Bombay High Court
National Securities Clearing ... vs Prime Broking Company (India) ... on 28 June, 2016
Bench: B.P. Colabawalla
NSCCL CP 3 OF 15.docx
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
COMPANY PETITION NO. 3 OF 2015
National Securities Clearing Corporation Ltd ..Petitioner
Vs.
Prime Broking Company (India) Ltd ..Respondent
Mr. Virag Tulzapurkar, Senior Counsel a/w Dr. B. Saraf, Sachin
Chandarana i/b M. K. Ambalal and Co, for the Petitioner.
Mr. Zal Andhyarujina a/w Nirav Shah, Rishikesh Soni, Naushar
Kohli i/b DSK Legal, for the Respondent.
CORAM :- B. P. COLABAWALLA, J.
Reserved on : June 17, 2016.
Pronounced on : June 28, 2016
[Judgement]: -
1. This Company Petition seeks winding up of the
Respondent Company- Prime Broking Company (India) Ltd on the
ground that it 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 Rs. 103.73 Crores as on 8th April, 2014
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along with interest @12% per annum till payment and/or
realization. Out of this, according to the Petitioner, an amount of
Rs.90.90 crores is admitted as due and payable by the Respondent
Company to the Petitioner. The obligation of the Respondent
Company arises out of various trades executed by the Respondent
Company on the platform of National Stock Exchange of India
Limited. Since the Respondent Company failed to make payment
to the counter parties, the Petitioner had to pay the said counter
parties out of its income-cum-profit and earnings, for and on
behalf of the Respondent Company, and therefore, the Petitioner is
entitled to recover the same from the Respondent Company.
2. The brief facts in the present controversy are as
follows:-
(a) The Petitioner is a wholly owned subsidiary of the
National Stock Exchange of India Limited ("NSE").
The Petitioner offers clearing and settlement services
to any person/organization including any trading
member of the NSE or any other recognized stock
exchange, subject to the provisions of the Petitioner's
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Bye-laws, Rules and Regulations. The Respondent
Company was enrolled as a trading member of the
NSE in the Futures and Options ("F & O") segment (in
addition to other segments). As a condition precedent
to being a trading member on the NSE in the F & O
segment, the Respondent Company executed a Trading
Membership Undertaking dated 17th January, 2003.
Similarly, being a Trading Member in the F & O
segment of the NSE, the Respondent Company was
required to clear and settle the deals executed by the
Respondent Company either by itself or as a clearing
member of the Petitioner and for this purpose also
executed a Clearing Membership Undertaking for the F
& O segment dated 16th January, 2003. In the normal
course of trading on the platform of the NSE in the F &
O segment, the Respondent Company sold long dated
nifty option contracts since June 2012 with their
maturity set for September 2012 and December 2012.
These contracts were subsequently partly rolled over
to March 2013 and June 2013 respectively.
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(b) As a result of the expiry of the contracts rolled over for
March 2013, as on 2nd April, 2013, an amount of
Rs.158.04 Crores became due and payable by the
Respondent Company to the Petitioner. The
Respondent Company vide its letter dated 2nd April,
2013, has in clear and express terms admitted the
outstanding amount of Rs.158.04 Crores as due and
payable by the Respondent Company to the Petitioner
and requested the Petitioner to adjust the outstanding
amount against the Respondent Company's Fixed
Deposits and cash collateral etc lying with the
Petitioner. Accordingly, the Petitioner, as per the
instructions of the Respondent Company, adjusted the
deposits/collaterals, the details of which are set out in
paragraph 7(h) of the Petition. After the aforesaid
adjustment, an amount of Rs.3.77 Crores was still
outstanding as due and payable by the Respondent
Company to the Petitioner. This amount has also been
expressly admitted by the Respondent Company vide
its letter dated 3rd April, 2013. Despite the express
admission, the Respondent Company failed and
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neglected to make the payment of the aforesaid
amount of Rs.3.77 Crores.
(c) In addition to the aforesaid sum (Rs. 3.77 Crores), that
was due and payable by the Respondent Company to
the Petitioner, on the expiry of the contracts rolled
over to June, 2013 an additional amount of Rs.91.01
Cores became due and payable by the Respondent
Company to the Petitioner. Therefore, as on 28th June,
2013 the outstanding amount due and payable by the
Respondent Company was Rs.94.78 Crores.
Accordingly, the Petitioner by its letter dated 28th
June, 2013 called upon the Respondent Company to
make the aforesaid payment failing which suitable
action would be initiated.
(d) In reply thereto, the Respondent Company sought to
deny its liabilty on the grounds set out in its
Advocates' letter dated 1st July, 2013 (Exhibit-I). The
contentions raised in the said letter were basically two.
They were:- (a) that the Petitioner had issued a
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Circular dated 20th December, 2012 which unilaterally
and suddenly removed/reduced certain securities from
the permissible list of collaterals to maintain the
requsite margins for the F & O segment with effect
from 1st January, 2013 which had far reaching
consequences; and (b) that a meeting was held on 14th
March, 2013 between the representatives of the
Petitioner and the Respondent Company wherein the
Petitioner conveyed to the Respondent Company that
since the Respondent Company had not brought in
additional margins in the form of cash, the Petitioner
would immediately, offload all pledged securities lying
with them to meet the pay-in obligations pertaining to
March and June contracts expiry. This would have
entailed sale of several securities including Twenty
Lakh (20,00,000) shares of a company called
"Gitanjali Gems Limited" (hereinafter referred to as
"Gitanjali"). Despite this, the Petitioner sold only
2,97,731 shares of Gitanjali between 19th March, 2013
and 22nd March, 2013. The Petitioner ought to have
sold all the 20,00,000 shares of Gitanjali, especially in
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view of the fact that during 19th March, 2013 and 22nd
March, 2013 the share price of Gitanjali was
approximately Rs.600/- per share and if all the shares
were sold, then nothing would have been due and
payable to the Petitioner. In the light of these facts,
the Respondent Company called upon the Petitioner to
grant them a personal hearing on 2nd July, 2013 to
demonstrate that nothing was payable by the
Respondent Company to the Petitioner.
(e) Thereafter, the Respondent Company by its Advocates'
letter dated 31st July, 2013 for the first time raised a
counter claim against the Petitioner in the sum of Rs.
213.02 Crores What is pertinent to note in this letter
is that the Respondent Company has expressly
admitted that an amount of Rs.90.90 Crores was due
and payable by the Respondent Company to the
Petitioner.
(f) As mentioned earlier, the outstanding of the Petitioner
were to the tune of Rs.94.78 Crores as on 28th June,
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2013. Thereafter, certain securities and deposits of
the Respondent Company were appropriated towards
the dues of the Petitioner bringing the balance
outstanding of Rs.89.65 Crores. The Petitioner also
charged interest and penalty as per Bye-law 16 of
Chapter VI of the Petitioner's Bye-laws (F & O)
segment amounting to Rs.14.07 Crores, and therefore,
the amount claimed in the Petition is Rs.103.73 Cores.
The details of the securities and deposits appropriated
by the Petitioner have been set out in paragraph 7(s)
of the Petition.
