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  • S.A Bobde, J.
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Smart Summary

Judgment Summary — Extracted from the Provided Opinion (S.A. Bobde, J.)

Factual and Procedural Background

This petition was filed by a bank to wind up the respondent-company for alleged non-payment of Rs. 2,94,60,698 together with further interest at 18% per annum. The debt is said to arise under a Credit Arrangement Letter (CAL) and an ISDA master agreement (Internal Swaps and Derivative Association Master Agreement dated 18 October 2007) executed between the parties to facilitate derivative transactions (forwards and options) and to hedge currency risk.

Key factual and procedural events recorded in the opinion:

  • 1 October 2007 — The bank issued a CAL sanctioning derivative limits of Rs. 1.52 crores.
  • 15 October 2007 — The company authorised its CFO, Mr. Jasmin Mehta, to execute the ISDA Agreement and enter into derivative transactions.
  • 18 October 2007 — The company board passed a resolution enabling derivative transactions and Mr. Jasmin Mehta executed the ISDA Master Agreement on behalf of the company.
  • 7 November 2007 — The petitioner requisitioned Rs. 46,00,000 as additional cash margin; the company paid Rs. 46,00,000.
  • 23 November 2007 — The bank credited the company’s account with Rs. 14,18,760.
  • 12 December 2007 — A cheque issued by the company for Rs. 1.52 crores was dishonoured.
  • 18 December 2007 — The petitioner issued a statutory notice; the company replied on 31 December 2007 stating that it had already filed High Court Suit No. 3398 of 2007 on 10 December 2007.
  • 27 December 2007 — The bank terminated the contract by letter dated 27 December 2007.
  • The company asserted solvency (networth of Rs. 80.57 crores) and also claimed it had issued a blank cheque; the bank and company continued correspondence regarding disputed transactions.

Legal Issues Presented

  1. Whether the winding up petition by the bank is maintainable in the face of the company's claim of a bona fide dispute over the alleged debt.
  2. Whether the company's defence (that certain transactions under the ISDA agreement are illegal, void and not binding) is a bona fide dispute sufficient to defeat a winding up petition.
  3. Whether proceedings for recovery before the Debts Recovery Tribunal or the filing of a civil suit (Suit No. 3398 of 2007) prevent the court from entertaining the winding up petition.

Arguments of the Parties

Petitioner-Bank's Contentions

  • The debt of Rs. 2,94,60,698 is due under the CAL and the ISDA Agreement.
  • The ISDA Master Agreement and CAL were entered into and acted upon by the parties; the ISDA was signed by the authorised officer of the company.
  • The company paid margin money (Rs. 46,00,000) and the bank credited Rs. 14,18,760 in accordance with the agreement; these acts demonstrate the agreement's operation and acceptance.
  • The cheque for Rs. 1.52 crores was dishonoured on the company's instructions; the bank terminated the contract and issued statutory notice in accordance with the agreement.
  • Implicitly, the bank contends the company's defence is not bona fide and is not sufficient to defeat the winding up petition.

Respondent-Company's (Mr. Hakani) Contentions

  • The company bona fide disputes the liability and had filed Suit No. 3398 of 2007 on 10 December 2007 (prior to the statutory notice of 18 December 2007).
  • Specific challenge to two transactions dated 24 October 2007 and 30 October 2007 relating to options, which the company contends are illegal, void and not binding.
  • The company maintains it entered into the ISDA agreement only for export-related activities and that the board resolution authorising the transactions was beyond the company's authority under its articles of association.
  • The company contends the resolution was drafted by the petitioner in violation of article 77 and article 165(d) of the articles of association (which purportedly require general meeting consent to borrow beyond prescribed limits), and therefore the borrowing/authority was without power and cannot bind the company.
  • The company asserted it is solvent (networth stated as Rs. 80.57 crores) and claimed that a cheque had been issued blank; the company also stated that amounts credited by the bank were unilaterally deposited by the petitioner into the company's account.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Viral Filaments Ltd., Mumbai v. Indusind Bank Ltd., Mumbai — [2001] 4 Comp. LJ 44 : [2003] 113 Comp Cas 85 (Bom) That filing proceedings for recovery under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 before the Debts Recovery Tribunal does not, by itself, preclude the maintenance of a winding up petition. The court relied on the principle in paragraphs 6 and 7 of that decision to hold that the existence of recovery proceedings before the DRT does not automatically bar the winding up petition; the court therefore proceeded to examine the bona fide nature of the dispute on the facts.

