Besant Raj International Limited v. Vishwa Bharathi Textiles Limited

R. Banumathi, J.

1. This Appeal arises out of the order in Company Petition No. 115 of 2002 dismissing the Petition filed under Sections 433(e), 434 and 439 of Companies Act and declining to pass an order winding up the Respondent Company − M/s. Vishwabharathi Textiles Limited.

2. Appellant-M/s. Besant Raj International Limited is the Management Consultancy Company providing services to Indian Companies. Respondent requested the Appellant to organise and arrange for funds from Foreign Banks for their business purposes to an extent of 8 Millions US dollars. After negotiations, Appellant agreed to do so and given terms of agreement. As per the letter dated 04.02.2000, it was indicated that the professional fee payable to the Appellant would be 2% of the funds to be arranged apart from Rs. 1,00,000/- as non-refundable retainer fee and Rs. 1,00,000/- towards the expenses for preparation of the business plan. Respondent accepted the offer and sent Rs. 2,00,000/- under letter dated 05.02.2000 stating that they had agreed that the professional fee payable to the Appellant would be 1% instead of 2%. Case of Appellant is that as per the contract, Appellant acted as financial intermediary. By contacting various source, they arranged External Commercial Borrowings [ECB] for 8 Millions US dollars through BHF Bank of Germany. As per the procedure, it was for the Respondent-Company to comply with various conditions like furnishing of Bank guarantee and get the clearance of Reserve Bank of India, etc. Project report was prepared and forwarded by the Appellant to their counter part to obtain financial sanction from BHF Bank. On 15.6.2000, BHF Bank sanctioned the loan and Respondent was directed to furnish bank guarantee and was also directed to get clearance/permission from Reserve Bank of India. Case of Appellant is that subsequent to the terms of contract, Respondent had to pay 1% of the value of the term loan sanctioned by the Foreign Bank by their letter dated 19.6.2000 Respondent accepted the offer and confirmed that they are taking steps to avail the loan. Case of Appellant is that by another letter dated 27.6.2000, Respondent confirmed that they had taken steps for furnishing the required bank guarantee; however, Respondent failed to procure guarantee from the Bank in India. Grievance of Appellant is that Respondent was unable to comply with the conditions and was merely taking time. In spite of sending reminders, there was no response from the Respondent. As per the terms of the revised agreement, they are entitled to professional fee on financial intermediation at 1.5% on the amount of loan sanctioned viz., 8 Million US dollars and calling upon the Respondent to pay the amount by 31.10.2000, Appellant issued a legal notice. Respondent sent a reply through their Counsel stating that their need for a loan was no longer there and hence declining to pay the professional fee to the Appellant. After issuing statutory notice, Appellant filed C.P No. 115 of 2002 for winding up of Respondent-Company under Section 433(e), 434 and 439 of Companies Act.

3. Respondent resisted the Winding up Petition contending that there was no enforceable debt payable by the Respondent to the Appellant and there was no contract to pay 1% of the total funds arranged. Further case of Respondent is that Appellant has not performed any obligation to justify even the advance payment of Rs. 2,00,000/- and it was at the instance of the Respondent in the letter dated 15.6.2000 BHF Bank gave a revised indicative of financing proposal for a loan. Respondent is a Public Limited Company which has to act in the interest of its shareholders and customers. There was no obligation on the part of the Respondent to give willingness for availing the loan and Respondent has already paid Rs. 2,00,000/- which itself according to the Respondent is excessive.

4. Upon consideration of the submissions, learned Single Judge dismissed the Company Petition holding that: (i) whether there is a concluded contract is doubtful, since the letter dated 5.2.2000 could only be taken as a counter-offer; (ii) even if a concluded contract emerged, whether the claimed amount is payable or not is a bona fide dispute and as such it cannot be postulated that there is a debt within the meaning of Section 433 of Companies Act. Examining the matter with reference to the word “debt” in Section 433(e) of Companies Act, learned Single Judge held that the ground raised by the Appellant against the Respondent cannot be held to be an inability to pay its debts by the Respondent-Company under Section 433(e) of the Act and dismissed the Winding up Petition. Hence the Appeal.

