Company by stating that it was never issued by it and is
not signed by any authorized signatory. This contention
also I shall deal with later in this judgment.
(m) Thereafter, the Petitioner Bank vide their demand notices
dated 6 July, 2010; 5 August 2010; 1 September, 2010;
and 14 March, 2012 issued a margin call on the
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Respondent Company in terms of the deal confirmation
without any success.
(n) Be that as it may, as per the deal confirmation dated 26
June, 2008, on the expiry of the first option (i.e. on 27
June, 2012), since the US Dollar was trading above
Rs.43.15 per Dollar, the first option was exercised by the
Petitioner on the expiry date of the said option. As per
the said option, the Company was obliged to sell
US$800,000/- to the Petitioner at the pre - agreed
USD/INR rate of Rs.43.15 (the strike price). Hence the
Petitioner addressed an email dated 27 June, 2012 to the
Company containing the details of the said option and
called upon the Company to inform the Petitioner as
regards utilization and/or nett settlement of the said
option so exercised by the Petitioner.
(o) In reply thereto, the Respondent Company by its email
dated 28 June, 2012 for the first time disputed the
options transaction. It was stated in the said email that
the said options transaction was entered into only to
square off all old contracts / deals dated 20 November,
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2007; 23 November, 2007; 19 December, 2007; 19
December, 2007; and 22 January, 2008 that were
entered into with CBOP. The Respondent Company stated
that the options transaction was entered into to square off
the old dues which were not enforceable in law and that
this deal confirmation - options transaction was only a
paper contract so that the accounts of the Petitioner Bank
could be squared up. An identical reply was given by the
Respondent Company when the Petitioner exercised their
second option which expired on 27 July, 2012. Similar
replies have been given by the Respondent Company for
all the options exercised by the Petitioner Bank on their
respective expiry dates as more particularly set out in the
deal confirmation.
(p) It is not in dispute that all the options have been duly
exercised by the Petitioner in view of the fact that the US
Dollar rate on the date of exercising the options was
higher than Rs.43.15. It is the Petitioner's case that since
the Company refused to honour its obligations under the
options transaction as envisaged by the deal
confirmation, the Petitioner was forced to procure
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US$800,000 from the open market on 29 June, 2012 (in
relation to the first option) and crystallized the said
options transaction thereby incurring a loss of
Rs.1,07,68,000/-. Similarly, it is pleaded in the Petition
that for all the other options also the Petitioner had to
procure US$800,000 from the open market to crystallize
the said options transactions which resulted in a loss that
was attributable to the Respondent Company.
ig These
details and averments can be found from paragraphs 21
to 31 of the Company Petition.
(q) It is the case of the Petitioner that the amounts claimed in
the Company Petition is the amount of difference in the
strike price agreed to between the parties in the deal
confirmation (namely Rs.43.15) and the US Dollar rate
on the date of expiry of the option. For example, under
the deal confirmation, on the expiry date of a particular
option, if the US Dollar traded at Rs.44.15, the
Respondent Company was bound to sell US$800,000 to
the Petitioner Bank @ Rs.43.15 per US Dollar. If it did not
do so then the Respondent Company had to make good
the difference in the Dollar rate being Rs.1.00 per US
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Dollar for US$800,000 (being Rs.8 Lacs). Though the
Petitioner has termed the word "loss" in a very loose
manner, it is the case of the Petitioner that these amounts
were payable under the contract (namely the deal
confirmation read with the ISDA Agreement and other
documents executed between the parties) and
irrespective of whether or not the Petitioners had
purchased US Dollars from the open market and suffered
a loss. This payment was due by the Respondent Company
to the Petitioner under a written contract entered into
between them, was the submission of the Petitioners. In
other words, it is the case of the Petitioner that this is
nothing but a debt due from the Respondent Company to
the Petitioner Bank.
(r) Be that as it may, on 4 September, 2012 the Petitioner's
Advocate addressed a notice to the Respondent Company
and its guarantors placing on record all the facts and
called upon the Respondent Company to honour its
obligations under the deal confirmation. It is pertinent to
note that in this letter, specific references have been
made to the letters dated 20 May, 2009 and 22 July,
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2009 which the Respondent Company now seeks to
disown. A reference to these letters can be found in
paragraph 4 (page 142 of the paper book). There is no
dispute that this letter dated 4 September, 2012 has been
received by the Respondent Company and yet it chose not
to reply to the same or controvert the allegations and the
contentions raised therein.
(s)
Since the Respondent Company failed to honour its
commitments under the deal confirmation, the Petitioner
through their Advocate's notice dated 18 January, 2013
and delivered at the registered office of the Company,
called upon the Respondent Company to pay a sum of
Rs.6,86,00,436.15 as on 31 December, 2012, within a
period of 21 days from the date of receipt of the notice
failing which the Petitioner would be constrained to
initiate legal proceedings against the Respondent
Company including initiating winding up proceedings
contemplated under Section 433 read with Section 434 of
the Companies Act, 1956. Despite receipt of this notice,
no reply was given to the said notice and hence the
present Company Petition. It would be pertinent to
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mention that the amount claimed in this notice was for a
lesser amount than what is claimed in the Company
Petition, because options 8 and 9 (expiring in January,
2013 and February, 2013 respectively) had not yet
expired when the said notice was issued. Since the
Petition is filed after the expiry of even options 8 & 9 and
payments thereunder have not been made by the
Respondent Company, the same are included in the claim
made in the present Company Petition. I must also
mention here that by the time I heard this Petition, all the
options have expired (namely options 10, 11 & 12) and
no payments thereunder have been made by the
Respondent Company to the Petitioner - Bank.
(t) For the sake of completeness, I must also mention here
that to recover its dues under the very same transaction
as pleaded in the Company Petition, the Petitioner - Bank
has also filed an Original Application before the Debts
Recovery Tribunal at Ahmedabad ("DRT"), being Original
Application No.163 of 2012 and which is pending. The
Petitioner has also filed a complaint under Section 138 of
the Negotiable Instruments Act, 1881 for dishonour of
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the cheque of Rs.5 Crores before the Metropolitan
Magistrate Court, Ahmedabad, being Case No.163 of
2012, and which is also pending till date.
4. In this factual backdrop, Mr Kamdin, learned counsel
appearing on behalf of the Petitioner Bank, submitted that the facts
in this case are really undisputed. He submitted that there is no
dispute that the deal confirmation was entered into on 26 June,
2008. Under the said deal confirmation it was agreed between the
parties that if on the expiry date of the relevant option the US Dollar
was traded at a rate higher than Rs.43.15 then the Respondent
Company would to either deliver US$800,000 to the Petitioner Bank
at the rate of Rs.43.15 per US Dollar or pay the difference between
the US Dollar rate on the date of the expiry of the option and the
strike price agreed to between the parties, namely Rs.43.15. Mr.
