1 mgj IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION Company Petition No. 242 of 2009 In the matter of Hometex Limited ..Company K.B.S.Trading (P) Limited ..Petitioner Mr.Zal Andhyarujina, i/b. Girish B.Kedia for petitioner Mr. Rustom M.Pardiwala i/b Mulla and Mulla for respondent CORAM: S.J.KATHAWALLA J. 30th September, 2009 P.C. 1 By this Company Petition, the petitioner has sought winding up of the respondent M/s International Hometax Ltd. According to the petitioner, an amount of Rs. 2,73,47,945.20, as per the particulars set out in Exhibit I to the petition, has become due and payable by the company to the petitioner as on 31st January 2009 under the following circumstances. i) The petitioner upon coming to know 2 that the respondent is desirous to allot preferential issue of equity shares of Rs. 10/- each with a premium thereon to intending purchasers, became interested to purchase such shares and negotiated terms with the said company. It was inter alia agreed that the petitioner will purchase 10,00,000/- equity shares of Rs.10/- each with a premium of Rs.10/- thereon aggregating to Rs.20/- per share. The entire consideration money will be paid immediately in one go before allotment. The shares would have a lock in period of six months during which period the petitioner will not sell the same. ii) Pursuant to such negotiations the petitioner at the request of the respondent who was urgently in need of funds, through RTG system transmitted a sum of Rs.2 crores to the account of the respondent on 17th January, 2007. iii) The petitioner by its letter dated 3 5th February 2007 addressed to the Board of Directors of the respondent inter alia recorded the terms and conditions on which the petitioner had agreed to purchase the said 10,00,000 (ten lacs) equity shares of the respondent on preferential basis. iv) The respondent issued an application form for the allotment of equity shares to be filled in by the petitioner which the petitioner did on 30th March 2007. A letter of allotment dated 13th April, 2007 was issued by the respondent to the petitioner allotting 10,00,000 equity shares of the respondent to the company bearing distinctive no(s) 17601516 to 18601515. The said letter of allotment inter alia contained a condition that the shares so allotted will not be sold/transferred/hypothecated until 30th April, 2008 i.e. for a period of one year from the date of allotment. v) On expiry of one year the petitioner 4 through its depository participants applied to the Share Registrar of the respondent for de-materialisation of the said shares. The same was rejected by the Share Registrar vide its letter dated 16th May 2008 on the ground that the letter of allotment issued to the petitioner was not share certificates and as such could not be dematerialized. vi) As no share certificates were issued by the respondent, even after expiry of the lock in period, the petitioner issued a letter dated 1st September, 2008 to the respondent inter alia recording that the petitioner has not yet received the said shares and therefore, the application for preferential shares stands cancelled. The respondent was requested to refund the amount of Rs.2 crores, with interest because the respondent was not able to deliver the shares within specific time as per SEBI guidelines. Since the respondent failed and neglected to 5 refund the amount of Rs.2,00,000,00/- (two crores), the petitioner issued to the respondent a statutory notice on 3rd November, 2008 through its advocate demanding payment of the said amount along with accrued interest at the rate of 18% p.a. within a period of 21 days from the date of receipt of the same. The notice was returned back with endorsement refused which led to the petitioners filing the present petition. It is submitted on behalf of the petitioner that the respondent not having replied to the statutory notice, have admitted the claim of the petitioner. It is also submitted that the respondent is admittedly facing financial problems. The respondent is unable to pay its debts and deserves to be wound up. 2 The respondent filed its affidavit in reply dated 2nd July 2009 wherein the respondent inter alia contended that the petition for winding up of the respondent is 6 a gross abuse of the process of law. The petitioner is not the creditor of the respondent but is in fact a share holder and has been recognised as a share holder since 13th April, 2007 on which date the shares were allotted to the petitioner. It was contended that the petitioner who voluntarily chose to be shareholders of the respondent now seems to have a second thought and is claiming to recover the allotment money paid by it to the respondent, under the guise of debt. It is, therefore, submitted that the petition should be dismissed in limine as it does not have any element of sections 433 and 434 of the Companies Act, 1956. The respondent has further contended/pointed out that the petitioner agreed to purchase 10,00,000 equity shares and accordingly paid a sum of Rs.2 crores to the respondent. In principle approval of the proposed issue had been received by the respondent from the 7 Bombay Stock Exchange (BSE) vide its letter dated 12th April, 2007. Under the in principle approval granted by the BSE the respondent was required to file the listing application within one month from the date of allotment of equity shares. The petitioner has complied with all the requirements. Attention of this Court is also drawn to the last two paragraphs of the letter (in principle approval) which reads as under; Please note that the validity of this in principle approval given by the Exchange is for a period of 15 days from the date of passing of Resolution under sec.81(1A) of the Companies Act, 1956 by the shareholders of the company. Kindly note that the Exchange will issue approval for listing subject to compliance as stated above and the company should not take any steps to dematerialise any of the securities pursuant to the in principle 8 approval given in this letter by the Exchange until further notice. 