5. Learned Counsel for Appellant-Mr. Ravi has contended that payment of Rs. 2,00,000/- by the Respondent would clearly show that it is a concluded contract which was over looked by the Company Court. Learned Counsel would contend that once BHF Bank has sanctioned the loan, Appellant's duty is over and Appellant cannot be compelled to go without the professional fee for the services rendered. It was further argued that once the offer of loan was accepted, the Respondent was bound to pay the professional charges. Learned Counsel would further contend that the agreement between the parties that professional fee would be paid to the Appellant “…. as and when the Respondent would draw the amount ……” only indicates the time of payment, but did not make liability itself a contingent liability and while so, the Company Court erred in finding that there is a dispute as to the liability. In support of his contention, learned Counsel for Appellant placed reliance upon Hurnandrai Fulchand v. Pragdas Budhsen, 1923 (18) LW 441; F. Ranchoddas v. Nathmal Hirachand & Co., AIR 1949 Bom. 356; Bashir Ahmad v. Government of Andhra Pradesh, AIR 1970 SC 1089; Madhusudan Gordhandas & Co. v. Madhu Woollen Industries Pvt. Ltd., 1971 (3) SCC 632; Alpha Trading Limited v. Dunnshaw-Patten Limited, 1981 (1) All ER 482; Harbakhsh Singh Gill v. Ram Rattan, AIR 1988 P & H 60.

6. Mr. M.S Krishnan, learned Senior Counsel for Respondent has submitted that there was no concluded contract between the Appellant and the Respondent and there was no obligation on the part of the Respondent to pay the amount. It was further submitted that even if the conduct of parties is taken into consideration, the amount of 1% was accepted as an arrangement to be paid only after the loan has been availed and since the loan was not availed, there is no obligation on the part of the Respondent to pay 1% of the loan amount. Learned Senior Counsel would further submit that even the initial amount of Rs. 2,00,000/- paid to the Appellant was only a service charge which itself was excessive. It is the further contention that when the Respondent has not availed the loan, there is no obligation on the part of the Respondent to pay the amount. In any event, when there is bona fide dispute regarding the claim made as “debt” by the Appellant and in such circumstances, it cannot be a ground for winding up the Respondent Company. In support of his contention, learned Senior Counsel placed reliance upon Bhagwandas Goverdhandas Kedia v. Girdharlal Parshottamdas and Co., AIR 1965 SC 543; Amalgamated Commercial Traders (P.) Ltd.… v. A.C.K Krishnaswami…., 1965 (35) Company Cases 456; Pradeshiya Industrial & Investment Corporation of U.P v. North India Petrochemicals Ltd., 1994 (3) SCC 348; Rickmers Verwaltung Gmbh v. Indian Oil Corporation Ltd., AIR 1999 SC 504; Neg Micon v. Nepc India Limited, 1678, Trichy Road, Ramanathapuram, Coimbatore-641 045, 2000 (3) CTC 107; and U.P Rajkiya Nirman Nigam Ltd. v. Indure Pvt. Ltd., AIR 1996 SC 1373.

7. Before we examine the merits and demerits of the claims of the parties, we deem it necessary to refer to the provisions of the Act.

8. Section 433 of Companies Act sets out the circumstances under which a Company may be wound up by the Court. Relevant portion of Section 433 reads as follows:

“Section 433. Circumstances in which Company may be wound up by Court.— A Company may be wound up by the Court,—

(a) to (d) ….

(e) if the Company is unable to pay its debts;

(f) if the Court is of the opinion that it is just and equitable that the Company should be wound up.”

9. Section 434 of Companies Act explains as to when a Company is deemed to be unable to pay its debts. Section 434 reads as under:

“Section 434. Company when deemed unable to pay its debts.— (1) A Company shall be deemed to be unable to pay its debts:

(a) if a creditor, by assignment or otherwise, to whom the Company is indebted in a sum exceeding five hundred rupees then due, has served on the Company, by causing it to be delivered at its registered office, by Registered post or otherwise, a demand note is not requiring the Company to pay the sum so due and the Company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor.”

10. Jurisdiction to wind up the Company is discretionary and has to be exercised only when there is no clear indication that there is no intention of carrying on the business or that it is unable to pay the debts. The word “debt” used in clause (e) of Section 433 has to be understood in commercial sense. It is well settled that winding up Petition is not a legitimate means of seeking to enforce the payment of debt which is bona fide disputed by the Company.

11. Stand of Appellant and Respondent has to be examined in the light of the well settled principles. Considering the rival contentions and facts and circumstances, the points falling for consideration are:

(1) whether there is any concluded contract between the Appellant and Respondent and pursuant to which Respondent is to be held liable to pay the amount;

(2) in the light of the bona fide dispute by the Respondent whether exercising jurisdiction under Section 433(e) of Companies Act, Respondent Company is to be ordered to be wound up.