Kamdin submitted that it is not in dispute that on the expiry dates of
all the 12 options, the US Dollar was traded at a rate higher than
Rs.43.15. In terms of the deal confirmation, the Petitioner therefore
called upon the Respondent - Company to either deliver to the
Petitioner US$800,000 under each of the options or pay the
difference between the US Dollar rate on the date of the expiry of the
respective option and the strike price agreed to between the parties,
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namely Rs.43.15. Since the Respondent - Company failed to do
either, the present Company Petition has been filed seeking to wind
up the Respondent Company on the ground that it is unable to pay its
debts.
5. According to Mr Kamdin, this liability of the Respondent
Company arises on account of the contract entered into between the
parties and was payable as per the terms of the contract.
ig He
submitted that as per the Risk Disclosure Statement executed by the
Respondent (Page 73 of the paperbook), the deal could be fulfilled in
two manners set out above i.e. either by delivering US$800,000
under each option at the pre-agreed / strike price of Rs.43.15 per US
Dollar or pay the difference between the Dollar rate on the date of the
expiry of the respective option and the strike price agreed to between
the parties, namely Rs.43.15. According to Mr. Kamdin this is also
further borne out by the Master Circular No./6/2007-08 dated 2 July,
2007 issued by the Reserve Bank of India, and more particularly
Annexure VII thereof which stipulates that option contracts could be
settled on maturity either by delivery on spot basis or by net cash
settlement in Rupees on spot basis as specified in the contract.
6. On the other hand, despite several contentions being
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raised in the Affidavit in Reply, Mr Cama, learned Counsel appearing
on behalf of the Respondent Company, resisted this Petition only on
the following grounds:-
(i) the aforesaid Deal Confirmation was entered into to
square off the old contracts/deals dated 20 November,
2007; 23 November, 2007; 19 December, 2007; 19
December, 2007 and 22 January 2008 entered into by
the Respondent Company with CBOP. The purpose of
entering into this Deal Confirmation was to square off all
the earlier deals which were unenforceable in law. This
Deal Confirmation which was entered into with the
Petitioner Bank was merely a paper transaction entered
into to accommodate the Petitioner and was not to be
enforced by either party. This being the case, there was
no liability on the Respondent Company to make payment
of any amount whatsoever under the aforesaid Deal
Confirmation dated 26 June, 2008;
(ii) in any event, the Deal Confirmation dated 26 June, 2008
does not caste any obligation on the Respondent Company
to make any payment. Under the Deal Confirmation, if the
US Dollar traded above Rs.43.15 per Dollar, then, the
Respondent Company was to sell US$800,000 to the
Petitioner at the price of Rs.43.15 per US Dollar. If the
Respondent Company failed to sell US$800,000 as
contemplated in the Deal Confirmation, then the remedy
of the Petitioner was to seek specific performance thereof.
The fact that the Deal Confirmation contemplated that the
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Respondent Company was to sell US$800,000 to the
Petitioner itself shows that it was a commodity that ought
to be delivered by the Respondent Company to the
Petitioner. If there was no physical delivery required
then the same would amount to a wagering contract hit
by Section 30 of the Contract Act, 1872;
(iii) the claim made in the present Petition was nothing but in
the nature of damages. This being the case, there was no
debt due and payable by the Respondent Company to the
Petitioner in presenti, and therefore, the Company
Petition could not be maintained on the basis of a claim in
damages;
(iv) that there is a serious dispute with reference to the
amounts owed to the Petitioner in view of the fact that
there was nothing to indicate what was the US Dollar rate
on the date of the expiry / settlement of the respective
options; and
(v) That in any event the Deal Confirmation that was
stamped, was not signed by the Respondent Company, but
the signature of the Respondent Company can be found
only on a duplicate of the Deal Confirmation. Therefore
there was a variance in the primary document itself
which has given rise to a bonafide dispute between the
parties.
7. For all the aforesaid reasons, Mr Cama submitted that
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there is no merit in this Company Petition and the same ought to be
dismissed. He submitted that, in any event all these issues would
give rise to a bonafide defence to the Company Petition, and
therefore, this Court ought not to entertain the same and leave the
Petitioner to recover its dues in the Original Application filed before
the Debt Recovery Tribunal.
8. I have heard the learned counsel for the parties at length
and perused the papers and proceedings in the Company Petition as
well as the annexures thereto. The first defence raised by Mr Cama
was that the Deal Confirmation dated 26 June, 2008 entered into
with the Petitioner Bank, was only for the purpose of squaring off the
old transactions entered into by the Respondent Company with CBOP
which were unenforceable in law. According to Mr Cama, it was the
understanding between the Petitioner Bank and the Respondent
Company that this Deal Confirmation was entered into only to
accommodate the Petitioner Bank and allow it to square off old
transactions that were entered into with CBOP and who was
subsequently taken over by the Petitioner Bank.
9. After carefully considering the argument canvassed by
Mr Cama, I am unable to agree with the aforesaid submissions. As
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noted earlier, under the Deal Confirmation, it was agreed between the
parties that any time after six months from the trade date (25 June,
2008) till the expiry / maturity of the deal, if negative MTM of the
options transaction exceeded Rs.5 Crores, the Petitioner Bank would
be entitled to make a margin call on the Company for excess of the
negative MTM over the amount of Rs.5 Crores. Since the negative
MTM exceeded Rs.5 Crores, the Petitioner Bank by its letter dated 13
May, 2009 called upon the Respondent Company to fulfill its
obligations and make up the shortfall in the margin as contemplated
under the Deal Confirmation. In reply to this letter, the Respondent
Company by its letter dated 20 May, 2009 (Exh P to the Petition)
expressed its inability to comply with the margin call citing the
reason that due to cash constraint, global slow down in the market
and prior business commitments, the Respondent Company was
unable to cater to the margin call made by the Petitioner Bank.
However, in this very letter, the Respondent Company expressed its
intention to continue with the options transaction (as set out in the
Deal Confirmation) and committed itself to clearing all the dues and
outstandings on the relevant expiry / settlement dates as set out in
the Deal Confirmation. This letter would clearly establish that way
back in May 2009, the Respondent has categorically affirmed the
Deal Confirmation entered into by it with the Petitioner Bank.
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Thereafter the same commitment has been given by the Respondent
Company once again vide its letter dated 22 July, 2009 (Exh. R to
the Petition). These two letters establish beyond any doubt that as
way back as in May 2009 and July 2009, the Respondent Company
affirmed the options transactions as recorded in the Deal
Confirmation dated 26 June, 2008 and represented to the Petitioner
Bank not to insist on any margin call as they would honour their
commitments under the Deal Confirmation on the relevant expiry/
settlement dates of the options. In view of these two categorical
letters, I am unable to accept the submissions of Mr Cama that the
Deal Confirmation dated 26 June, 2008 was entered into only to
accommodate the Petitioner Bank to square off the old transactions
entered into by the Respondent Bank with CBOP and which was not
to give rise to any liability to either party.
