1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY PETITION NO.803 OF 2008 Messrs Anupama Wine Distributors ..Petitioners. Versus Tilaknagar Industries Ltd. ..Respondents. Mr. F. D. DeVitre, Senior Counsel with Mr.Vivek Menon with Mr. Rafeeq Peer Mohiddin i/b. M/s. Singhania & Co. for the Petitioners. Mr. Janak Dwarkadas, Senior Counsel with Mr. Chirag Balsara with Mr. Amit Yadkikar i/b. M/s. Desai & Diwanji for the Respondents. CORAM : S.J. VAZIFDAR, J. DATE : 16TH MARCH, 2009. ORAL JUDGMENT : 1. The petitioner has sought an order winding up the Respondent company inter-alia on the ground that the company is unable to pay its debts. According to the Petitioner the company is indebted to it in the sum of Rs. 4,21,00,000/-. 2. The company does not dispute the fact that a sum of Rs.4 crores was paid by the Petitioner to it and that the said sum has not been repaid. It is contended that the said sum was paid as a security deposit and that the company has several claims against 2 the Petitioner far in excess of the said amount of Rs. 4 crores. 3. Though the payment by the Petitioner to the company of the said sum of Rs. 4 crores is not disputed, it is necessary to see the circumstances and the manner in which it was paid by the Petitioner to the company in view of the first defence viz. that the said amounts were paid as security deposit and not as an advance/trade deposit. 4. In or about 1986 the company appointed the petitioner as its exclusive distributor/promoter for the alcoholic branded products manufactured by it in the state of Karnataka. 5. By a letter dated 7.9.2004 the company thanked the Petitioner for responding to its call for an urgent meeting on 30.8.2004 and stated that during the discussion the company had explained to the Petitioner its problems on account of the skyrocketing prices of molasses, highly costs and certain unforeseen liabilities fastened on the company and that under the circumstances, to tide over the abnormal requirements of large working capital finances for continuing the business operation to service the petitioners requirements in an effective manner it had requested the Petitioner to place with it an unsecured interest-free trade deposit of Rs. 50 lakhs for a period of twelve months. The 3 company stated that with these amounts, it would be in a position to procure a large quantity of molasses to effectively service the orders placed by the Petitioner and will also be in a position to meet certain liabilities as a result thereof. The company stated that the said amounts would be refunded within twelve months either by adjusting the same suitably against business volumes or by suitable installments. The company concluded by stating that the petitioner had graciously agreed to place the said funds with the company and therefore requested the Petitioner to forward the amount at the earliest. 6. By another letter dated 14.6.2006 the company stated that it had requested the Petitioner for an additional interest-free deposit of Rs. 4 crores which would be refunded in twelve months . The company stated that as the Petitioner was aware, it was in the midst of a massive expansion both on production facilities and on the marketing front; that the company was in the process of setting up a modern plant and that the amounts would enable the company to produce internationally accepted products which would be used for its products leading to superior quality. The Petitioner was requested to extend its co-operation to the company stating that the same would translate into an increase of 4 three times in the volume of sales and would also benefit the Petitioner. 7. The above letters addressed by the company itself belie the Defendants contention that the amounts were deposited as a security deposit and not as a trade deposit. There is no explanation for what is stated in these letters which clearly are contrary to the companies case now sought to be made out that the amounts were to be deposited by the petitioner by way of security. It is not the company’s case that what is stated therein was only for purpose of convenience or for some other reason. Considering the fact that it is the company that had written these letters it was for the company to establish any case contrary to what is stated therein. In the circumstances, the Petitioner’s case that the said amounts were advanced by way of a trade deposit is clearly established. 8. The doubt, if any, is set at rest by reference to a letter dated 20.6.2006 addressed by the company to the Petitioner wherein, the company undertook to refund the interest-free deposit of Rs. 4 crores to be deposited with it in 48 equal monthly installments commencing twelve months from the date of full disbursement. 5 9. It is not necessary to refer to the advices forwarded by the Petitioner to the company regarding the various amounts deposited from time to time aggregating to Rs. 4 crores as the receipt thereof is not denied by the company. Suffice it to state that a sum of Rs.25,00,000/- was paid on 11.10.2004, another sum of Rs. 25,00,000/- was paid on 9.12.2004, a sum of Rs.50,00,000/- was paid on 22.11.2005 and a sum of Rs. 3 crores was paid in three installments of Rs.1 crore each on 19.6.2006, 1.7.2006 and 4.8.2006. 10. This brings me to the next defence. Mr. Dwarkadas contended that an amount far in excess of the said sum of Rs. 4 crores is to be recovered by the company from the Petitioner as the Petitioner had allegedly fraudulently over the years, recovered amounts far in excess of what it was entitled to and had also recovered amounts it was not entitled to. He submitted that it is for this reason that the company had caused to be issued a public notice stating that the services of the Petitioner had been discontinued by it effective from 16.8.2007 and informing the public that they should not deal with the Petitioner in respect of the company’s products in any manner. 