3 According to the respondent, after receiving the in principle approval from the BSE the respondent allotted 10 lacs equity shares on preferential basis to the petitioner in the meeting of the Board of Directors of the respondent held on 13th April, 2007 and also informed the BSE about the same. A letter of allotment dated 13th April, 2007 was issued by the respondent allotting 10 lacs equity shares bearing Distinctive No(s) 17601516 to 18601515 to the petitioner. The respondent by its letter dated 12th May 2007 furnished certain information as called for by the BSE in its letter dated 12th April, 2007 addressed to the respondent. While submitting the said information the respondent requested the BSE to accord its approval of listing of the said equity shares at the earliest. The 9 respondent by its letter dated 3rd November, 2008 once again requested the BSE to look into the matter and grant final approval to dematerialise the securities allotted to its various shareholders. The respondent by the said letter also informed the Stock Exchange that the lock in period for the said shares had already expired on 13th April, 2008 in terms of the guidelines for the issue of the said equity shares. The respondent once again wrote a letter dated 22nd January 2009 to the BSE for an earlier action in the matter as requested by the respondent in its earlier letter dated 12th May 2007 and 3rd November, 2008. The respondent made a similar request by its letter dated 31st March, 2009 and 14th May 2009. On 29th July 2009 the BSE addressed a letter to the respondent asking for some more details from the respondent. The said letter was received by the respondent on 3rd August, 2009. In 10 reply to the said letter of 29th July 2009, the respondent by its letter dated 6th August, 2009 furnished all the details as required by the BSE. The application of the respondent for listing is, therefore, still pending with BSE and the respondent cannot take any further steps as provided in the inprinciple approval, having not received  further notice from the BSE. 4 The respondent submits, that in the circumstances, the share application money cannot be treated as debt. The term debt is not defined under the Companies Act, 1956. Therefore, the dictionary meaning of the term debt is to be considered. Debt means what is owed . When the share application money was paid to the respondent, there was no condition to refund the said share application money. The respondent would have had to refund the money if the respondent had not allotted shares to the petitioner. 11 However, in the present case, it is an admitted position that the petitioner is the share holder of the respondent. Letter of allotment annexed at Exhibit D to the petition is a conclusive proof of the shares being held by the petitioner with the respondent. Apart from this the name of the petitioner is also highlighted in the BSE Website as person holding more than 1% of the total number of shares 5 The respondent has also relied on the decision in G.Sivqa Ramakrishna and another Vs. Rusni Distilleries P.Ltd. Reported in 2008(143) COMP CAS 289(A.P.) wherein the Andhra Pradesh High Court has held that the amounts paid for allotment of shares cannot be treated as debt of company nor applicant can be treated as a creditor. The respondent has submitted that the decision of the Andhra Pradesh High Court squarely covers the present case. 12 6 From the aforesaid facts, it is established that the amount of Rs.2 crores was paid by the petitioner to the respondent towards share purchase price. The respondent has already allotted the shares to the petitioner bearing distinctive No(s)17601316 to 18601515. The name of the petitioner is also highlighted in the BSE Website as person holding more than 1% of the total number of shares. Admittedly, the respondent has not issued shares in demat form to the petitioner. However, as per SEBI guidelines respondent is supposed to issue shares in demat form by crediting the respective account of the allottee with NSDL/ CDSL only after listing approval is granted by the BSE. The petitioner has through out, [i.e. in the letter dated 1st September 2008, statutory notice dated 3rd November 2008 and in the petition affirmed on 28th February 2009,] contended that the petitioner is entitled to 13 refund of Rs.2 crores since the said shares are not received by the petitioner from the respondent and therefore,the petitioner is unable to trade in such shares. The respondent has correctly pointed out that the said shares can be issued in demat form only after the BSE allows listing of the shares of the respondent on the Exchange. The BSE has till date not rejected the application of the respondent seeking necessary listing. Even after the petition has been affirmed on 28th February, 2009 as late as in July 2009, the BSE has sought certain information/compliance from the respondent which has been carried out/responded to by the respondent on 6th August, 2009. I am, therefore, of the view that the money paid by the petitioner to the respondent is towards the consideration of shares which are already allotted to the petitioner, but have yet to