10. Faced with this situation, Mr Cama contended that the
letters dated 20 May, 2009 and 22 July, 2009 did not emanate from
the Respondent Company and were not signed by a person
authorized by the Respondent Company as per its resolution dated
14 November, 2007. According to Mr Cama this resolution (Exh B to
the Petition) only authorized Mr. Radheshyam Agarwal and/or Mr.
Rohan Agarwal to transact in spot and forward any foreign exchange
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and enter into interest rate and foreign currency swap options and
any other derivative transactions that may from time to time be used
to hedge the Company's interest and foreign exchange exposure risk.
He submitted that admittedly these letters have not been signed by
either Mr. Radheshyam Agarwal or Mr. Rohan Agarwal, and
therefore, the same are not binding on the Respondent Company.
11. I am unable to accept this submission of Mr Cama for
multiple reasons. Firstly, the board resolution, and on which reliance
was placed by Mr. Cama, only authorized Mr. Radheshyam Agarwal
and/or Mr. Rohan Agarwal to enter into derivative contracts. This
does not mean that all correspondence that is subsequently
exchanged between the Respondent Company and the Petitioner has
to be only signed by Mr Radheshyam Agarwal and/or Mr Rohan
Agarwal. It is one thing to contend that the transaction itself was not
entered into by an authorized person and it is wholly another to say
that the correspondence exchanged with reference to that very
transaction, was not signed by a person authorized to do so. I,
therefore, find that the reliance placed by Mr Cama on the board
resolution to further this argument is wholly misplaced. Secondly, I
find that the Deal Confirmation dated 26 June, 2008 (Exh K to the
Petition), apart from being signed by a person authorized by the
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board resolution dated 14 November, 2007, is also signed by the
gentleman who has signed the letter dated 20 May, 2009. The Deal
Confirmation as well as the letter dated 20 May, 2009, specifically
state that this person signing the Deal Confirmation as well as the
letter dated 20 May, 2009 is the authorized signatory of the
Respondent Company. I am, therefore, unable to accept the
argument of Mr Cama that these letters dated 20 May, 2009 and/or
22 July, 2009 have not been signed by the authorized signatory of
the Respondent Company, and therefore, not binding on them.
12. There is yet another reason why I am unable to accept the
submissions of Mr. Cama. As noted earlier, since the incident of
negative MTM took place on 26 December, 2008, the Petitioner vide
their letters dated 30 December, 2008 as well as 13 May, 2009
issued a margin call in terms of the Deal Confirmation. Thereafter, by
several other letters dated 15 July, 2009; 6 July, 2010; 5 August,
2010; 1 September, 2010 and 14 March, 2012 issued further margin
calls on the Respondent Company in terms of the Deal Confirmation.
Even if I were to ignore the letters dated 20 May, 2009 and 22 July,
2009 written by the Respondent Company to the Petitioner, there is
not a single letter written by the Respondent Company in response to
the aforesaid letters (making a margin call) contending that the
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entire transaction entered into between the Petitioner bank and the
Respondent Company was only a paper transaction and was not to be
enforced and or acted upon. To my mind, any prudent person, after
receiving these letters calling upon him to provide a short fall in the
margin, would have immediately replied to the same and refuted the
entire transaction thereby denying that any margin shortfall ought
to have been made up by him. Admittedly, no such reply was ever
given. This alone speaks volumes about the conduct of the
Respondent Company and how it treated the Deal Confirmation as a
valid and binding transaction between the Respondent Company and
the Petitioner. I must mention here that this defence was raised for
the first time only when the Respondent Company was called upon to
honour its commitments under the first option that expired on 27
June, 2012. Looking to all these facts, I am clearly of the view that
this defence has been put up only as an afterthought to somehow
wriggle out of the liability that the Respondent Company had
incurred under the said Deal Confirmation. For all the aforesaid
reasons, I have no hesitation in rejecting the argument of Mr Cama
that the Deal Confirmation dated 26 June, 2008 entered into between
the Petitioner Bank and the Respondent Company was not a real
transaction that could be enforced against the Respondent Company.
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13. The next argument canvassed by Mr Cama was that the
Deal Confirmation dated 26 June, 2008 does not cast any obligation
on the Respondent Company to make any payment. He submitted
that the Deal Confirmation itself contemplated that on the date of the
expiry of the relevant option, if the US Dollar traded above Rs.43.15,
then the Respondent Company was to sell US$800,000 to the
Petitioner @ Rs.43.15 per US Dollar. If the Respondent Company
failed to sell/ deliver US$800,000 as contemplated in the Deal
Confirmation, then the remedy of the Petitioner was to seek specific
performance thereof. An ancillary argument to this is that if no
physical delivery was required then the same would amount to
wagering contract which would be squarely hit by Section 30 of the
Indian Contract Act, 1872.
14. I am unable to agree with this submission. It is common
knowledge that any derivative transactions, essentially of the nature
like in the present case, the market practice is that when there is no
delivery, there is a nett cash settlement. In fact the Risk Disclosure
Statement executed by the Respondent Company (at page 73 of the
paper book ) itself contemplates that the deal can be settled either by
a cash settlement or the purchaser of the option acquiring or
delivering the underline asset. The relevant portion of the said Risk
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Disclosure Agreement reads as under:
"................You should calculate the extent to which the value of
the options would have to increase for your position to become
profitable, taking into account the premium paid and all
transaction costs. The purchaser of options may exercise the
options or allow the options to expire. The exercise of an option
results either in a cash settlement or in the purchaser of the
option acquiring or delivering the underlying
asset....................."
(emphasis supplied)
15.
Even Annexure VII of the Master Circular No./6/2007-08
dated 2 July, 2007, (which deals with Foreign Currency - Rupee
Options) states as under:
"g) Option contracts may be settled on maturity either by
delivery on spot basis or by net cash settlement in Rupees on spot
basis as specified in the contract. In case of unwinding of a
transaction prior to maturity, the contract may be cash settled
based on the market value of an identical offsetting option."
(emphasis supplied)
16. In fact, the Deal Confirmation dated 26 June, 2008 itself
contemplates payment being made on the expiry of the relevant
option. The relevant portion of the Deal Confirmation reads thus:
"Each party will make each payment specified in this Confirmation as
being payable by it, not later than the due date for value on that date in
the place of the account specified below, in the freely transferable funds
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and in the manner customary for payments in the required currency. If on
any date amounts would otherwise be payable in the same currency by
each party to the other, then on such date, each party's obligation to make
payment of any such amount will be automatically satisfied and
discharged and, if the aggregate amount that would otherwise have been
payable by one party exceeds the aggregate amount that would otherwise
have been payable by the other party, replaced by an obligation upon the
party by whom the larger aggregate amount would have been payable to
pay to the other party the excess of the larger aggregate amount over the
smaller aggregate amount."