Court's Reasoning and Analysis

The court conducted a fact-specific, prima facie analysis limited to the question of whether the company's defence amounted to a bona fide dispute that should prevent the winding up petition from being entertained. The court's key analytical steps were:

  1. Verification of objective indicia that the agreements were entered into and acted upon:
    • The board passed a resolution authorising entry into derivative transactions;
    • The ISDA Agreement was executed by the authorised officer, Mr. Jasmin Mehta;
    • The company made a cash margin payment of Rs. 46,00,000 as demanded;
    • The bank credited Rs. 14,18,760 to the company's account in accordance with the contract's mode of payment.
  2. Assessment of the strength of the company's pleaded defence:
    • The court observed that the company's defence that the agreements and two specific transactions were void did not appear to be bona fide on a prima facie review.
    • The dishonour of the cheque for Rs. 1.52 crores on the company's instructions was treated as a material fact undermining the company's stance.
  3. On the procedural point that the company filed Suit No. 3398 of 2007 before the statutory notice, the court held that mere filing of a suit before a statutory notice does not automatically render a dispute bona fide; the court must examine the substantiality of the defence.
  4. The court noted that the pendency of recovery proceedings before the Debts Recovery Tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 does not, per authority cited, prevent the court from entertaining a winding up petition; whether a dispute is bona fide would be decided on the facts.
  5. The court expressly limited its comments to prima facie observations for the purpose of the present winding up proceedings and stated that the truth of the company's defence would be open to testing in the suit or proceedings before the Debts Recovery Tribunal.

Holding and Implications

Holding: The court held that the company's defence was not shown to be bona fide on prima facie consideration and directed conditional steps to proceed with the winding up petition. Specifically:

  • The respondent-company is directed to deposit Rs. 2,94,60,698 within eight weeks from the date of the order.
  • If the company fails to make the deposit within that period, the company petition shall stand admitted and the petitioner shall advertise the petition in two local newspapers (Free Press Journal and Maharashtra Times) and in the Maharashtra Government Gazette.
  • The petitioner is directed to deposit Rs. 10,000 with the Prothonotary and Senior Master towards publication charges within three weeks from the date of default, with an intimation to the Company Registrar; failure to do so will result in dismissal of the petition for non-prosecution.
  • If the amount is deposited as directed, it shall be transmitted to the credit of Original Application No. 57 of 2008.

Implications: The direct effect of the order is procedural and bilateral: the company must pay the specified sum to avoid admission of the winding up petition and consequent publicity steps; the bank obtains conditional relief to proceed if the company does not comply. The court's observations are expressly described as prima facie and restricted to the present winding up proceedings, and the opinion does not purport to lay down any new binding precedent beyond applying established principles (including the cited Viral Filaments decision) regarding the interplay between bona fide disputes and winding up petitions.

This summary is prepared strictly from the text of the provided opinion. No information beyond that text has been added or inferred.

Show full summary ...

    Icici Bank Ltd. v. Sundaram Multi Pap Ltd.

    S.A Bobde, J.:— This is a petition for winding up of the respondent-company for alleged non-payment of a sum of Rs. 2,94,60,698 with further interest at the rate of 18 per cent per annum.

    2. The petitioner-bank claims the aforesaid amount as due under a credit arrangement letter (CAL) and an internal swaps and derivative association master agreement dated October 18, 2007, together with its schedule collectively referred to as “ISDA Agreement”. Apparently, the company entered into the aforesaid agreement with the petitioner with a view to protect itself from the losses arising out of adverse fluctuations in the rate of exchange in import export transactions. Broadly, the salient features of the two agreements are as follows:

    The company would enter into derivative transactions. If as a result it makes any gains, the petitioner-bank would credit the amount to their account. If there are losses, the petitioner would debit their account. The derivative limits were to be Rs. 15.2 million. The agreements would cover both forward and options contract. The company would deposit such moneys and execute such security documents by way of margin with the bank as may be demanded by it. The agreement was liable to be cancelled upon certain termination events specified in the contract such as defaults, etc.

    3. In the present case, on October 1, 2007, the bank issued a CAL, sanctioning derivative limits to the extent of Rs. 1.52 crores so as to enable the company to enter into forward and options contract and other derivative limits with the petitioners to hedge their currency risk. On October 15, 2007, the company appointed Mr. Jasmin Mehta, the Chief Finance Officer, to execute the ISDA Agreement and to enter into derivative transaction. On October 18, 2007, the board of the company passed a resolution enabling the company to enter into derivative transaction with the petitioner-bank on terms, regulations and conditions laid down by the ICICI Bank for the purpose and resolved to authorise Mr. Jasmin Mehta to enter into transaction under the said agreement. The ISDA Master Agreement was executed on October 18, 2007. It was signed on behalf of the company by said Mr. Jasmin Mehta. Apparently, it is not signed on behalf of the petitioner. That is, however, not significant since the existence of the agreement is not disputed on behalf of the respondent-company and it has been acted upon by the parties. The petitioner sent a requisition on November 7, 2007, for a sum of Rs. 46,00,000 towards the additional cash margin and the company paid the amount of Rs. 46,00,000 to the petitioner.