12. Respondent requested the Appellant to arrange for funds from Foreign Bank for offering term loan for working capital facility. After discussion, under letter dated 04.02.2000, Appellant offered to take an assignment of arranging the term loan of 8 Million US dollars. As per the said letter, in respect of the term loan, the fee payable was three fold viz.,—

(i) Rs. 1 lakh non-refundable retainer fee;

(ii) Rs. 1 lakh for preparation of detailed business plan; and

(iii) professional fee payable to the Appellant on successful completion of the assignment, is 2% of the total funds arranged by the Appellant and this is payable on Respondent's drawing the first instalment.

For assignment in respect of short term working capital, the fee payable was 1% of the total working capital limits arranged by the Appellant that is payable once the Respondent receives the letter of sanction from the party providing for funds. In the said letter, Appellant has informed the Respondent as:

“if the above terms are acceptable to you, please confirm your acceptance to these terms in writing along with your cheque/demand draft for Rs. 2 Lakhs (towards the advance) payable in favour of our Company at Chennai.”

From the above, it is clear that the letter dated 04.02.2000 was merely an “offer”.

13. In response to the said letter dated 04.02.2000, Respondent-Company by its communication dated 05.02.2000 has sent cheque for Rs. 2,00,000/- towards non-refundable retainer fee payable in advance and towards preparation of detailed business plan for Respondent's short term and long term funds. In the said letter, Respondent has offered the professional fees payable at 1% as is seen from the following:

“As per our personal discussion and also reconfirmed through telecom the professional fee payable is 1% of the total loan funds to be organised by your good selves. Kindly acknowledge receipt and confirm the above”.

14. As seen from the above said letter dated 05.02.2000, Respondent has made counter offer to pay 1% of the total loan organised as professional fees to the Appellant. In fact in the said letter, Respondent has requested the Appellant to acknowledge and confirm the same. As pointed out by the learned Single Judge, in the said letter dated 05.02.2000, Respondent has made only counter offer to pay 1% of the total loan to be arranged by the Appellant. As such there was lack of “consensus ad idem” and there was no concluded contract between the Appellant and the Respondent.

15. It is not as if the Appellant alone functioned as financial intermediary, but the same appears to have been routed through M/s. Ennen & Associates which was brought in by the Appellant as is seen from the various letters. In its letter dated 20.04.2000 addressed to M/s. Ennen & Associates, it is stated as:

“… the fee for financial intermediation will be 1.5% on the amount of loan sanctioned. The fee will be paid on the date of induction of funds to our account”.

In the letter dated 28.04.2000 addressed to M/s. Ennen & Associates, copy of which was marked to the Appellant, the Respondent has reiterated that the fee will be settled on the loan being availed by the Respondent. In the said letter, Respondent reiterated as:

“… it will be our endeavour to avail the loan as soon as the letter of sanction is received from the Funding Agency. We will avail the loan and immediately settle your fee”.

16. From the above letters, two things emerge:

• 1.5% fee on the amount of loan sanctioned is payable to M/s. Ennen & Associates for financial intermediation;

• The fee will be paid on the date of induction of funds to the Respondent's account.

In the Appellant's letter dated 04.05.2000 sent on their behalf as well as on behalf of their associates [M/s. Ennen & Associates], Appellant has stated that their associates [M/s. Ennen & Associates] are not happy about getting their fee only after Respondent draws the money since Respondent has to complete the various formalities before drawing the money. Requesting the Respondent to pay 50% of the fee payable, in the said letter, Appellant has stated as under:

“As our work is over once the letter of sanction is issued, I would request you to agree to pay 50% of the fee payable (both to me and Mumbai Associates) when you get the letter of sanction from the Bank and the remaining 50% when you draw the funds, after completing all the formalities”.

17. In their letter dated 05.05.2000, Respondent has reiterated that as already committed by them, they will settle the fees once the loan is availed and asked the Appellant to convince their associate also. As is seen from the letter dated 15.06.2000, the offer of German Bank is conditional. The relevant portion of the said letter reads as under:

“…. This offer should be treated subject to BHF-BANK AGs credit committee approval, and subject to receipt of a payment guarantee from an acceptable prime Indian Bank. This letter substitutes our offer dated 31.05.2000 …….