(emphasis supplied)
17.
Looking to all these facts, I am unable to accept the
submission of Mr Cama that on expiry of the relevant option, if the
Respondent failed to sell/ deliver US$800,000 to the Petitioner, then
the only remedy available to the Petitioner was to sue for specific
performance. The Master Circular issued by the Reserve Bank of
India as well as other documents (as more particularly set out above)
clearly establish that the options transactions were to be settled
either by delivery of the US Dollars or by a nett cash settlement. This
being the position, I have no hesitation in rejecting this argument.
18. As far as the argument of Mr Cama on this contract being
a "wagering contract" is concerned, I find this argument to be without
any basis. The issue whether a transaction like in the present case, is
a "wagering contract" has been dealt with extensively in a leading
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decision of the Madras High Court in the case of Rajshree Sugars &
Chemicals Ltd. Vs. Axis Bank Ltd.1 The facts of this case would
reveal that in pursuance of the ISDA Master Agreement, at least 10
deals were struck between the Plaintiff therein and UTI Bank (which
later became AXIS BANK LTD). Admittedly, 9 out of those 10 deals
had already matured without any dispute on either side. But the
Plaintiff has come to court with regard to the 10th deal bearing
contract No. OPT 727. The disputed deal was a USD-CHF (U.S.Dollar-
Swiss Franc) Option Structure, entered into by the Plaintiff with UTI
Bank. The structure of the said deal was as follows:
"(i) The plaintiff would receive USD 100,000 on 23.6.2008 if spot
never trades at 1.2385 from trade date namely, 22.6.2007 till fixing
date 1 namely, 19.6.2008.
(ii) During the reference period from 22.6.2007 to 19.6.2008, if
USD-CHF never touches 1.1250 and 1.2385 and if it ever touches
1.2385, there is no exchange of principal, but if it ever touches
1.1250 and never touches 1.2385, the plaintiff should buy USD 20
million against paying CHF at 1.3300.
During the reference period from 22.6.2007 to 15.6.2009, if USD-
CHF never touches 1.1200 and 1.2385 or if it ever touches 1.2385,
there is no exchange of principal, but if it ever touches 1.1200 and
never touches 1.2385, the plaintiff should buy USD 20 million
against paying CHF at 1.3300.
(iii) If the USD-CHF touches the level of 1.2385 ever during the
period starting from 22.6.2007 to 15.6.2009, then the entire structure
gets knocked out with no subsequent liability and the plaintiff would
receive USD 100,000 on the spot date of touch. However if spot
touches 1.2325, then the plaintiff would receive instant payment of
USD 100,000, though the structure will not get knocked out."
1 AIR 2011 MADRAS 144 : 2008 SCC OnLine Mad 746 : (2009) 1 CTC 227
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19. In terms of the said deal, the Defendant paid to the
Plaintiff US$100,000 which was received by the Plaintiff. However,
after six months, the Plaintiff sent a letter dated 12 December, 2007
claiming that the entire structure as per the contract dated 22 June,
2007 got knocked out with no liability to either of the parties. By a
reply dated 7 January, 2008, the Bank challenged this claim and
contended that the contract was still alive and that the Bank was
prepared to work out suitable risk mitigation structures.
ig Not
satisfied with the stand taken by the Bank, the Plaintiff filed a suit
before the Madras High Court inter alia seeking a declaration that the
Deal Confirmation in Contract No. OPT 727 purportedly made by the
Plaintiff was void ab-initio, illegal, violative of RBI Guidelines,
opposed to public policy and unenforceable and not binding on the
Plaintiff. One of the issues raised before the Madras High Court for
challenging the said Contract No.OPT 727 was that the same
amounted to a wagering contract and therefore hit by Section 30 of
the Indian Contract Act, 1872. Dealing with this contention as to
what is a contract of wagering, the observations of the Madras High
Court (at paragraph 53 to 59) are very instructive in this regard and
read thus:-
53. As we have seen in the first part of this order, the plaintiff
challenges the contract in question as being void, violative of the law
of the land, opposed to public policy and as a wagering contract. It
is the stand of the plaintiff in the suit that the contract is violative of
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the Master circulars and Regulations issued by the Reserve Bank of
India and consequently hit by Section 23 of the Contract Act. It is the
further contention of the plaintiff that since there was no underlying
exposure, the contract was, per se, speculative and a wagering
contract, hit by Section 30 of the Contract Act. Therefore, it is
necessary to analyse whether the contract in question is hit by
Section 23 and/or Section 30 of the Contract Act.
54. Though the Indian Contract Act, 1872 defines a "Contingent
Contract" under Section 31, it does not define what a "Wagering
Contract" is. But the consequences of a Wagering Contract are
indicated in Section 30, which reads as follows:
"30. Agreements by way of wager, void. -- Agreements by way of
wager are void; and no Suit shall be brought for recovering
anything alleged to be won on any wager, or entrusted to any
person to abide by the result of any game or other uncertain event
on which any wager is made.
Exception in favour of certain prizes for horse-racing. -- This
Section shall not be deemed to render unlawful a subscription or
contribution, or agreement to subscribe or contribute, made or
entered into for or toward any plate, prize or sum of money, of the
value or amount of five hundred rupees or upwards, to be awarded
to the winner or winners of any horse-race."
In Carlill v. Carbolic Smoke Ball Co., 1892 (2) Q.B. 484, 490,
Hawkins J., defined a wager as follows:
"A wagering contract is one by which two persons professing to
hold opposite views touching the issue of a future uncertain event,
mutually agree that, dependent upon the determination of that
event, one shall win from the other, and that other shall pay or
hand over to him, a sum or money or other stake; neither of the
contracting parties having any other interest in that contract than
the sum or stake he will so win or lose, there being no other real
consideration for the making of such contract by either of the
parties."
The above view was first affirmed in 1893 (1) Q.B. 256 and later
in Weddle Beck & Co. v. Hackett, 1929 (1) K.B. 321
and Ellesmere v.Wallace, 1929 (2) Ch. 1.
55. The essential features of a Wagering Contract as formulated by
the English Courts are as follows:
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(1) There must be 2 persons or 2 sets of or 2 groups of persons
holding opposite views touching a future uncertain event. It may
even concern a past or present fact or event.