11. The Petitioner through its advocates addressed a notice 6 dated 21.9.2007 to the Respondents, The Ugar Sugar Works Ltd., Netravati Distilleries Private Limited and Karnataka State Beverages Corporation Ltd. The Petitioner referred to the facts regarding the said trade deposit of Rs. 4 crores as well as to various other amounts which according to it were due and payable to it by the company. By the said notice the Petitioner was called upon to pay an aggregate sum of Rs.7,46,52,625/- with interest at the rate of 18% per annum. The notice read as a whole claimed the said amount only from the company although for reasons which are not very clear, in one sentence in paragraph 17, it is stated that the other parties are also jointly and severally liable to pay the said amounts. The Karnataka State Beverages Corporation Ltd. a nodal agency for the state of Karnataka, was alleged to be a garnishee in nature and was therefore called upon not to release the sales amount to The Ugar Sugar Works Ltd. and Netravati Distilleries Pvt. Ltd. It is not really necessary to consider in any detail the reference to the other two parties which were bottling agencies for the company. It is important only to note that in paragraph 15 of this notice the Petitioner has specifically raised a grievance regarding the said termination by the public notice dated 24.8.2007 and 7 stated that it is entitled to claim damages from the company as it had engaged more than 125 sales representatives and office staff to carry on the business of the company for the past twenty years. This answers the contention that the termination had never been questioned by the Petitioner. 12. The company by its advocates reply dated 12.10.2007 alleged that it had come to its knowledge that the Petitioner had duped it by overcharging on various accounts namely freight/insurance, finance and promotions, marketing, a trainee schemes, promoters margin in collusion and connivance with its erstwhile employees and had been successful in duping the company to the tune of Rs.26,30,03,436/-. Mr. Dwarkadas relied upon paragraphs 2(iii) and (v) which read as under :- “2(iii) With reference to para 5 of your notice, our clients, vehemently deny that our clients were paying the commission and that your clients were incurring expenses for sales promotion activities of every nature and freight, insurance charges and other expenses out of commission paid to your clients as alleged. In fact, from the records, it is evident that your clients have not only claimed commission from the sale of our client's products, but claimed and recovered exorbitant expenses under various heads viz freight, insurance charges, financial charges and other expenses from our clients. With regard to excise duty, our clients state that, your clients have defrauded our clients by claiming the cost of money provided by your clients towards excise duty remission and interest and further charged 8 and claimed exorbitant financial charges and costs from your clients. Your clients, over the years, have not only over charged our clients but duped our clients for crores of rupees. Our clients vehemently deny that, for your clients accounting purpose, you used to split the commission amounts towards commission, the sales promotion expenses and freight charges under different heads as alleged by you. (v) With reference to para 8 of your notice, our clients state that Manufacturing Agreement between our clients and Ugar Sugar Works Limited expired on June 30, 2007, due to efflux of time. Upon expiry of the term of the said Manufacturing Agreement, our clients Managing Director repeatedly requested the Managing Director of the said Ugar Sugar Works Limited that the amount lying in the joint account of Ugar Sugar Works Limited be transferred. Thereafter, your clients in connivance with Mr. Rajabhau Shirgaonkar, CMD of Ugar Sugar Works Limited, conspired and surreptitiously withdrew an amount of Rs.197.75 Lakhs and Rs.86.10 lakhs from the said joint account, by misusing the trust of our clients had in you. For the aforesaid purpose, your clients misused the blank cheques duly signed by the Chairman and Managing Director of our clients without prior intimation and consent. We are instructed to state that, your clients are not entitled to aforesaid amounts and are liable to return the said money to our clients, forthwith. Further, your clients have breached the trust of our clients and are liable to be prosecuted accordingly. With regard to the excise payment relating to Netravati Distilleries Pvt. Limited is concerned, our clients state that our clients changed the payment mechanism to avoid any misuse of any funds by your clients, therefore, our clients are not liable if there were any delays in making payments to your clients since this was agreed by them. Our clients state that, in fact, the reason for delay in making payments is your clients own misconduct. Our clients deny that, they are liable to pay to your clients, towards arrears of the excise duty 9 and additional excise duty to the tune of Rs.3,04,07,514/- as alleged by your clients. In fact, our clients are entitled to recover an amount to exceeding Rs.86.30 crore from your clients.” 13. Mr. Dwarkadas submitted that there are serious allegations and in view thereof a petition for winding up ought not to be entertained. 