(g) I must mention here that in the interregnum on 18th
March, 2013, the Petitioner received two complaints,
one from Sarvin Mercantile Pvt. Ltd. ("SARVIN") and
another from Trusha Infrastructure Pvt. Ltd.
("TRUSHA") against the Respondent Company
alleging non-delivery of 7 Lac and 13 lac shares of
Gitanjali respectively. It was the case of SARVIN and
TRUSHA that they had bought these shares through
the Respondent Company and the said shares had been
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pledged by the Respondent Company with the NSE
without their consent. A copy of these complaints were
marked (amongst others), to the Additional
Commissioner of Police, Economic Offences Wing,
Mumbai ("EOW"). Be that as it may, as there was a
shortfall in the margins maintained by the Respondent
Company with the Petitioner [and for which the shares
of Gitanjali (amongst others) were pledged], the
Petitioner during the period 19th March, 2013 to 22nd
March, 2013 sold 2,97,731 shares of Gitanjali. As 23rd
March, 2013 and 24th March, 2013 were Saturday and
Sunday respectively, no further sale of Gitanjali shares
took place. Thereafter on 25th March, 2013 the
Petitioner received a letter dated 23rd March, 2013
from the EOW. By this letter, the EOW requested the
Petitioner to withhold the shares of Gitanjali till
further orders in view of the fact that the said shares
were the subject matter of an investigation pursuant to
the criminal complaints filed by SARVIN and TRUSHA.
Subsequently, on 27th April, 2013 the Petitioners
received an order passed by the EOW under Section
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102 of the Code of Criminal Procedure, 1973 ("CrPC").
By the said order, the Petitioner was directed to freeze
all the shares of Gitanjali pledged with the Petitioner
by the Respondent Company. It would be important to
note that this order of the EOW was challenged by the
Petitioner before this Court by filing Criminal
Application No.483 of 2013 under Section 482 of the
CrPC. This challenge was ultimately negated by this
Court by its order and judgment dated 22nd August,
2013. Being aggrieved thereby, the Petitioner
preferred an appeal to the Supreme Court which is
pending. I must also mention here that the Supreme
Court by its interim order allowed the Petitioner to sell
the balance 17.03 Lac shares of Gitanjali and deposit
the sale proceeds thereof in the Supreme Court.
(h) Be that as it may, since the Respondent Company
failed to make payment of its outstandings in
accordance with the Rules, Regulations and Bye-Laws
of the Petitioner, the Respondent was declared as a
defaulter on 15th October, 2013. Subsequently, the
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Respondent Company was also declared a defaulter by
the Bombay Stock Exchange vide its Notification dated
17th October, 2013. Subsequent to this, on 7th March,
2014 the Respondent Company has also been expelled
from the trading membership of the NSE in all
segments. I must mention here that the Respondent
Company challenged the action of the Petitioner in
declaring them as a defaulter before the SAT without
any success. The Respondent Company thereafter
challenged this order of the SAT dated 30th June, 2015
before the Supreme Court, which is pending.
(i) Since no payment was forthcoming, the Petitioner
served a statutory notice dated 17th April, 2014 under
Sections 433 and 434 of the Companies Act, 1956 on
the Respondent Company and called upon the
Respondent Company to make payment of a sum of
Rs.103.73 Crores. It is not in dispute that this
statutory notice has been served on the registered
address of the Respondent Company and the same has
been duly received by it.
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(j) The Respondent Company through its Advocates letter
dated 7th May, 2014 replied to the said statutory
notice wherein they sought to refute the contentions of
the Petitioner. The Petitioner by their letter dated 13th
June, 2014 refuted the allegations contained in the
letter dated 7th May, 2014. It is in these circumstances
that the present Petition has been filed.
(k) For the sake of completeness, it would be important to
mention here that before the issuance of the statutory
notice, the Respondent Company has also filed a Suit
being Suit (L) No.939 of 2013 in this Court against the
Petitioner and the National Stock Exchange of India
Limited seeking a decree in the sum of Rs.152.57
Crores together with interest thereon @ Rs.18% per
annum. The particulars of claim of this suit would
reveal that the claim made in this suit is entirely on
the basis of the alleged loss suffered by the Respondent
Company on account of the actions of the Petitioner.
Even so, on perusal of the particulars of the claim in
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the said Suit, it is clear that the Respondent Company
has admitted its liability to the Petitioner in the sum of
Rs.90.90 Crores and has sought set off of the said
amount against their claim for damages.
3. In this factual backdrop, Mr. Tulzapurkar, the learned
Senior Counsel appearing on behalf of the Petitioner, submitted
that the dues of the Petitioner at least to the extent of Rs.90.90
Crores have been duly admitted by the Respondent Company. He
submitted that it is not in dispute that since the Respondent
Company did not honour the trades that matured / expired in
June 2013 with the counter parties, the Petitioner was required to
make payment to them. He submitted that it is not in dispute that
therefore this payment has to be made by the Respondent
company to the Petitioner. It is in this light that the dues of the
Petitioner have been duly admitted by the Respondent Company
to the Petitioner. Mr. Tulzapurkar, brought to my attention the
particulars of claim in the suit filed by the Respondent Company
[Suit (L) No.939 of 2013] wherein an amount of Rs.90.90 Crores
has been admitted as due and payable by the Respondent
Company to the Petitioner because the Respondent Company itself
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has given credit for the same in the particulars of claim, to the
Petitioner. Apart from the admission in the aforesaid suit, the
learned counsel also brought to my attention a letter dated 31st
July, 2013 (Exhibit J, page 55 of the paper book) addressed by
the Advocates of the Respondent Company to the Advocates of the
Petitioner wherein, after giving a break up of the alleged loss
suffered by the Respondent company of Rs.213.02 Crores, the
Petitioner is called upon to pay a sum of Rs.122.12 Crores as a
compensation failing which the Respondent Company would adopt
such legal proceedings as may be advised. Mr. Tulzapurkar,
submitted that therefore reading this letter as a whole, it is clear
that the dues of the Petitioner, atleast to the extent of Rs. 90.90
Crores have been expressly admitted by the Respondent
Company.
4. Apart from this, Mr. Tulzapurkar submitted that in
any event the Respondent Company is shut down, not doing any
business and is commercially insolvent. In this regard, he brought
to my attention, the statement made by the Respondent Company
before this Court on 2nd September, 2014 in Company Application
(L) No.383 of 2014 wherein the statement of the Respondent
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Company is recorded that its business is shut down due to the
orders of NACL and BSE disconnecting their terminals and
declaring them as defaulters. An additional statement was made
that the Respondent Company has no assets whatsoever except
the trade receivables. He also pointed out that the balance-sheets
for the year ending 31st March, 2012 and 30th September, 2013
reflect a loss of Rs.7.88 Crores and Rs.3.71 Crores respectively.
Looking to all these factors, he submitted that in any event of the
matter, the Respondent Company was not doing any business and
was commercially insolvent and therefore ought to be wound up
by and under the directions of this Court.