(2) In a Wagering Contract, one party is to win and the other to
lose upon the determination of the event. Each party must stand
either to win or lose under the terms of the contract. It will not be
a Wagering Contract if one party may win but cannot lose or if
he may lose but cannot win or if he can neither win or lose.
(3) The parties have no actual interest in the occurrence or non-
occurrence of the event, but have an interest only on the stake.
56. Applying the above essential features, contracts for differences in
stock exchange or commodity market transactions were once treated
as wagers Grizewood v. Blane,
ig 1851 (11) CB 526
and Richards v. Starck, 1911 (1) K.B. 296. They were held to be
wagers because of the understanding of the parties that the subject
matter should neither be transferred nor paid for, on the settlement
day, but that on that day, one party should pay to the other, the
difference between the market price on that day and the price on the
day of the contract. Thus where a series of contracts for the sale and
purchase of shares gave the buyer an option to demand delivery on
payment of an extra sum, it was held that they were wagers, since it
was only if the option was exercised that they would become genuine
transactions of sale and purchase. But if one party to the transaction
undertakes a real liability to give or take delivery, the mere fact that
the other party intends by a subsequent transaction to arrange that
delivery under the first transaction shall not take place, does not turn
the transaction into a wager. A genuine purchase of shares followed
by a separate and genuine sale, creates enforceable obligations,
even though the original purchaser never intended to take delivery of
the shares and was in fact merely speculating upon their value. Sales
and purchases of stocks and shares are not wagering transactions
unless there is an agreement between the parties to them that they
shall not be actually carried out but shall end only in the payment of
differences. If there is an agreement to this effect, the transaction
will be a wager notwithstanding the fact that the ostensible terms of
business give a right to insist on delivery (Chitty on Contracts,
Volume II − 29th Edition Page 1119).
57. Until the enactment of the Gaming Act, 1845, wagering contracts
were not prohibited by law in England. But Section 18 of the Gaming
Act, 1845 (UK) declared that all contracts or agreements by way of
wager shall be null and void and that no Suit shall be brought or
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maintained in any Court of law and equity for recovering any sum of
money or valuable thing alleged to be won upon any wager.
However, certain dealings in investments by way of business are
excepted from invalidity under Section 18 even though they might
amount to wagering contracts. For example, contracts for
differences or bets on stock market indices, City Index Ltd. v. Leslie,
1992 (1) Q.B. 92.
58. Though every wagering contract is speculative in nature, every
speculation need not necessarily be a wager. In Bhagwandas
Parasram v. Burjori Ruttonji Bomanji, AIR 1917 PC 101, it was held
that speculation does not necessarily involve a contract by way of
wager and that to constitute a Wagering Contract, a common
intention to wager is essential. It was further held therein that in a
wagering contract, there has to be a mutuality in the sense that the
gain of one party would be the loss of the other on the happening of
the uncertain event which is the subject matter of wager. The said
decision was quoted with approval by the Supreme Court in Firm of
Pratapchand Nopaji v. Firm of Kotrike Venkata Setty & Sons and
Others, 1975 (2) SCC 208.
59. The mere fact that the parties never intended to take delivery at
the end would not also make a transaction a wager. In Ismail Lebbe
Marikar Ebrahim Lebbe Marikar v. Bartleet and Company, AIR (29)
1942 Privy Council 19, a firm of share and produce brokers entered
into an arrangement with the grower of rubber in Ceylon. Under the
arrangement, the broker was to buy rubber for the defendant in the
London market, but there was to be no delivery. The arrangement
was that the defendant should pay the differences when the market
was against him and that he should be paid the differences, when the
market was in his favour. Holding such a contract not to be a wager,
the Privy Council held as follows:
"The essence of a bet is that both parties agree that they will pay
and receive respectively on the happening of an event in which
they have no material interest. The transaction may be cloaked
behind the forms of genuine commercial transactions; but to
establish the bet, it is necessary to prove that the documents are
but a cloak and that neither party intended them to have any
effective legal operation. Where the documents show an ordinary
commercial transaction, and, in conformity with them, one of the
parties incurs personal obligations on a genuine transaction with
third parties so that he himself is not a winner or loser by the
alteration of price, but can only benefit by his commission, the
inference of betting is irresistibly destroyed. In such cases the fact
that no delivery is required or tendered is of practically no value."
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20. Thereafter, applying the aforesaid principles, the Madras
High Court examined Contract No. OPT 727 and ultimately held that
the said contract was not a wagering contract. I think the issue of
whether the present contract is wagering contract, and therefore, hit
by Section 30 of the Contract Act, 1872, is squarely answered by this
decision of Madras High Court. I am in full agreement with the
decision of the Madras High Court on this issue. The facts of the
present case would show that the Deal Confirmation dated 26 June,
2008 confers rights on the Petitioner Bank to seek actual delivery.
In other words, the performance of the contract can always be
compelled by the Petitioner insisting on actual delivery of US$
800,000 on the expiry of the relevant option, provided the US Dollar,
on the date of expiry / maturity, traded higher than Rs.43.15. If
actual delivery can be compelled, then this particular contract can
never be termed as wagering contract. In any event, the records do
not show or in any manner indicate any intention between the
Petitioner Bank and the Respondent Company to enter into a
wagering contract, which is sine qua non for the transaction to be
dumped as a "wager". I am, therefore, not impressed with the
argument of Mr Cama that the Deal Confirmation dated 26 June,
2008 entered into by the Respondent Company with the Petitioner
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Bank is void-ab-initio, illegal and unenforceable as it amounts to a
"wagering contract", and therefore, hit by the provisions of Section
30 of the Indian Contract Act, 1872.
21. The next submission canvassed by Mr Cama was that the
claim made in the present Company Petition was nothing but in the
nature of damages. This being the case, there was no debt due and
payable by the Respondent Company to the Petitioner in presenti and
therefore, this Company Petition could not maintained on the basis of
a claim for damages. In this regard, he was at pains to point out the
averments in the Petition wherein the Petitioner has averred that
since the Respondent Company did not honour its commitments
under the options transactions, the Respondent Company had
suffered a "loss". In this regard, Mr Cama placed reliance on a
decision of the Supreme Court in the case of Union of India v/s
Raman Iron Foundry2, as well as a decision of a Single Judge of this
Court (Dr D.Y. Chandrachud J. as he then was) in the case of E-City
Media P.Ltd. v/s Sadhrta Retail Ltd.3
22. On carefully considering the arguments of Mr Cama, I am
unable to accept the submission that the claim made in the present
2 AIR 1974 SC 1265
3 [2010] 153 Comp Cas 326 (Bom)
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Company Petition is nothing but a claim in damages. As mentioned
earlier, the amounts claimed in the present Petition arise directly
under the Deal Confirmation dated 26 June, 2008. The options
mentioned in this Deal Confirmation could be settled by two methods.