be issued by the respondent in the demat form, not because of 14 any fault at their end but only because the BSE till date is considering the application filed by the respondent for listing of its shares and has not rejected the same. In view thereof, I see much substance in the argument of the respondent that unless the BSE rejects the application for listing of the shares of the respondent, the respondent cannot be held to be a debtor of the petitioner and consequently, it cannot be held at this stage that the amount claimed in the petition is due and/or payable to the petitioner by the respondent. The dispute raised by the respondent is, in my view bonafide, which is required to be agitated by the petitioner by way of a civil suit. 7 The submission advanced on behalf of the petitioner, that the respondent not having replied to the statutory notice should be construed as an admission of the claim by the respondent, cannot be accepted. In the 15 decision of this Court in Digital Data Services Vs. Sharp Industries reported in 1986(4) L.J.Soft 338 it is held that whether the reply is given to the statutory notice or not is not material because even in absence of reply, before admitting the petition the Court has to be satisfied that the debt in relation to which the petition has been filed is clearly due. For that purpose, the Court is entitled to go into the defence put up in the affidavit in reply. I am in respectful agreement with the decision in Digital Data Services (supra). 8 As regards the submission of the petitioner that the respondent company is financially not well off, is unable to pay its debt and therefore, deserves to be wound up, I am of the view that once the Court is convinced that the defence of the respondent is bonafide and not moonshine, the Court cannot proceed to wind up a company on the 16 ground that the company is financially not very sound, but has to relegate the parties to pursue the remedy of filing a civil suit. 9 During the course of arguments, the aforestated views of this Court were conveyed to the learned Advocates. The learned Advocate for the petitioner, therefore, sought some time from the Court and on the adjourned date relied on section 73 of the Companies Act, 1956, more particualrly clauses 73(1),(1A)(2), (3) and (5) which are reproduced hereunder :- Allotment of shares and debentures to be dealt in on stock exchange: 73.(1)Every company intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognized stock exchange for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange or each such stock exchange; 17 (1A) Where a prospectus, whether issued generally or not, states that an application under sub-section (1) has been made for permission for the shares or debentures offered thereby to be dealt in one or more recognized stock exchanges, such prospectus shall state the names of the stock exchange or, as the case may be, each such stock exchange, and any allotment made on an application in pursuance of such prospectus shall, whenever made, be void if the permission has not been granted by the stock exchange or each such stock exchange as the case may be, before the expiry of ten weeks from the date of the closing of the subscription lists; (2) Where the permission has not been applied under sub-section(1)or such permission having been applied for, has not been granted as aforesaid, the company shall forthwith repay without interest all moneys received from applicants in pursuance of the prospectus, and, if any such money is not repaid within eight days after the company becomes liable to repay it, (the company and every director of the company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and 18 severally liable to repay that money with interest at such rate, not less than four per cent and not more than fifteen per cent, as may be prescribed, having regard to the length of the period of delay in making the repayment of such money. (3) All moneys received as aforesaid shall be kept in a separate bank account maintained with a Scheduled Bank until the permission has been granted, or where an appeal has been preferred against the refusal to grant such permission, until the disposal of the appeal, and the money standing in such separate account shall where the permission has not been applied for as aforesaid or has not been granted, be repaid within the time and in the manner specified in sub-section (2); and if default is made in complying with this sub-section, the company and every officer of the company who is in default, shall be punishable with fine which may extend to fifty thousand rupees. (5) For the purposes of this section, it shall be deemed that permission has not been granted if the application for permission, where made, has not been disposed of within the time specified in sub-section (1). 19 10 In response, the respondent has pointed out that the shares issued by it were under sec.81(1A) of the Companies Act and not by the issue of a prospectus. Section 73 of the Companies Act is, therefore, not applicable to issue of shares by the respondent. It is also submitted that the issue of shares by the respondent cannot be treated as an offer to public. In response to the respondent s contention that the shares issued by the respondent were not by issue of a prospectus, the petitioner has relied on section 64 of the Companies Act and has contended that the application form for equity shares dated 30th March, 2007 issued by the respondent (Exh.C to the company petition) should be treated as a prospectus. In answer to the contention raised by the respondent that the issue of shares by the respondent company cannot be treated as an 20 offer to public, the petitioner has relied on the decision of the Hon ble Apex Court in Needle Industries (India) Ltd. and others Vs. Needle Industries Newey (India) Holdings Ltd. and others reported in A.I.R.1981 S.C.1298 wherein, the Hon ble Supreme Court approved of the passage from Growers Company Law (4th Edition page 351) to the effect that an offer of securities in public company even to a handful of people may be an offer to the public if it is calculated to lead to securities being subscribed or purchased other than those receiving the initial offer. According to the petitioner, the offer of shares by the respondent was therefore an offer made to the public. 