14. There is nothing on record which substantiates or even indicates the possibility of the above allegations. I am not inclined to accept Mr. Dwarkadas’s contention that the allegations being serious in nature ought not to be ignored merely because there are no supporting documents relied upon at this stage in support thereof. If this contention were to be accepted all that would be required of any company in such a petition is to make allegations and thereafter contend that they would be substantiated in appropriate proceedings. This would render the provisions of sections 433 and 434 of the Companies Act nugatory. It is important to note that in paragraph 1 of this letter it is alleged that it had come to the knowledge of the company that the Petitioner had duped the company on various counts. There are no particulars as to how the same had come to the knowledge of the company. There are no particulars as to when the same had 10 come to the knowledge of the company. There is no explanation as to why if these allegations had come to the knowledge of the company, the company had not even recorded the same in any correspondence prior to the issuance of the said notice on behalf of the Petitioner. 15. In the affidavit in reply, it is alleged that after an investigative audit conducted by the company in August 2007 the company came to know about the various fraudulent activities of the Petitioner which resulted in a huge loss to the company. As rightly pointed out by Mr. DeVitre, the audit report is dated 30.8.2008. This audit report could therefore never have been the basis on which the company alleged in the said letter dated 12.10.2007 that it had come to its knowledge that the Petitioner had duped it. No other report by an auditor or otherwise is relied upon. No other information as the source of the alleged knowledge is referred to. It appears therefore that these allegations have been made only with a view to deny the Petitioner’s claim. 16. Mr.Dwarkadas relied upon the said audit report dated 30.8.2008 prepared by the chartered accountants. Firstly, this report is prepared by chartered accountants appointed by the company. The fact that the chartered accountants invited the 11 Petitioner to assist them in the preparation of the report cannot be a factor against the Petitioner. The report by itself, in any event, does not inspire confidence enough to resist the Petitioner’s claim. As the report indicates, the chartered accountants were requested by the chairman of the company to review the payments to the Petitioner by way of commission, sales promotion, freight and other reimbursements during the last eight years to ascertain whether the Petitioner had defrauded the company in any way and whether any of the employees of the company past or present had assisted the Petitioner in this regard. There is nothing to indicate why such a request had been made. Nor is there anything in the report to indicate as to when the request for the report was made. It appears clear that the request was made much after the Petitioner raised its claims. 17. Further as the report itself states, it is based on very limited details and the records made available to the chartered accountants. It states that the possibility of collusion between the former employees of the company and the Petitioner cannot be ruled out. It states that the fraud appears to have been committed by the Petitioner by possibly claiming amounts in excess and the possibility of interest being charged twice for excise duty funding. It 12 states that based on the limited documentation made available they are of the opinion that payments have been made without applying satisfactory checks that the claims of the petitioner were correct and due. The observations are general, hypothetical and vague. 18. The mere fact that the rates of commission had been reduced after the new management i.e. the present management had taken over does not indicate fraud. Further, merely because the Petitioner did not respond to the auditors queries cannot be held against the Petitioner. The Petitioner was not bound to attend to the auditors appointed by the company. Curiously the report even refers to statements made by a former employee of the company against the Petitioner and the former Managing Director of the company as if that was sufficient to establish any fraud against the Petitioner. Throughout the report, all that is stated is that there appears to be a possibility of certain financial irregularities. It is difficult to understand under what authority these chartered accountants directly contacted the Petitioner’s auditor and adviser. Apart from the question of the propriety of such a step, admittedly, even that did not evidence anything against the Petitioner. The report read as a whole, I am constrained to say, 13 has been prepared not on an independent professional basis but only at the behest and as per the dictates of the company. 19. It is important to note that the amounts due in respect of each allegation in the audit report were not even quantified before me. If what is stated in the report is true, it constitutes serious lapses on the part of the auditors of the company during the past eight years. It is important to note that nothing is stated as to whether and, if so, what action has been taken by the company against its internal and statutory auditors for not having detected and reported the alleged lapses and fraudulent transactions and misappropriation of its funds. 20. There obviously were no disputes between the parties at least till the year 2006. In fact, by a letter dated 16.4.2006 addressed to the Petitioner, the company placed on record its appreciation of the Petitioner’s efforts to lift the allocated number of cases of the company’s products in February and March 2006. The company further recorded that due to the Petitioner’s efforts the sales had crossed one million cases in the financial year 2005- 2006 which was a landmark achievement for the company. The company further stated that it would like to far exceed this in the coming year and looked forward to the Petitioner’s continued 14 undisputed dedication and commitment in this regard in increasing the sales in the state of Karnataka. By a further letter dated 3.5.2006, the company congratulated the Petitioner and expressed its appreciation for the Petitioner’s efforts and contribution towards the company achieving a sale of one million cases during the year 2005-2006. The company invited the Petitioner to its annual conference which was to be held on 13th and 14th May 2006. The company stated that it looked forward to the valuable inputs by the Petitioner during the conference towards strengthening its product portfolio and the growth in its business in the state of Karnataka. 