The first method was the actual delivery of US$800,000 on the date
of expiry of the relevant option. If this was not done, then the same
had to be settled on a nett cash settlement basis. Since admittedly
the Respondent Company did not fulfill its obligations under the
relevant options by delivering US$800,000 to the Petitioner, the
present claim in the Petition has been made on the basis that a nett
cash settlement had to be done by the Respondent Company with the
Petitioner on the expiry of the relevant options. Therefore, the
obligation of the Respondent Company to pay to the Petitioner the
amounts claimed in this Petition arise directly under the Deal
Confirmation entered into between the parties dated 26 June, 2008.
I am therefore unimpressed with the argument of Mr Cama that the
claim of the Petitioner is one in damages. If I was to accept the
submission of Mr Cama that the present claim made by the Petitioner
under the option transactions entered into with the Respondent
Company is in damages, then effectively, non-fulfillment of all
derivative transactions, would be a claim in damages. I am unable to
accept this submission. In fact, the Madras High Court in the case of
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Rajshree Sugars & Chemicals Ltd.1 has dealt with this issue, albeit
in the context of whether a derivative transaction is a debt within the
meaning of section 2(g) of the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993. Paragraphs 24 and 25 are very
instructive in this regard and read as follows :-
"24. I have carefully considered the rival contentions. The definition
of the word "debt" in Section 2(g) of the Act includes any liability
claimed as due from any person, by a Bank, during the course of any
business activity undertaken by the Bank. Therefore, if the claim of
the Bank has arisen during the course of any business activity
undertaken by the Bank, then the amount so claimed by the Bank
would certainly come within the meaning of the word "debt" as
defined in Section 2(g). Section 6(1) of the Banking Regulation Act,
1949, enables a Banking Company to engage in any one or more of
the forms of business enumerated in Clauses (a) to (o), in addition to
the business of Banking. Sub-section (2) of Section 6 prohibits a
Banking Company from engaging in any form of business other than
those enumerated in sub-section (1). Therefore if a transaction falls
within any one of the forms of business covered by Section 6(1) of the
Banking Regulation Act, 1949, it would certainly be a business
activity undertaken by the Bank. Consequently, a claim that arises
during the course of such a business activity undertaken by the Bank,
would come within the definition of the word "debt" in Section 2(g).
25. Transactions in derivatives, fall within the category of "business
activity undertaken by the Bank" as they are covered by Section 6(1)
of the Banking Regulation Act, 1949. Therefore I have no difficulty in
coming to the conclusion that if the transaction in question gives rise
to a claim by the Bank, of any liability, on the part of the plaintiff,
the defendant-Bank may certainly be able to invoke the provisions of
Act 51 of 1993. Since the word "debt" is defined to include any
claim arising out of the business activity of the bank, it is not
necessary that only in those cases where there is an act of lending
and borrowing that the provisions of Act 51 of 1993 could be
invoked by the Bank. Therefore I have no difficulty in accepting the
first limb of the argument of Mr. V. Ramachandran, learned Senior
Counsel appearing for the respondent-Bank, that if the transaction in
1 AIR 2011 MADRAS 144 : 2008 SCC OnLine Mad 746 : (2009) 1 CTC 227
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question gives rise to a claim by the Bank, the Bank has to go before
the Debts Recovery Tribunal."
23. This being the position, I am unable to accept the
submission of Mr Cama that the present claim is in the nature of
damages and therefore the present Company Petition would not be
maintainable.
24.
As far as the decisions relied upon by Mr Cama are
concerned, there is no dispute with the propositions laid down
therein. In Raman Iron Foundry2 the Supreme Court inter alia held
that the law is well settled that the claim for unliquidated damages
does not give rise to a debt until the liability is adjudicated and
damages are assessed by a decree of the Court or other adjudicating
authority. The Supreme Court opined that a claim for damages is
therefore not a claim for a sum presently due and payable and
therefore, the party against whom the breach is complained of, does
not eo instanti incur any pecuniary obligation. The Supreme Court
further held that damages or compensation are not awarded by
reason of any existing obligation on the part of the person who has
committed the breach, but the party complaining of the breach gets
compensation as a result of the fiat of the Court. I fail to understand
2 AIR 1974 SC 1265
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how this judgment can be of any assistance to Mr Cama in the facts of
the present case. As elaborated earlier, the claim made in the
present case, in my opinion, is not one that is in damages. The
pecuniary liability incurred by the Respondent Company and claimed
in this Petition, is under the options transactions entered into by the
Respondent Company with the Petitioner which form part of the Deal
Confirmation dated 26 June, 2008. In these circumstances, the ratio
of the decision of the Supreme Court in the case of Raman Iron
Foundry2 has no application whatsoever to the factual matrix before
me.
25. Similarly, on the same parity of reasoning, I find the
reliance placed by Mr Cama on the decision of a Single Judge of this
Court in the case of E-City Media P.Ltd.,3 as wholly misplaced. The
facts of this case would reveal that the Company Petition was filed
admittedly on the basis of a claim for liquidated damages. The
learned Judge held that even if the claim was in the nature of
liquidated damages, the same would make no difference and
therefore a winding up petition would not be maintainable. This
decision is also therefore, to my mind, wholly inapplicable to the facts
of the present case.
2 AIR 1974 SC 1265
3 [2010] 153 Comp Cas 326 (Bom)
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26. Mr Cama then submitted that there is a serious dispute
with reference to the amounts owed to the Petitioner in view of the
fact that there was nothing to indicate what was the US Dollar rate on
the date of the expiry / settlement of the respective options. To
counter to this argument, Mr Kamdin, and in my view correctly so,
submitted that as far as the US Dollar rate is concerned, it is
determined at the end of the closing business day of the expiry of the
option. In fact, under the Master ISDA Agreement, the calculation
agent is the Petitioner Bank, unless otherwise specified in the Deal
Confirmation in relation to a particular transaction (See page 64 of
the paper-book). In fact, even the Deal Confirmation dated 26 June,
2008 specifically states that the calculation agent shall be as per the
signed Master ISDA Agreement which in term makes the Petitioner
Bank the calculation agent. In each of the e-mails that have been
sent by the Petitioner Bank to the Respondent Company on the
expiry of the relevant options, a specific US Dollar rate has been
mentioned by the Petitioner Bank. It is therefore incorrect to
contend that there was nothing on record to show or indicate as to
what was the US Dollar rate on the date of the expiry of each of the
options. In any event, Mr Cama tendered the US Dollar rates as
downloaded from the internet on the dates when each of these
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options expired. This clearly indicates that the US Dollar rate ranged
from approximately Rs.53 per US Dollar to Rs.56 per US Dollar.