5. Mr. Tulzapurkar further submitted that just because
the Respondent Company has filed a suit for damages in the sum
of Rs.152.57 Crores against the Petitioner, is no answer to the
admitted claim of the Petitioner. He submitted that the claim in
damages can never be a defense to a winding up Petition wherein
an admitted debt is due to the Petitioner. In this regard, Mr.
Tulzapurkar relied upon the following two judgments:
(a) ICICI Bank Ltd v/s Sundaram Multi Pap Ltd.1
(paragraphs 5 and 8)
1 (2010) 153 Comp Cas 424 (Bom)
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(b) Union of India v/s Raman Iron Foundry.2
6. For all the aforesaid reasons, the learned Senior
Counsel submitted that there is no bonafide dispute raised by the
Respondent Company in relation to the admitted dues of the
Petitioner, and therefore, this Company Petition be admitted and
further directions be given for advertisement etc.
7.
On the other hand, Mr. Andhyarujina, the learned
counsel appearing on behalf of the Respondent Company
submitted that several triable issues arise in the present case. He
submitted that this being the case, the Company Petition cannot be
entertained and the Petitioner ought to be relegated to file a Civil
Suit for recovery of its dues. Mr. Andhyarujina submitted that
their claim for damages as more particularly set out in their Suit
(L) No.939 of 2013 is a legitimate claim which has every chance of
succeeding when the Suit goes to trial. It would therefore be highly
unfair at this stage to seek orders of winding up of the Respondent
Company when that Suit is still pending.
8. To elaborate this point further Mr. Andhyarujina was
2 (1974) 2 SCC 231
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at pains to point out that the major loss suffered by the
Respondent Company was due to the fact that the Petitioner,
though holding 20,00,000 shares of Gitanjali and which were
pledged to them, did not sell the same between 14th March, 2013
and 27th April, 2013. He submitted that if the 20,00,000 Gitanjali
shares were sold during this period, at an average price of
approximately Rs.600/- per share, the Petitioner would have been
able to recover approximately Rs.118 Crores from the sale
proceeds thereof and then nothing would be due and payable by
the Respondent Company to the Petitioner. He submitted that this
loss is directly attributable to the negligence of the Petitioner. He
submitted that a meeting was held between the representatives of
the Petitioner and the Respondent Company on 14th March, 2013
wherein the Petitioner clearly conveyed to the Respondent
Company that since the Respondent Company had not fulfilled its
margin requirements, the Petitioner would offload the securities
held by them including the shares of Gitanjali. Despite conveying
this to the Respondent Company, the Petitioner offloaded/ sold all
shares of ABG Shipyards, Alok Industries & Flexistuff Industries,
but only sold 2,97,731 shares of Gitanjali. Mr. Andhyarujina was
at pains to point out that the 2,97,731 shares of Gitanjali sold
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between the periods 19th March, 2013 to 22nd March, 2013 were
as follows:-
(a) 19th March, 2013 the Petitioner sold 96,581 shares of
Gitanjali;
(b) 20th March, 2013 the Petitioner sold 83,954 shares of
Gitanjali;
(c) 21st March, 2013 the Petitioner sold 1,07,533 shares
of Gitanajali;
(d) 22nd March, 2013 the Petitioner sold 9,673 shares of
Gitanjali.
9. He submitted that there is absolutely no explanation
as to why only 9,673 shares of Gitanjali were sold on 22nd March,
2013 especially in view of the fact that during this period i.e. from
19th March, 2013 till 27th April, 2013 (the date of the freezing
order passed by the EOW), there was no impediment from selling
the said shares. Mr. Andhyarujina submitted that the EOW froze
the selling of shares of Gitanjali only but its order dated 27th April,
2013 passed under Section 102 of the Code of Criminal Procedure,
1973 ("CrPC"). Therefore, until this date (i.e. 27th April, 2013),
the Petitioner could have and should have sold all 20,00,000
shares of Gitanjali. By not doing this, the Petitioner was guilty of
not only negligence but also conducted the sale improperly which
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has given rise to a legitimate claim in damages.
10. Mr. Andhyarujina fairly submitted that the
Respondent Company (as a pledgor) could not compel the
Petitioner (as a pledgee) to exercise the power of sale as a means
of discharging or satisfying Petitioner's debt. The only rights the
Respondent Company had were, (i) in case the Petitioner
exercised the power of sale, to insist that it should be honestly and
properly done and the sale proceeds applied to the debt; (ii) in
case the Petitioner did not exercise the power of sale, to redeem
the pledge on payment of the debt or such part of it that remained
unpaid; and (iii) in case the sale was improperly done, to get
damages caused thereby. He, however submitted that looking to
the fact that the Petitioner itself had conveyed to the Respondent
Company that it was going to sell all the shares of Gitanjali and
thereafter sold only 2,97,731 shares, itself goes to demonstrate
that the sale of Gitanjali shares was conducted improperly which
has given rise to the claim in damages and which is the subject
matter of Suit (L) No. 939 of 2013 filed by the Respondent
Company against the Petitioner. He therefore submitted that
there is a bonafide dispute raised by the Respondent Company in
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relation to the debt owed by the Respondent Company to the
Petitioner. In support of his propositions, Mr. Andhyarujina relied
upon following judgments:-
(a) Vimal Chandra Grover v/s Bank of India.3
(b) S. L. Ramaswamy Chetty and Another v/s M. S.
A.P.L. Palaniappa Chettiar.4
11. Mr. Andhyarujina submitted that this claim of
damages and which is directly attributable to the negligence of the
Petitioner can be set off against the debt owed to the Petitioner
notwithstanding the fact that the dues of the Petitioner had been
admitted by the Respondent Company. He submitted that a
defense in a winding up Petition can be set up by way of set off or
as a cross claim. He was at pains to point out the difference
between a legal set off as provided under Order 8 Rule 6 of the
Code of Civil Procedure, 1908 and an equitable set off. He
submitted that a right to set off dealt with by Order 8 Rule 6 of the
CPC is a legal set off. It's characteristics are that the sum of
money is ascertained and both the parties fill the same character
as they fill in the Suit. He submitted that independently of this,
the Courts of equity allowed a plea of equitable set off being
3 (2000) 5 SCC 122 (paragraphs 12 & 16).
4 AIR 1930 Madras 364.
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entertained though the amount was unascertained and there were
mutual debits and credits amounting to cross demands arising out
of the same transactions or so connected in their nature and
circumstances so as to make it inequitable so that the Plaintiff
should recover its claim and the Defendant be driven to file a cross
Suit. He very fairly stated that though an equitable set off can be
entertained, it cannot be raised as a matter of right. It stands on a
lower pedestal than the plea of a legal set off. If raised, the Court
on being satisfied that the plea may result in protracting or
delaying the trial, may refuse to entertain it, leaving it open to the
Defendant to raise the same in an independent action. He
submitted that in the facts of the present case, the Respondent
Company has in fact filed its independent suit claiming damages
from the Petitioner.