CollateralUnconditional irrevocable payment guarantee from an acceptable prime bank in India.DocumentationIndividual loan agreement between Viswabharathi Textiles Ltd., Tirupur and BHF-BANK AG, Frankfurt, containing the usual clauses for such type of financing subject to the laws of the Federal Republic of Germany.

The terms and conditions set out in this letter are only the most important one and are based on today's market situation. It is well understood that the above mentioned loan would be subject to all authorizations and regulations required and to be obtained in India and Germany respectively.”

A perusal of the above letters would clearly show that there was no concluded contract at any point of time between the Appellant and the Respondent.

18. Holding that mere making of an offer does not form part of the cause of action, in Bhagwandas Goverdhandas Kedia v. Girdharlal Parshottamdas and Co., AIR 1965 SC 543, the Supreme Court held as under:

“4. Making of an offer at a place which has been accepted elsewhere does not form part of the cause of action in a Suit for damages for breach of contract. Ordinarily it is the acceptance of offer and intimation of that acceptance which result in a contract. By intimating an offer, when the parties are not in the presence of each other, the offeror is deemed to be making the offer continuously till the offer reaches the offeree. The offeror thereby merely intimates his intention to enter into a contract on the terms of the offer. The offeror cannot impose upon the offeree an obligation to accept, nor proclaim that silence of the offeree shall be deemed consent. A contract being the result of an offer made by one party and acceptance of that very offer by the other, acceptance of the offer and intimation of acceptance by some external manifestation which the law regards as sufficient is necessary.

5. By a long and uniform course of decisions the rule is well settled that mere making of an offer does not form part of the cause ofaction for damages for breach of contract which has resulted from acceptance of the offer. [See Baroda Oil Cakes Traders v. Purushottam Narayandas Bagulia, ILR 1954 Bom 1137 : AIR 1954 Bom. 451. The view to the contrary expressed by a Single Judge of the Madras High Court in Sepulchre Brothers v. Khushal Das Jagjivan Das Mehta, ILR 1942 Mad. 243; AIR 1942 Mad. 13, cannot be accepted as correct.”

The same principle was reiterated in Rickmers Verwaltung Gmbh v. Indian Oil Corporation Ltd., AIR 1999 SC 504.

19. Applying the ratio of the above decisions, in the instant case, the entire correspondence on record shows that there was no concluded contract between the parties. In more than one letter, Respondent reiterated that professional fee is payable only after the loan is availed by them. Even assuming that there was a concluded contract, the commission becomes payable only after induction of funds into the account of the Respondent.

20. According to Appellant, the dealing with M/s. Ennen & Associates is independent. What is the role played by M/s. Ennen & Associates and the commission payable to M/s. Ennen & Associates has to be examined in the light of the stand taken by the parties. In the light of the denial of the Respondent to pay the amount, we are of the view that there is a bona fide dispute between the parties as to the amount payable.

21. Learned Counsel for Appellant placed reliance upon Hurnandrai Fulchand v. Pragdas Budhsen, 1923 (18) LW 441; F. Ranchoddas v. Nathmal Hirachand & Co., AIR 1949 Bom. 356. Those cases were contract for sale of goods and failure of delivery of goods, Court held that “the contract was not a contingent contract and that there was unconditional obligation to deliver the goods and delivery of goods was not dependent upon the arrival of the goods”. The ratio of the above decisions are not applicable to the factual matrix of the case on hand.

22. In Alpha Trading Limited v. Dunnshaw-Patten Limited, 1981 (1) All ER 482, both Plaintiffs and Defendants carried on business as international merchants and dealers. Plaintiffs would buy the cement themselves, either from the Defendants or from other suppliers and would then resell it to Dutch Company [Mueller] for a profit. There were exchange of telexes between the Plaintiffs and the Defendants to the effect that Plaintiffs would buy the cement from the Defendants. Subsequently, Brodie, a representative of the Plaintiffs decided that it would be more convenient and more profitable if the cement were sold direct by the Defendants to Mueller through the agency of the Plaintiffs. Plaintiffs claimed remuneration on the premise the Defendants entering into the contract with Mueller. In the said case, it was observed that it is right for the Court to imply a term that Defendants will not fail to perform their contract with the buyer so as to deprive the agent (Plaintiffs) of the remuneration due to him under the agency contract. Placing reliance upon the said decision, it was contended that in the understanding between the Appellant and the Respondent, it is right for the Court to imply a term into the contract that the Respondent is bound to pay the amount notwithstanding that they have not availed the loan facility. In this regard, reliance was also placed upon Bashir Ahmad v. Government of Andhra Pradesh, AIR 1970 SC 1089 and Harbakhsh Singh Gill v. Ram Rattan, AIR 1988 P & H 60. As pointed out earlier, in the instant case, various correspondences between the parties shows that there was no concluded contract and in any event, the amount was payable as and when the loan amount is inducted into the account of the Respondent. In the light of the denial of Respondent's obligation to pay the amount, the Court cannot read an implied term into the contract.