    4. Apparently, on November 23, 2007, the petitioner credited the company's account with an amount of Rs. 14,18,760. On December 12, 2007, the cheque issued by the company for Rs. 1.52 crores was dishonoured. The bank terminated the contract by letter dated December 27, 2007. On December 18, 2007, the petitioner issued the statutory notice which was replied to on December 31, 2007, inter alia, contending that the transactions referred to in the statutory notice are already the subject-matter of High Court Suit No. 3398 of 2007 filed on December 10, 2007 and claiming that the company was fully capable of honouring the cheque, but the amount has been withheld because the petitioner deposited the cheque in spite of knowledge of the suit. There is further correspondence between the parties in which the company has claimed that they had issued a blank cheque and that they are fully solvent with a networth of Rs. 80.57 crores.

    5. Mr. Hakani, learned counsel for the company, submitted that the company bona fide disputes the said liability and has, in fact, filed Suit No. 3398 of 2007 on December 10, 2007, prior to the statutory notice dated December 18, 2007. According to learned counsel, though the company does not dispute the documents and the contract between the parties, there is a dispute about two transactions dated October 24, 2007 and October 30, 2007, in relation to options and the said transactions have been challenged by the company as illegal, void and not binding on the company. It may be noticed that the contentions of the company are to the effect that they entered into ISDA agreement only for the purpose of export and the resolution taken by the company is not in accordance with the articles of association since it is in excess of the borrowing limits imposed by the articles of association. According to the company, its resolution was, in fact, drafted by the petitioner-bank in violation of article 77 of the articles of association and article 165(d) of the articles of association which require the company to obtain the consent of the company in general meeting to borrow in excess of the limits provided by article 77. According to the company, the borrowing is itself without any authority and cannot bind the company.

    6. On a consideration of the entire matter, it appears that the defence of the company is not bona fide. There is no dispute that the resolution to enter into these derivative transactions and execute agreements with the petitioner-bank was passed by the company. The agreements are signed by the authorised officer of the company, i.e, Mr. Jasmin Mehta. The company paid Rs. 46,00,000 to the petitioner on account of differential margin money demanded by the petitioner.

    7. They also issued a cheque for Rs. 1.52 crores towards CAL which was dishonoured on their instructions. Prima fade, therefore, the defence that the agreements in question are void and the two transactions under them are also void does not appear to be substantial. In fact, the petitioner-company also made payment of Rs. 14,18,760 to the company by crediting its account bearing No. 515348420 with the petitioner. No doubt it is contended by Mr. Hakani on behalf of the respondent that the amount has been unilaterally credited by the petitioner by depositing the amount in the company's account maintained by the petitioner. However, that was the mode of payment prescribed by the agreement.

    8. It must, however, be noted that the truth or otherwise of the defence taken by the company would be liable to be tested by the court in the suit or other proceedings filed by the petitioner before the Debts Recovery Tribunal. The observations made herein are only prima facie and restricted to the present proceedings for winding up.

    9. There is no merit in the contention on behalf of the company that the dispute raised by the company must be treated as bona fide because the company has filed the suit before the statutory notice was issued. Such a suit does not make the dispute bona fide only because it is filed before the statutory notice. It is necessary for the court to examine whether the defence to the company proceedings based on such a suit is substantial. Also it cannot be said that merely because the bank has filed proceedings for recovery under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, before the Debts Recover Tribunal, it cannot maintain the petition for winding up vide Viral Filaments Ltd., Mumbai… v. Indusind Bank Ltd., Mumbai…., [2001] 4 Comp. LJ 44 : [2003] 113 Comp Cas 85 (Bom), paragraphs 6 and 7.

    10. Mr. Hakani relied on several decisions of various High Courts, including this court, in support of his contention that the company petition ought not to be entertained because there is a bona fide dispute. All those decisions have not been dealt with here since there is no dispute about the proposition that where the debt is bona fide disputed, the court will not entertain a petition for winding up. It is equally well-settled that whether the dispute is bona fide or not would have to be decided on the facts of each case by the court.

    11. In this view of the matter, the respondent-company is directed to deposit a sum of Rs. 2,94,60,698 within a period of eight weeks from today, failing which the company petition shall stand admitted and the petitioner shall advertise the petition in two local newspapers, viz., Free Press Journal, Maharashtra Times and in the Maharashtra Government Gazette. The petitioner shall deposit an amount of Rs. 10,000 with the Prothonotary and Senior Master towards the publication charges within three weeks from the date of default with an intimation to the Company Registrar, failing which the petition shall stand dismissed for non-prosecution.

    12. In case the amount is so deposited as directed hereinabove, it shall be transmitted to the credit of Original Application No. 57 of 2008.

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    Comments

    Icici Bank Ltd. v. Sundaram Multi Pap Ltd.
    (Sep 15, 2008)