12. Mr. Andhyarujina submitted that unless this Court
comes to a conclusion, at least prima facie, that the claim made in
the said Suit is absolutely frivolous, this Court at this stage cannot
discard the same. In support of the proposition, that in a winding
up Petition a claim for damages can be legitimately set up as a
defense, he relied upon the judgment of the Court of Appeal in
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England in the case of Re Portman Provincial Cinemas Ltd.5
Mr. Andhyarujina submitted that before I reject the claim of the
Respondent Company made in the said Suit and which is a claim
for damages, I have to prima facie examine whether the said claim
is one which is sustainable, and in fact he invited me to do so. In
this regard, he has taken me through the averments in the plaint
in Suit (L) No. 939 of 2013. According to Mr. Andhyarujina, the
plaint raises several triable issues which this Court will be
required to go into at the trial of the Suit after evidence is led by
both parties. He therefore submitted that the claim of the
Respondent Company against the Petitioner cannot be
disregarded or discarded at this stage itself and hold that the
Respondent Company did not have a bonafide defense to the
Company Petition. For all these reasons, Mr.Andhyarujina
submitted that the Company Petition be dismissed and the
Petitioner be relegated to file a Civil Suit to recover their dues.
13. In addition to the aforesaid argument, Mr.
Andhyarujina also submitted that the Petitioner issued a Circular
dated 20th December, 2012 under which certain securities were
suddenly removed from the permissible list. Mr. Andhyarujina
5 1999 (1) WLR 157.
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submitted that by virtue of this Circular many of the securities
pledged by the Respondent Company with the Petitioner towards
the F & O margins were deemed ineligible for acceptance as
collateral and the value of the securities pledged with the
Petitioner was reduced drastically to the tune of about 100 Crores.
According to him, overnight the said securities all of a sudden
became ineligible securities for no reason whatsoever. The
Petitioner thereafter required from the Respondent Company
replacement of these ineligible securities. By rendering the said
securities given by the Respondent Company as ineligible, the
margin short fall came to approximately to Rs.92.08 Crores. By
virtue of this, the Respondent Company was required to provide
eligible collateral securities as per the new list of the Petitioner at
very short notice. During the said time, the Petitioner refused to
return to the Respondent Company ineligible securities resulting
in the Respondent Company's inability to raise money and replace
the said securities. Due to the Respondent's inability to comply
with the Petitioner's unilateral and arbitrary action, the F & O
terminal of the Respondent Company was disabled by the
Petitioner and consequently the Respondent was unable to carry
on trade and business on the NSE. This also, according to Mr.
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Andhyarujina, has caused substantial loss to the Respondent
Company which is solely attributable to the actions of the
Petitioner. For all the aforesaid reasons, Mr. Andhyarujina
submitted that the claim of the Petitioner is bonafide disputed by
the Respondent Company and the Company Petition be dismissed
with costs.
14. I have heard the learned counsel appearing on behalf
of the respective parties, perused the papers and proceedings in
the Company Petition as well as the Annexures thereto. Before I
deal with the contentions canvassed on behalf of the Respondent
Company, it would be pertinent to mention here that the claim
made in the Petition, at least to the extent of Rs.90.90 Crores is
undisputed. In fact, this amount of Rs.90.90 Crores is admittedly
due and payable by the Respondent Company to the Petitioner as
can be seen not only from the letter dated 31st July, 2013 (Exhibit
"J" page 55 of the paper book) but also from the particulars of
claim set out in Suit (L) No.939 of 2013. Even before me, Mr.
Andhyarujina, learned counsel appearing on behalf of the
Respondent Company, very fairly conceded that this amount of
Rs. 90.90 Crores is due and payable by the Respondent Company
to the Petitioner. He however submitted that against the admitted
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claim of the Petitioner, the Respondent Company has a cross claim
of approximately Rs. 152.57 Crores which is the subject matter of
Suit (L) No.939 of 2013. It was his submission that the claim
made in the said suit, albeit for damages, is a substantial claim,
and therefore, would be a good defense to the Company Petition.
15. On a bare perusal of the proceedings in Suit (L) No.939
of 2013 it is clear that the claim therein is in damages. In a
nutshell, this claim mainly arises due to the fact that according to
the Respondent Company, even though the Petitioner had
informed the Respondent Company that they would sell all
20,00,000 shares of Gitanjali, which were pledged with the
Petitioner, the same was not done. If the shares were sold between
the period 19th March, 2013 to 27th April, 2013 (the date on which
the freezing order was passed by the EOW), the Petitioner would
have realized far more than what was due to them. According to
Mr. Andhyarujina this was admittedly not done, and therefore,
the Respondent Company has suffered a huge loss on that count.
16. In my view, a set off or a counter claim can be
considered as a bonafide defense to a winding up Petition if, firstly
the defense is in is in good faith and one of substance, secondly,
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the defense is likely to succeed on the point of law, and thirdly that
the Company adduces prima facie proof of the facts on which the
defense depends. Where the debt is undisputed, the Court will not
act upon a defense that the Company has the ability to pay the
debt but it chooses not to pay that particular debt. Where there is
no doubt that the Company owes a debt to the creditor entitling
him to a winding up order but the exact amount is disputed, the
Court will make a winding up order without requiring the creditor
to quantify the debt precisely. This proposition has been succinctly
laid down by the Supreme Court in the case of M/s Madhusudan
Gordhandas and Co. v/s Madhu Woollen Industries Pvt Ltd.6
Paragraph 21 of the said decision 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)
6 (1971) 3 SCC 632
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17. Applying this test, I will have to examine the defenses
raised by the Respondent Company. As far as the present
controversy is concerned, the counter claim made by the
Respondent Company is one for damages mainly on account of the
failure of the Petitioner to sell all 20,00,000 shares of Gitanjali
between the period 19th March, 2013 to 27th April, 2013 (the date
on which freezing order was passed by the EOW). What is
pertinent to note here is that, these shares of Gitanjali were
pledged with the Petitioner to meet the margin requirements as
per the Circulars issued by the Petitioner from time to time in that
regard. Since there was a margin short fall, the Petitioner in a
meeting held on 14th March, 2013 informed the Respondent
Company that they would proceed to sell the shares of Gitanjai
pledged with them. In contrast to this, the claim made in the
present Petition is with reference to the trades that expired /
matured in June 2013. The fact that the claim in the Petition is
with reference to the trades that expired / matured in June 2013,
is undisputed. In fact, the admission of liability by the Respondent
Company is also with reference to these very same trades.
18. Section 176 of the Contract Act, 1872 deals with the
rights of a Pawnee where the Pawner make default. Section 176
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reads as under:-
"176. Pawnee's right where pawnor makes default.--If the pawnor
makes default in payment of the debt, or performance, at the
stipulated time, of the promise, in respect of which the goods
were pledged, the pawnee may bring a suit against the pawnor
upon the debt or promise, and retain the goods pledged as a
collateral security; or he may sell the thing pledged, on giving
the pawnor reasonable notice of the sale.
If the proceeds of such sale are less than the amount due in
respect of the debt or promise, the pawnor is still liable to pay the
balance. If the proceeds of the sale are greater than the amount
so due, the pawnee shall pay over the surplus to the pawnor."
19.