Even this clearly shows that on the date of each of the expiry of
options the US Dollar rate was far greater than Rs.43.15 per US
Dollar. This would clearly show that even if one were to go by the US
Dollar rates as handed over by Mr Cama, huge outstandings are due
and payable by the Respondent company to the Petitioner which
would entitle the Petitioner to an order of admission of this Petition.
In this regard, it would be apposite to refer to a decision of the
Supreme Court in the case of Madhusudan Gordhandas and Co. v/s
Madhu Woollen Industries Pvt.Ltd.4, and more particularly
paragraph 21 thereof which reads thus :-
"21. Where the debt is undisputed the court will not act upon a
defence that the company has the ability to pay the debt but the
company chooses not to pay that particular debt, see Re. A
Company. [94 SJ 369] Where however there is no doubt that the
company owes the creditor a debt entitling him to a winding up
order but the exact amount of the debt is disputed the court will make
a winding up order without requiring the creditor to quantify the
debt precisely See Re Tweeds Garages Ltd.[1962 Ch 406] 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."
(emphasis supplied)
27. As clearly stipulated by the Supreme Court, once there is
4 (1971) 3 SCC 632
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no doubt that the Respondent Company owes to the Petitioner an
amount which would entitle the Petitioner to a winding up order,
then a winding up order can be passed by the Company Court without
driving the Petitioner to quantify the debt precisely. Following this
proposition, two Division Benches of this Court have also taken the
same view. The first decision is in the case of Pfizer Limited v/s
Usan Laboratories Pvt Ltd.5 wherein a Division Bench of this Court
held as under:-
"6. The short question we are considering is the position of the
notice or of the subsequent petition when a part of the claim made by
the creditor is seriously in dispute, but the remaining portion which
prima facie would appear to be in order exceeds the limit of Rs.
500/- indicated in section 434. Shri Tulzapurkar submitted that the
position is not res integra being concluded by the decisions both of
the English Courts and of the Calcutta High Court, which decisions
have taken view contrary to the view which found favour with the
learned Company Judge. Our attention was invited to these decisions
and it becomes necessary therefore to refer to them.
7. In point of time, the first of the decisions in the decision given by
Plowman J. in In re Tweeds Garages Ltd., [(1962) 1 Chancery 406.]
The relevant observations are to be found at pages 413 and 414 of
the report. An opinion has been expressed in the said judgment that
it would be quite unjust to refuse a winding-up order to a petitioner
who is admittedly owed moneys which have not been paid merely
because there is a dispute as to the precise amount owing.
8. Almost to the same effect are the observations in Cardiff
Preserved Coal and Coke Company v. Norton, [(1866-1867) 2 Law
Reports Chancery Appeals 405.]. A contention had been advanced
before the appellate Court that the winding-up order which was
being considered was bad because the creditor had demanded a sum
of £628, and it appeared that he was entitled only to £411 7s. 9d.
This argument has been decisively rejected by Lord Chelmsfore, L.C.
5 (1985) Mh. L. J. 554
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speaking for the Bench at page 410 of the report. It has been
observed that even if the creditor has made a demand upon the
company for payment of more than was due, that per se will not
make the notice or the consequential winding up order bad or
invalid, provided that there was a debt in excess of £50 due to the
creditor.
9. Both the above decisions have been cited and followed by a Single
Judge of the Calcutta High Court in Ofu Lynx Ltd. v. Simon Carves
India Ltd. [AIR 1970 Cal. 418.] The learned Single Judge was
considering the validity of a notice under section 434 of the
companies Act, 1956, and the contention raised was that the notice
must be deemed to be bad because a portion of the claim in respect
of which notice had been given was disputed and prima facie the
dispute was required to be upheld. It was observed:
"I, therefore, hold that notice under section 434 of the
Companies Act, 1956 will not be rendered invalid only
because of the fact that the amount of debt mentioned in the
notice may not be exactly the correct amount of the debt due,
provided the amount mentioned in the notice includes the
debt due and exceeds the sum of Rs. 500/-."
10. In our opinion, the aforesaid decisions set out the correct
principle and once we have reached the conclusion, it will have to be
held that the dismissal of the winding-up petition on the basis
indicated in the impugned order would be clearly bad and order
required to be set aside. Merely because there could be a serious
dispute as to the liability to pay interest at all or at the rate of 18%
would not render the statutory notice invalid or result in a dismissal
of the winding-up petition. The Company Judge was required to
consider the claim of the petitioners in respect of the principal
amount and to come to a conclusion whether or not there was any
real substantial dispute with regard to the said claim. If there was a
genuine and bonafide dispute, then certainly it was within his
discretion and jurisdication to dismiss the petition and relegate the
petitioners to claim the amount by a regular suit. However, he did
not go into this aspect but chose to dispose of the winding-up petition
by dismissing the same on an erroneous basis which we have earlier
indicated. If that be so, the impugned order will be required to be set
aside and the petition will now go back to the Company Judge for
reconsideration of the position and to decide whether it is required
to be admitted and whether further directions after admission are
required to be given."
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(emphasis supplied)
28. The second decision is in the case of Tata Finance Ltd
v/s Kanoria Sugar and General Manufacturing Company Ltd.,
Mumbai.6 The relevant portion reads thus:-
"8. It is well settled that a winding up petition should not be allowed
to be taken as a means to recover debt from the company. It is not a
legitimate way to enforce payment of debts which are bona
fide disputed by the company and cannot be used as a weapon to
pressurise and coerce the company to make payments. But it is also
equally well settled that when the debt is undisputed and the defence
is not bona fideand genuine, the Court will not act upon a defence
that the company has liability to pay but chooses not to pay and the
creditors will, in such case, be entitled to a winding-up order. This is
clear from the following observations of the Supreme Court
in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries,
(1972) 42 Comp Cases 125:
"Two rules are well settled. First, if the debt is bona
fide disputed and the defence is a substantial one, the Court
will not wind up the company. The Court has dismissed a
petition for winding-up where the creditor claimed a sum for
goods sold to the company and the company contended that
no price had been agreed upon and the sum demanded by
the creditor was unreasonable. (See London and Paris
Banking Corpn., Re. 4) Again, a petition for winding-up by a
creditor who claimed payment of an agreed sum for work
done for the company when the company contended that the
work had not been done properly was not allowed. (See
Brighton Club and Horfold Hotel Co. Ltd. Re. 5)
Where the debt is undisputed the Court will not act upon a
defence that the company has the ability to pay the debt but
the company chooses not to pay that particular debt. (See A
Company, Re. 6) Where, however, there is no doubt that the
company owes the creditor a debt entitling him to a winding-
up order but the exact amount of the debt is disputed the
Court will make a winding-up order without requiring the
creditor to quantify the debt precisely. (See Tweeds Garages
6 (2002) 1 Mh. L. J. 617
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Ltd., Re. 7). The principles on which the Courts 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."