21. There is nothing to indicate as to when the company discovered the alleged fraudulent acts on the part of the Petitioner. There is nothing to indicate how the company acquired knowledge about the alleged fraudulent acts on the part of the Petitioner. The allegations against the Petitioner were raised by the company for the first time admittedly only after the receipt of the statutory notice dated 21.9.2007. This, if not by itself when considered with the other facts and circumstances of the case, is a strong indication that the allegations have been made only with a view to raising a false defence. 22. On 26.10.2007, the Petitioner filed a suit in the 15 Karnataka High Court against the company and the other parties for recovery of a sum of Rs. 7,31,10,153/- together with interest at 18% per annum against the company. It is pertinent to note that the other parties had been impleaded only as necessary and proper parties and no relief had been claimed against them. On 1.1.2008 the company filed a written statement and counterclaim. 23. Mr.Dwarkadas submitted that the fact that the Petitioner had earlier filed a suit to recover the said amounts, itself established that there were bona-fide disputes between the parties. I do not agree. 24. Merely because a party first files a suit against the company does not warrant an inference that there is an admission on the part of such party that there are bona-fide disputes between the company and itself. Considering the backlog in suits and the possibility of appeals, there is nothing unusual or unnatural in a party filing a suit in addition to a winding up petition on the ground that the company is unable to pay its debts. 25. It is true that normally, as a practice, parties first file a petition for winding up and thereafter depending upon the order passed therein, decide whether or not to file a suit. That however 16 is only a matter of practice and there is nothing in law which prevents a creditor from first filing a suit and thereafter a petition for winding up. Indeed, this may be the more prudent course in many cases such as where it is necessary for a party to protect its claim from being barred by the law of limitation. Even if limitation is not about to expire, it would not be unusual for a party out of abundant caution to file a suit either earlier or even after filing a petition for winding up. If there is a deposit order and the amount deposited is ordered to be transferred to the credit of a suit to be filed within a stipulated time the Petitioner would in all probability file a suit. Even if a company petition is admitted the Petitioner may well file a suit. This is for the obvious reason that there is no certainty as to the nature of the order that may be passed at the final hearing of the petition. It is well established that even if the claim is undisputed the company court is not bound to order the company to be wound up. In that event, the Petitioner may well find its claim barred by limitation if the petition for winding up is dismissed although the Petitioner has an unanswerable claim on merits. The course chosen by a party in this regard cannot therefore possibly lead to an inference regarding the parties confidence in or perception of its claim. 17 26. In the present case, the Petitioner served another statutory notice under section 434 dated 15.4.2008. This notice however was addressed only to the company and was limited to the claim in respect of the said trade deposit of Rs. 4 crores and did not include the claims which were mentioned in the previous statutory notice dated 21.9.2007. The company by its advocates letter dated 15.5.2008 replied to the second statutory notice dated 15.4.2008. The company reiterated the allegations made by it earlier. 27. The fact that the second statutory notice referred only to the said trade deposit and not to the other claims referred to in the earlier statutory notice cannot be held against the Petitioner. In fact, this approach is entirely understandable. This is for the obvious reason that whatever the disputes regarding the other amounts there is no dispute regarding the fact that the said sum of Rs. 4 crores was advanced by the Petitioner to the company and that the same remains to be returned by the company to the Petitioner. The company has admitted receipt of the said sum as well as the fact that it has not repaid the same. It claims to be entitled to retain the said sum on account of its alleged claims. 28. In the circumstances, I do not find there to be a bona-fide 18 dispute regarding the said sum of Rs. 4 crores. Interest at 18 percent per annum was claimed from 7.5.2008. In fact the company would be bound and liable to pay interest from 21.9.2007 i.e. the date of the first statutory notice wherein interest at 18 percent per annum was claimed. However as the particulars of claim at EXHIBIT “A” to the petition claims interest only from 7.5.2008, I will restrict my order accordingly. 29. If the company deposits a sum of Rs.4,21,00,000/- on or before 30.6.2009 the same shall be transferred to the credit of the suit filed by the Petitioner in the Court of City Civil Judge at Bangalore being suit no O.S. 8311 of 2007. In that event, an application for an order of investment may be made by the