As the Section clearly stipulates, if the pawnor makes
default in payment of the debt, or performance, at the stipulated
time, of the promise, in respect of which the goods were pledged,
the pawnee may (i) bring a suit against the pawnor upon the debt
or promise, and retain the goods pledged as a collateral security;
or (ii) he may sell the goods pledged, on giving the pawnor
reasonable notice of the sale. If the proceeds of such sale are less
than the amount due in respect of the debt or promise, the pawnor
is still liable to pay the balance. If the proceeds of the sale are
greater than the amount so due, the pawnee shall pay over the
surplus to the pawnor. What is important to note for the present
purpose in Section 176 is that, the Pawnee can only sell the goods
pledged once the pawnor makes a default in the payment of the
debt. Prior thereto, the pawnee has no right to sell the pledged
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goods.
20. In the facts of the present case and as rightly
submitted by Mr. Tulzapurkar, the shares of Gitanjali that were
sold during the period 19th March, 2013 to 22nd March, 2013 were
not because the Respondent Company had defaulted in making
payment of the debt as claimed in the Company Petition but
because there was a short fall in the margin. In fact the debt as
claimed in the Company Petition had not even crystallized on the
date when part of the Gitanjali shares were sold (2,97,731
shares). In fact, the debt had not crystallized even when the order
of the EOW was passed on 27th April, 2013 freezing the sale of all
Gitanjali shares. It is not in dispute that after 27th April, 2013 the
Petitioners could not sell any shares of Gitanjali due to the
freezing order passed by the EOW. This being the case, in law, the
Petitioner could never had sold the shares of Gitanjali between
19th March, 2013 to 27th April, 2013 for recovery of the debt that
became due only in June 2013. Mr. Tulzapurkar, in my view, has
rightly submitted that the question of maintaining margins as
required by the circulars issued by the Petitioner from time to
time, and the question of the Respondent Company paying its dues
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under the trades that expired / matured in June 2013, are totally
different and operate in different fields. The requirement of
margins is to safe guard the Petitioner against any risk in the
event the concerned party who is maintaining the margins fails to
honour its committments to the Petitioner. If the Petitioner
chooses not to keep a margin or allows a shorfall in the margins, it
does so at its own risk and detriment. If in law, the Petitioner,
from 19th March, 2013 to 27th April, 2013, could not have sold
20,00,000 pledged shares of Gitanjali for the recovery of the debt
that became due only in June 2013, then, I find, at least prima
facie, that the claim made for damages against the Petitioner is not
bonafide. What is important to note is that in the meeting of 14th
March, 2013, the Petitioner informed the Respondent Company
that it would be selling Gitanjali shares to make up the short fall in
the margin. It was unilateral decision of the Petitioner. It is not as
if there was any agreement between the Respondent Company and
the Petitioner that the Petitioner would sell all the Gitanjali shares
and because of a breach of the said agreement a claim for damages
has been made. In fact, Mr. Andhyarujina very fairly conceded
that there was no agreement between the parties that the
Petitioner would sell 20,00,000 shares of Gitanjali. Therefore, I
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find that in law the Petitioner could not have sold 20,00,000
shares of Gitanjali in March - April 2013 for recovery of the debt
that became due only in June 2013. If this be the case, then at
least prima facie and in my view, the Respondent Company cannot
contend that the Petitioner had caused a loss to the Respondent
Company because they did not sell all 20,00,000 shares of
Gitanjali between 19th March, 2013 and 27th April, 2013
respectively against the claim of the Petitioner for the trades that
expired / matured in June, 2013.
21. Faced with this situation, Mr Andhyarujina sought to
contend that even though the trades expired / matured in the
June 2013, the Petitioner ought to have sold all 20,00,000
Gitanjali shares between March and April, 2013 itself towards the
margin shortfall, because the margin would have been ultimately
used for the purposes of squaring up the trades that expired /
matured in June 2013. He, therefore, submitted that the claim
made for the damages on account of the alleged loss suffered by
the Respondent Company towards the unsold shares of Gitanjali
(17.03 lac shares) was a claim made on this basis in the suit filed
by them in this Court.
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22. I am unable to accept this argument for more than one
reason. Firstly, the claim made in the suit, at least as I have
noted, does not seem to proceed on this basis. In fact, as initially
argued by Mr Andhyarujina, it is the case of the Respondent
Company that these 17.03 Lac shares ought to have been sold and
the monies recovered to set off the claim of the Petitioner against
the trades that expired / matured in June 2013. Secondly, as
held by me earlier, the trades of June 2013 had not expired /
matured between 19th March, 2013 (the date on which the
Petitioner started selling the Gitanjali shares ) and 27th April,
2013 (the date of the freezing order by the EOW). These shares
admittedly were being sold not to square off the trades that
expired / matured in June 2013 but to make up the margin
shortfall that had occurred by virtue of the fact that certain
securities were rendered ineligible for the purposes of margin. I,
therefore, find that this argument is wholly misconceived and does
not carry the case of the Respondent Company any further.
23. Even otherwise, I find, that the law as far as Section
176 is concerned, is quite well settled. The law, as I understand it,
is that a pledgor cannot compel a pledgee to exercise the power of
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sale as a means of discharge or to satisfy the debt. The pledgor's
rights are only (i) in case the Pledgee exercised the power of sale,
to insist that it should be honestly and properly done and the sale
proceeds applied to the debt; (ii) in case the pledgee did not
exercise the power of sale, then the Pledgor can redeem the pledge
on payment of the debt or such part of it that has remained
unpaid; and (iii) in case the sale was improperly exercised, to get
damages caused thereby. This proposition of law has been laid
down as far back as in the year 1930 in a decision of the Madras
High Court in S. L. Ramaswamy Chetty and Another v/s M. S.
A.P.L. Palaniappa Chettiar.4 This decision of the Madras High
Court has been referred to by the Supreme Court with approval in
the case of Vimal Chandra Grover v/s Bank of India.3 In fact, a
Division Bench of this Court in the case of State Bank of India v/s
Neela A. Naik and another.7 has also taken the same view.
Paragraphs 12 to 16 of the said decision read thus:-
"12. We may notice that in the present appeal there are no
disputes on facts. The contentions are purely legal. Now we
would consider the first contention regarding applicability of
Sec. 176 of the Contract Act. Section 176 provides for pawnee's
right where pawnor makes default. It inter alia stipulates that on
pawnor making default in payment of the debt, at the stipulated
time, in respect of which the goods are pledged, the pawnee may
4 AIR 1930 Madras 364.
3 (2000) 5 SCC 122 (paragraphs 12 & 16).