9. In United Western Bank Ltd.'s case, (1978) 48 Companies Cases
378 (Bom), Kania, J. (as he then was) observed that when the
defence is that the debt is disputed, the Court has to see first whether
the dispute on the face of it is genuine or merely a cloak to cover
company's real inability to pay the debts. The inability is indicated
by its neglect to pay the debt within three weeks, after proper
demand was made. He added that neglect is to be assessed on the
facts of each case.
10. In Goel Bros, and Co. Pvt. Ltd.'s case, 1979 Mh. L.J. 607 :
(1980) 50 Comp Cases 356 (Bom.), another Single Judge of this
Court, Agarwal, J. held that after the creditor establishes that the
debt is clear, valid in law, unimpeachable and indisputable, the
creditor is entitled to a winding up order ex debito justitiae. But if
the debt is disputed and the dispute is bona fide and genuine, no
winding up order can be made. He clarified that neglect to pay is not
equivalent to omission to pay for it requires that such omission is
without reasonable cause or valid excuse.
11. Applying now, the law as above, to the case in hand, can it be
said that the defence raised by the company is legitimate and the
debt of company is bona fide disputed. In the instant case, the
Company's case is that the total amount of more than Rupees Two
crores is payable by the company. It is true that there is some dispute
about the claim of enhanced lease rentals on account of
disallowance of claim of depreciation by the Income Tax department.
There is, however, absolutely no dispute for the outstanding lease
rentals which are in the range of nearly Rupees Thirty Lakhs. The
terms of agreement are also very clear and in case of default, the
company is liable to pay the service charges. When a part of claim
made by the creditor is seriously disputed but the remaining portion
is prima facie appear to exceed the limit of Rs. 500/- indicated in
section 434 of the Act, it would be unjust to refuse wind up order on
the ground that there is dispute as to precise amount owned.In re
Tweeds Garages Ltd., (1962) 1 Ch. 406: it was clearly held that it
would be unjust to refuse a winding up order to the petitioner who
has admittedly owned moneys which have not been paid merely
because there is a dispute as to the precise amount owning. Almost
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to the same effect are the observations in Cardiff Preserved Coal and
Coke Co. v. Norton, (1867) 2 Ch. App. 405.
12. The learned single judge of Calcutta High Court in Ofu Lynx
Ltd. v. Simon Carves India Ltd., (1971) 41 Comp Cas 174 has
observed:
"I, therefore, hold that a notice under section 434 of the
Companies Act, 1956, will not be rendered invalid only
because of the fact that the amount of debt mentioned in the
notice may not be exactly correct amount of the debt due,
provided the amount mentioned in the notice includes debt
due and exceeds sum of Rs. 500/-."
13. The Judgment of single judge of Calcutta High Court has been
cited with approval by the Division Bench of this Court in Pfizer
Ltd. v. Usan Laboratories P. Ltd., 1985 Mh. L.J. 554 : 1985 (57)
Comp Cas 236. Therefore, merely because a part of the claim was
disputed by the company, the defence cannot be said to be legitimate
and bona fide."
(emphasis supplied)
29. In view of this clear enunciation of the law, I find that the
argument made by Mr Cama is misconceived. As stated earlier, even
if one goes by the US Dollar rates as given by Mr. Cama, (which range
from approximately Rs.53 to Rs.56 per US Dollar) huge amounts
would be payable by the Respondent Company to the Petitioner which
would entitle them to an order of admission of this Company Petition.
In this view of the matter, I find no merit in this submission.
30. The last contention canvassed by Mr Cama was that the
Deal Confirmation that was duly stamped was not signed by the
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Respondent Company but the signature of the authorised signatories
of the Respondent company can be found only on the duplicate of the
Deal confirmation which was not duly stamped. In other words, it
was the case of Mr Cama that there is a variance between the two
Deal Confirmations and which would give rise to a bonafide dispute
and hence a bonafide defence to the winding up petition.
31.
To my mind, this argument is made only to be rejected. I
have carefully gone through the deal confirmation annexed at Exh.'K'
to the Petition (page 84 of the paper-book) as well as Exh.'F' to the
affidavit in rejoinder dated 24 March, 2014 (page 246 of the paper-
book). Both the aforesaid documents are one and the same deal
confirmation and are identical in its terms. The only difference
between the two is that the duplicate of this deal confirmation has
been signed by the Respondent - Company (through its authorised
signatories) whereas the stamped deal confirmation is unsigned by
the Respondent Company. Reading these two documents together, I
find absolutely no merit in the submission of Mr Cama that there is
any variance between the two documents. In any event, this defence
is taken for the first time in this Company Petition and was never
raised by the Respondent Company at the time when it disputed its
liability on the expiry of the relevant options under the Deal
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Confirmation dated 26 June, 2008. I therefore find that this defence
is neither in good faith nor bonafide which would persuade me to
dismiss this Company Petition on this ground. If in fact, it was the
case of the Respondent Company that it was not a signatory to the
Deal Confirmation which in turn did not give rise to any liability, such
a fundamental defence would have been taken up by the Respondent
Company at the very first instance and would not find place for the
first time only in the affidavit in reply filed to contest the contentions
raised by the petitioner Bank. This being the position, I
unhesitatingly reject this argument.
32. For all the aforesaid reasons, I find that there is no
bonafide defence that has been raised by the Respondent Company.
The liability incurred by the Respondent Company to the Petitioner -
Bank is on the basis of a written contract (the Deal Confirmation)
entered into between them which the Respondent Company has,
without sufficient cause, failed to honour. The liabilities are far in
excess of an amount of Rs.500/- as contemplated under section
434(1)(a) of the Companies Act, 1956. This, to my mind, would
entitle the Petitioner to seek an order of admission of this Company
Petition. In these circumstances, the following order is passed :-
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(i) The Company Petition is admitted and made
returnable on 3rd October, 2016.
(ii) The admission of this Company Petition shall be
advertised in two local newspapers viz. (i) Free
Press Journal (in English) and (ii) Navshakti (in
Marathi) as also in (iii) Maharashtra Government
Gazette. Any delay in publication of the
advertisement in the Maharashtra Government
Gazette and any resultant inadequacy of notice shall
not invalidate such advertisement or notice and
shall not constitute non-compliance with this
direction or with the Companies (Court) Rules,
1959.
(iii) The Petitioner shall, on or before 27th August, 2016
deposit a sum of Rs.10,000/- towards publication
charges with the Prothonotary and Sr. Master of
this Court, under intimation to the Company
Registrar, failing which the Petition shall stand
dismissed for non-prosecution without further
reference to the Court. After the advertisements
are issued, the balance, if any, shall be refunded to
the Petitioner.
( B. P. COLABAWALLA J. )
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