23. In any event, the amount becomes payable only on the amount being inducted into the account of the Respondent. When the Respondent has not availed the facility whether professional fee payable becomes disputed question of fact. Referring to various decisions, learned Single Judge held that the grounds raised by the Appellant cannot be presumed to be an inability to pay its debts by the Respondent-Company under Section 433(e) of Companies Act. Obligation of the Respondent is disputed not only on the ground that there was no concluded contract but also on the ground that assuming that it is a case of concluded contract, obligation arises only on availing the loan.

24. Ofcourse, Respondent has paid the non-refundable retainer fee of Rs. 2 lakhs. In the light of the fact that Respondent has not availed the loan funds, the question whether professional fee is payable is disputed.

25. It is well settled that Winding up Petition cannot be used as a method for the purpose of making recovery of any amount due which is otherwise enforceable as per due process of law. Invoking the provisions of the Companies Act and seeking a prayer for winding up will not be entertained if it is only in the nature of exercising pressure to enforce payment of a debt. The Supreme Court in Amalgamated Commercial Traders (P.) Ltd.… v. A.C.K Krishnaswami…., 1965 (35) Com.C 456, held as follows:

“It is well settled that Winding up Petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the Company. A petition presented ostensibly for a winding up order but really to exercise pressure will be dismissed, and under circumstances may be stigmatised as a scandalous abuse of the process of the Court.”

26. Winding up Petition is not a step to recover the amount was reiterated in Pradeshiya Industrial & Investment Corporation of U.P v. North India Petrochemicals Ltd., 1994 (3) SCC 348, where the Supreme Court held as under:

“29. It is beyond dispute that the machinery for winding up will not be allowed to be utilised merely as a means for realising its debts due from a Company. In Amalgamated Commercial Traders (P.) Ltd.… v. A.C.K Krishnaswami…., this Court quoted with approval the following passage from Buckley on the Companies Act:

“It is well-settled that ‘a winding up Petition is not a legitimate means of seeking to enforce payment of the debt which is bona fide disputed by the Company. A Petition presented ostensibly for a winding up order but really to exercise pressure will be dismissed, and under circumstances may be stigmatised as a scandalous abuse of the process of the Court’.”

27. While examining the entire case laws on the issue with reference to the word “debt” under Section 433(e) of Companies Act, in Neg Micon v. Nepc India Limited, 1678, Trichy Road, Ramanathapuram, Coimbatore-641 045, 2000 (3) CTC 107, the Division Bench of this Court held as under:

“16. If the debt is bona fide disputed and the defence is a substantial one, the Court will not wind up the Company. In determining whether a debt is disputed bona fide or mala fide, the conduct of the parties, the character of the pleas and the circumstances which will be peculiar to each case will be the contributing factors. The test is whether the dispute is raised only to avoid payment of the debt and not based on the substantial ground.”

The same principle was reiterated in Narsey Brothers v. Nithyalakshmi Textiles Mills Pvt. Ltd., 2008 (6) MLJ 633.

28. Whether the disputes which are raised or sought to be raised are bona fide or not or whether the same has been devised for the purpose of resisting a case for winding up of the Company have to be considered and determined by the Court on the facts of each particular case and on the basis of the materials that is available to the Court. The intention of parties is to be gathered from various correspondences available before the Court. The correspondence exchanged between the parties shows that professional fee was agreed to be paid as and when the loan amount is inducted into the account of the Respondent. When the Respondent has not availed the facility, whether professional fee is payable is a disputed question. In the light of the well settled position, upon analysis of the facts, the learned Single Judge rightly held that Appellant has not made out the ground i.e inability to pay its of the debts by the Respondent under Section 433(e) of Companies Act. We do not find any reason warranting interference with the well considered Judgment of the learned Single Judge and this Appeal is liable to be dismissed.

29. In the result, the Appeal is dismissed. No costs.