7 AIR 2000 Bom 151
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bring a suit against the pawnor on the debt and retain the goods
pledged as a collateral security; or he may sell the goods
pledged, on giving the pawnor reasonable notice of the sale and
if the sale proceeds are deficient the pawnor would be liable to
pay the balance and if more, the surplus amount shall be paid to
the pawnor. The contention of Mr. Nadkarni is that the only effect
of aforenoticed clause 6 is that the Bank can dispose of the
security without giving any notice to the respondents. It is only a
waiver of the stipulation of right of the respondents to a
reasonable notice before the Bank decides to appropriate the
security. Learned counsel relies upon a decision of the Delhi
High Court in Bank of Maharashtra v. Racmann Auto (P) Ltd.,
AIR 1991 Delhi 278. In the said decision, the question which
came up for consideration was whether there was any legal duty
cast on the plaintiff-Bank to take early steps for disposing of the
pledged goods. Construing Sec. 176, it was held that the very
wording of the section makes it clear that it is the discretion of
the pawnee to sell the goods in case the pawnor makes default
but if the pawnee does not exercise that discretion no blame can
be put on the pawnee and pawnee has the right to bring a suit for
recovery of the debt and retain the goods pledged as collateral
security. Doubt was also expressed whether a defendant as
pawnor could force the pawnee to dispose of the pledged goods
without defendant clearing the debt. However, on the facts of the
present case, we need not go into this latter aspect on which
doubt has been expressed. It has been categorically held in the
cited decision that it is the discretion of the plaintiff-Bank to have
filed the suit for recovery of the debt and retain the pledged
goods as collateral security or in the alternative it could resort to
selling the pledged goods after giving reasonable notice of sale to
the defendants. In that case the plaintiff-Bank had in its wisdom
exercised the first option of filing the suit and retaining the
collateral security.
13. We are in respectful agreement with the legal proposition
propounded in the aforesaid decision and thus there would be no
question of judicious or arbitrary exercise of discretion by the
Bank as to the time of appropriation of the amount from the
collateral security to it in the form of FDRs.
14. In the Gulamhusain Lalji Sajan v. Clara D'souza, AIR 1929
Bombay 471, it was held that in cases of a pledge the creditor
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has two rights which are concurrent and the right to proceed
against the property is not merely accessory to the right to
proceed against the debtor personally and on the same lines.
Reliance in the said decision was also placed on a Full Bench
decision of the Madras and Calcutta High Courts. The same
principles were held to be applicable to the cases of
hypothecation or mortgage of movable property. Section 176 has
been held to be mandatory in the Division Bench decision of this
Court in Official Assignee, Bombay v. Madholal Sindhu(AIR
1947 Bom 217).
15. In view of aforesaid legal position, we are unable to accept
the contention that the Bank was obliged to adjust the instalments
immediately on amount becoming due from the FDRs. Faced with
this position, Mr. Thali, learned counsel for the respondents,
contends that Sec. 176 has no applicability since it applies only
to goods and the Fixed Deposit Receipts cannot be construed as
goods within the meaning of Sec. 176 read with Sec. 2(7) of the
Sale of Goods Act. The contention of learned counsel is just
stated to be rejected. Clause 6 has to be read in consonance with
the interpretation of Sec. 176 of the Act, which means that the
respondents agreed to waive notice to them before appropriation
of amount by the Bank. The provisions of Sec. 126, 148 and 172
of the Contract Act also do not, in any manner, help the
respondents in support of their contention that there is a legal
obligation on the appellant to adjust the amount due to it every
month out of the Fixed Deposit Receipts. The acceptance of such
contention may throw open various questions. We may just make
mention of one of it. If adjustment from the amount of instalment
of Rs. 2775/- was to be made on default being committed every
month in payment thereof, what would happen to the remaining
amount of FDR? Would it be kept again in fixed deposit? Would
it be kept in a saving account or would it be kept in a suspense
account? All this clearly shows that the adjustment as made by
learned single Judge cannot be sustained in law.
16. Mr. Thali, learned counsel for the respondents, also contends
that the appellant-Bank had earlier appropriated Rs. 9500/- from
the Fixed Deposit Receipts and, therefore, it does not how lie in
their mouth to plead or contend otherwise. We are unable to
accept this contention of learned counsel as well. The fact of the
said appropriation will not change the legal position that the
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Bank is not obliged to make appropriations month by month
which is the effect of the impunged judgment. It may be noticed
that Mr. Nadkarni explains that earlier appropriation of Rs.
9500/- was made on the maturity of the Fixed Deposit Receipts."
24. It is therefore clear that a pledgee has the discretion to
decide whether he wants to sell the pledge security; when to sell it;
and how much of it to sell. The pledgor cannot dictate terms to the
pledgee on how he is to exercise his right. If this is the correct
position in law, and that is how I understand it, then, I find at least
prima facie that the claim for damages on account of the Petitioner
failing to sell all 20,00,000 Gitanjali shares between 19th March,
2013 and 27th April, 2013, cannot succeed in law. In fact on a
perusal of the Plaint filed in Suit (L) No.939 of 2013, at least to my
mind, it is clear that the claim for damages is made on account of
the Petitioners' failure to sell all 20,00,000 shares of Gitanjali
between the period 19th March, 2013 and 27th April, 2013. It is
not the case of the Respondent Company that the sale of the
shares of Gitanjali by the Petitioner was conducted in breach of
any agreement arrived at between the parties or was done
improperly which has given rise to the claim in damages. As laid
down in the judgment of the Madras High Court in the case of S. L.
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Ramaswamy Chetty and Another.4 and which has got approval of
the Supreme Court in the case of Vimal Chandra Grover3, the
claim for damages can be brought by the pledgor against the
pledgee only in the event that the pledgee sells the pledged goods
and the same are sold improperly. In the facts of the present case
the Respondent Company alleges that the Petitioner (who was the
pledgee) ought to have sold all 20,00,000 shares and not only
2,97,731 shares of Gitanjali. This to my mind, does not in any way
amount to a sale being conducted improperly as contemplated in
the aforesaid two judgments. In fact, the grievance of the
Respondent Company in the present case is that the Petitioners
have acted improperly by not selling all 20,00,000 shares of
Gitanjali. As stated earlier, in law, in the absence of an agreement
in that regard, the pledgor cannot compel the pledgee to sell the
pledge goods to discharge its debt. That is entirely at the
discretion of the pledgee. This being the case, I find at least prima
facie that the claim for the damages made by the Respondent
Company on account of the Petitioner not selling all 20,00,000
shares of Gitanajali between the period 19th March, 2013 to 27th
April, 2013 is unsustainable in law.
4 AIR 1930 Madras 364.
3 (2000) 5 SCC 122 (paragraphs 12 & 16).
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25. Even otherwise in the facts of this case, at least prima
facie, I do not find that the Petitioners were in any way wrong in
deciding not to sell all 20,00,000 shares of Gitanjali. From the
facts narrated above, it is clear that after the meeting that was
held on 14th March, 2013, the Petitioner sold 2,97,731 shares of
Gitanjali between the period 19th March, 2013 to 22nd March,
2013. 23rd March, 2013 was a Saturday and 24th March, 2013
was a Sunday. The Petitioner received a letter from the EOW on
25th March, 2013 (dated 23rd March, 2013) wherein the EOW
informed the Petitioner that it had received a complaint from
SARVIN and TRUSHA claiming that they were the owners of the
shares and that the Respondent Company had not transferred
them to the said SARVIN and TRUSHA. 13,00,000 shares were
claimed by TRUSHA and 7,00,000 shares were claimed by
SARVIN. Since all 20,00,000 shares were the subject matter of
Criminal Complaints that were being enquired into by the EOW,
the Petitioners were requested to withhold these shares till
further correspondence from the office of the EOW.
26. Faced with this letter, Mr.Andhyarujina submitted
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that this letter was merely a request from the EOW asking the
Petitioners not to dispose of the Gitanjali shares. This letter was
not an order by the EOW restraining the Petitioners from
disposing of the shares, which order was passed by the EOW only
on 27th April, 2013. I am unable to agree with this submission.
The EOW, like the Petitioners, is a statutory body. When the
Petitioners received this letter from the EOW, which is also
another statutory body and which was enquiring into the
complaints made by SARVIN and TRUSHA with reference to the
very same shares, the Petitioners decided to stay its hands and in
my view correctly so. The fact that this was a correct decision is
now further borne out by subsequent events because not only on
27th April, 2013 the EOW passed an order under Section 102 of
the CrPC freezing the sale of these very same shares, but the
Petitioners being aggrieved by this order, challenged the same by
way of a Writ Petition in this Court which was ultimately
dismissed on 22nd August, 2013. Being aggrieved by the said
order, the Petitioners preferred an SLP to the Supreme Court in
which an interim order was passed allowing the Petitioners to sell
the balance 17.03 Lac shares of Gitanjali and the sale proceeds
thereof were ordered to be deposited in the Supreme Court. That
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SLP is still pending. All these facts clearly bare out the fact that it
was not as if the Petitioners unilaterally one day decided not to
sell all 20,00,000 shares of Gitanjali that has resulted in a loss to
the Respondent Company. They stopped selling the shares of
Gitanjali once they received intimation from the EOW that the
shares and the title thereto was being investigated by them, and
therefore, not to dispose of the same. To my mind, the actions of
the Petitioner at least prima facie appear to be bonafide in not
selling these shares. In fact, once permission was granted by the
Supreme Court to sell these shares, the Petitioners have gone
ahead and done so and the sale proceeds thereof (approximately
Rs.6.18 Crores) have been deposited in the Supreme Court.
Therefore, even on facts I find, at least prima facie, that the claim
of damages as pleaded by the Respondent Company is unlikely to
succeed. I therefore have no hesitation in rejecting the defense of
the Respondent Company that it has a bonafide cross claim in
damages against the Petitioner on account of the conduct of the
Petitioner in not selling all 20,00,000 shares of Gitanjali.
27. Equally, I find the argument canvassed by Mr
Andhyarujina that issuance of the circular dated 20 December,
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2012, was done suddenly and, therefore, caused serious loss and
prejudice to the Respondent Company, without any merit. The
circulars have been issued from time to time by SEBI as well as the
Petitioner. In the year 2005, SEBI issued a circular dated 23
February, 2005 whereby a Comprehensive Risk Management
Framework for the cash market was announced. By the said
circular, stock exchanges were called upon to put in place the
necessary systems to ensure the operationalization of the
Comprehensive Risk Management Framework. Thereafter, on 31
December, 2010 SEBI issued a master circular on matters relating
to Exchange Traded Derivatives. This circular inter alia provided
that a list of acceptable equity securities shall be updated on the
basis of trading and mean impact cost on the 15th day of each
month, and when a security is dropped from the list of acceptable
equity securities, the existing deposit of that security shall
continue to be counted towards liquid assets till the end of the
month. It is not in dispute that these circulars issued by SEBI are
binding on the Petitioner as well as the Respondent Company and
they are obliged to follow the same.
28. Accordingly, as part of the prudent system of Risk
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Management, vide circular dated 13th December, 2011, the
Petitioner notified the prudential norms relating to acceptance of
securities as collateral towards margin requirements. All the
members of the Petitioner were notified (including the Respondent
Company) that there shall be market wide limits across all
segments and member specific limits for each segment. It was
stated in this circular that a list of approved securities for the
month would be announced and the date of implementation would
be intimated subsequently.
ig Further the criteria for member
specific limits were expressly provided in the said circular dated
13th December, 2011. In fact the Respondent Company vide its
email dated 12th September, 2012 addressed to the Petitioner
noted its understanding of the circular dated 13th December, 2011
and the effect of its implementation. Thereafter, several other
circulars dated 18th June, 2012; 20th July, 2012; 22nd August,
2012; 26th September, 2012; 19th October, 2012; 20th November,
2012; 20th December, 2012 and 21st January, 2013 were issued
by the Petitioner for the purposes of implementing the revised
prudential norms in a phase-wise manner.
29. What is important to note is that this was done and
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applied to all the members of the Petitioner and was not restricted
only to the Respondent Company. On going through these
circulars, I find, and as correctly submitted by Mr Tulzapurkar,
that the aforementioned circulars (including the circular dated
20th December, 2012) merely implement the norms notified by
the circular dated 13th December, 2011. I, therefore, find the
argument of Mr Andhyarujina that issuance of the circular dated
20th December, 2012 was like a bolt from blue and the Respondent
Company was asked to replace the ineligible securities (for making
up the margin shortfall) at very short notice, which in turn has
caused financial losses to the Respondent Company, without any
merit. It is not in dispute before me that the Respondent Company
had knowledge of all the earlier circulars. Apart from this, the
same was also repeatedly brought to the notice of all the members
of the Petitioner. These facts are really undisputed. It is,
therefore, today to late in the day for the Respondent Company to
contend that by issuing the circular dated 20th December, 2012,
the Petitioner has caused any loss to the Respondent Company. At
the risk of repetition, this circular was issued only to implement
the earlier circular issued by the Petitioner dated 13th December,
2011 and infact said circular (13th December, 2011) was being
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implemented in a phase-wise manner as set out earlier. I,
therefore, find no merit in this submission either.
30. What is also important to note is the conduct of the
Respondent Company. After the circular dated 20th December,
2012 was issued, the Respondent Company by its letters dated
14th January, 2013; 16th January, 2013; 17th January, 2013, 1st
February, 2013; 11th February, 2013; 12th February, 2013; 12th
March, 2013; and 13th March, 2013 (Exh H-1 to H-8), in
compliance of the said circular transferred cash collateral from
time to time towards securities which became ineligible pursuant
to the said circular. It is also not in dispute that these pledged
ineligible securities were released by the Petitioner to the
Respondent Company from time to time. In not one of these
letters has the contention been raised by the Respondent
Company that by issuance of the circular dated 20th December,
2012, and which according to the Respondent Company was
"sudden", has caused any loss to the Respondent Company. As
can be seen from the said letters, the Respondent Company in fact
acted in furtherance of the said circular and also understood it to
be binding on the Respondent Company.
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31. Lastly, Mr Andhyarujina submitted that even if I am
inclined to admit this Petition, I should not order advertisement of
the same. He submitted that in view of the fact that the
Respondent Company has huge trade receivables from their
clients, the advertisement of the admission of the Company
Petition would cause grave prejudice to the Respondent Company.
32.
I am unable to accept this submission for the simple
reason that the purpose of advertisement of the Petition is to put
on notice the public at large that a winding up petition had been
entertained by the Court against the Respondent Company and if
anybody has a claim against them, they can join in the winding up.
It also puts the public at large to notice to be careful in their
dealings with the Company. It would be meaningless, at least in
the peculiar facts of this case, to simply admit the Petition and not
have the same advertised. In this view of the matter, I would have
to reject this contention also.
33. This now only leaves me to deal with the Judgment of
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the Court of Appeal in Re Portman Provincial Cinemas Ltd.5 Mr
Andhyarujina relied upon the aforesaid decision to contend that a
claim in damages can be legitimately set up as a cross claim in a
winding up petition and that the threshold to see whether the
claim is genuine or not, is extremely low. The facts of this case
would reveal that the secured creditor's petition for winding up of
the Company was for upwards of £40,000/- due under a legal
charge of June, 1961. The Company's defence to the petition was
based on a cross claim exceeding the balance due under the
charge. That claim, according to the company, arose on an alleged
oral agreement made in 1955 at the time of the sale of certain
cinemas to the Company for £175,000/- by the petitioning
creditors' then managing director, who died in 1962. The oral
agreement alleged was that the creditors would indemnify the
company against any losses which the latter might sustain in the
future operation of the cinemas. The Company therein had
claimed against the petitioning creditors damages for breach of
that alleged contract of indemnity. On these facts, the creditors'
petition was dismissed. On appeal, Lord Denning M.R. observed
that there had to be a genuine cross-claim with substance in it
before the petition should be rejected. Lord Denning M. R. further
5 1999 (1) WLR 157.
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observed that in re welsh Brick Industries Ltd. [(1946) 2 All
E.R. 197] it was held that in spite of the fact that unconditional
leave to defend had been granted in the King's Bench action, the
winding up court could look into the matter and hold that there
was no substance in the defence. According to Lord Denning M.R.
the oral agreement was far too vague and uncertain to obtain
recognition by a court of law and therefore he rejected the cross-
claim and allowed the appeal. However, the majority view of Lord
Hannan and Lord Russell was whether the trial Judge had rightly
exercised his discretion. They were of the opinion that there was
at least a chance that the Court would believe the story of the
alleged oral agreement. Even though the question of uncertainty
had made them pause, they held that the appeal was liable to be
dismissed. Mr Andhyarujina heavily relied upon these
observations (Lord Hannan's) and contended that the threshold to
see whether his claim in damages would succeed or otherwise is
extremely low. He submitted that in the case of Re Portman
Provincial Cinemas Ltd.5 even though the oral agreement
pleaded was vague, the majority was of the view that there can be
a chance that the Company could succeed in setting up a claim in
5 1999 (1) WLR 157.
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damages against the petitioning creditors and, therefore,
dismissed the appeal. He submitted that the same test ought to be
applied in the present case also.
34. I am unable to agree with the submission of Mr
Andhyarujina for more than one reason. Firstly, the majority view
in Re Portman Provincial Cinemas Ltd.5 is not binding on me and
has only persuasive value. Secondly, as mentioned earlier, the law
laid down in India by the decision of the Supreme Court in the case
of M/s Madhusudan Gordhandas and Co.6 is that the defence in
the Company Petition (i) has to be in good faith and one of
substance; (ii) that it is likely to succeed on a point of law; and (iii)
the company adduces prima facie proof of the facts on which the
defence depends. Thirdly, what is important to note is that the
courts in India have in fact consistently followed the view taken by
Lord Denning M.R. in the aforesaid decision rather than following
the majority view. The observations in this regard by the
Karnataka High Court in the case of State Bank of Hyderabad Vs
Varson Chemicals Pvt. Ltd. & Anr.8 are apposite. Paragraph 30
of the said decision reads thus:
5 1999 (1) WLR 157.
6 (1971) 3 SCC 632
8 1988 SCC OnLine Kar 138 : ( 1989) 3 Kant LJ 222
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"30. Whatever may be the majority view in the case of Portman
Provincial Cinemas Ltd. (Supra) the dissent expressed by Lord
Denning, M.R. (as he then was) is the more logical and
pragmatic view which the courts in India have generally
followed. In almost similar situation in the case of State Bank of
India v. Hegde and Golay Ltd.[ILR 1987 KAR 2496] the Court
had occasion to examine a similar plea of the respondent-
company therein. Relying upon the decision of the Supreme Court
of India in the case of Madhusudan Gordhandas and
Co. v. Madhu Woollen Industries Private Ltd. [(1971) 3 SCC
632 : A.I.R. 1971 S.C. 2600] Court emphasised the view that the
Company Court must be satisfied that the Company adduces
prima facie proof of the facts on which the defence depended
before the matter could be left to the Civil Courts to decide the
disputed debt, among other reasons given for recording a
finding, preliminary though it was, that the Company Court could
proceed with the winding up petition despite a plea of counter-
claim. That conclusion reached by the Court was affirmed by a
Division Bench of this Court and later Bopanna, J., as Company
Judge after considering every aspect of the resistance put up by
Hegde and Golay Ltd. passed the winding up order inter alia
holding that the Company therein had not proved its substantial
counter-claim against the Bank (See ILR 1987 KAR 2364).
Therefore what we in India have come to accept falls in line more
with the view of Lord Denning, M.R. (as he then was) that there
must be substance in the plea of cross-claim or counter-claim.
Mr. Sundaraswamy relied upon the decision of the Supreme
Court in the case of Union of India v. Raman Iron
Foundary [(1974) 2 SCC 231 : A.I.R. 1974 S.C. 1265] to the
effect that claims of damages are really not to be taken note of till
they are quantified. In the case on hand process of quantification
has commenced only during the hearing of the case.
(emphasis supplied)
35. In this view of the matter, I am unable to accept the
submissions of Mr. Andhyarujina in this behalf.
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36. After having examined the defenses of the Respondent
Company, I prima facie find that the same are not bona fide.
Applying the test laid down in the case of M/s Madhusudan
Gordhandas and Co.6, prima facie I find that the defences raised
by the Respondent Company are neither one of the substance,
likely to succeed in a point of law and nor has the Respondent
Company adduced prima facie proof of the facts on which the
defense is made. In these circumstances, the following order is
passed.
(i) The Company Petition is admitted and made
returnable on 8th August, 2016;
(ii) Learned counsel appearing on behalf of the
Respondent Company waives service of the notice
under Rule 28 of the Companies (Court) Rules, 1959;
(iii) The 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
6 (1971) 3 SCC 632
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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;
(iv) The Petitioner shall, on or before 7th July, 2016
deposit a sum of Rs.10,000/- towards publication
charges with the Prothonotary and Senior Master of
this Court under intimation to the Company
Registrar, failing which the Company 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;
37. I must clarify that all observations made herein are
only prima facie and shall in no way influence the Court hearing
Suit (L) No.939 of 2013, which shall be decided on its own merits
and in accordance with law.
( B. P. COLABAWALLA J. )
After the Judgement was pronounced, Mr.
Andhyarujina, learned counsel appearing on behalf of the
Respondent Company prays for a stay of this order. Dr. Saraf,
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learned counsel appearing on behalf of the Petitioner, vehemently
opposes the said request. In order to enable the Respondent
Company to test this order in Appeal, the Petitioner is directed not
to advertise the admission of the Company Petition for a period of
three weeks from today.
( B. P. COLABAWALLA J. )
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