11 The submission on the part of the petitioner that section 73 is applicable to the issue of shares by the respondent in my view is only an afterthought. The following conduct of the petitioner shows/exhibits that 21 the petitioner at all relevant times including at the time of making payment to the respondent or filing of the above company petition have not proceeded on the basis that section 73 of the Companies Act is applicable to the shares issued by the respondent. This is inter-alia clear from the following : (i) Sub-section(3) of section 73 requires that all share application moneys received shall be kept in a separate bank account maintained with a Scheduled Bank until the permission has been granted, or where an appeal has been preferred against the refusal to grant such permission etc. In the instant case, it is the petitioner s own case that the petitioner had applied for shares some time in February 2007 and had filled in the application form dated 30th March,2007, but had made payment of Rs.2 crores to the respondent on 16th January 2007 because the respondent was in need of money. 22 If section 73 was applicable to the transaction between the petitioner and the respondent as is now contended by the petitioner, it would be mandatory for the respondent to keep the said amount of rupees two crores in a separate account and the petitioner would never have parted with the amount much before even applying for the said shares, on the ground that the respondent was in need of moneys. This shows that, according to the petitioners themselves section 73 of the Companies Act was not applicable or was not to be made applicable to the said issue of shares. ii) Under section 73(1A) of the Companies Act, any allotment made on an application in pursuance of a prospectus shall be void if the permission has not been granted by the stock exchange before the expiry of ten weeks from the date of the closing of the subscription lists. Section 23 73(5) provides that it shall be deemed that permission has not been granted if the application is not disposed of within the time specified in sub-section (1A). The shares were allotted by the respondent to the petitioner and others on 13th April 2007. If according to the petitioner, section 73 was applicable to their share application, they would have sought a refund after a period of ten weeks i.e. by July 2007 and not waited upto September 2008 when admittedly the respondent purported to cancel the transaction and sought refund. In none of their letters addressed to the respondent or even in the petition, the petitioner has averred that it became entitled to refund of the share application money within ten weeks from the date of closing of subscription list. iii) Under sub-section (2) of section 73, a company is required to forthwith repay 24 without interest all moneys received from the applicants in pursuance of the prospectus, in the event of the permission not being granted by the stock exchange. If the respondent fails to pay the said amount without interest within 8 days after the company becomes liable to repay it, in that event the company is liable to pay interest after the expiry of the 8th day which may not be less than four percent and not more than fifteen percent. In the instant case, the petitioner as can be seen from the particulars of claim has claimed interest at the rate of 18% and that too from 16th January 2007, i.e. the day on which the amount was paid to the respondent. The petitioner has not made any claim in the notice dated 1st September 2008, or in the statutory notice dated 3rd November 2008 or in the company petition affirmed on 28th February 2009, as prescribed under section 73 25 of the Companies Act, 1956. iv) Though the petitioner has not pleaded any oral agreement with the respondent in the letter addressed to the respondent dated 1st September 2009 seeking refund of the amount of Rs.2 crores, in the statutory notice dated 3rd November 2008, the petitioner have pleaded existence of an oral agreement between the petitioner and the respondent to the effect that in the event the petitioner is not in a position to trade in the said shares, the respondent would refund the share application money together with interest at the rate of 18% p.a. on and from the date of receipt of allotment money until payment thereof to the petitioner. If the provisions of section 73 of the Companies Act, 1956 were applicable to the transaction between the petitioner and the respondent, as is now alleged by the petitioner, the petitioner would have been able to invoke 26 the provisions of section 73 which would fully protect the petitioner and the question of any oral agreement as pleaded in the statutory notice dated 3rd November 2008 would not have arisen. 12 The Company Court does not conclusively adjudicate the claims of parties but investigates summarily whether the dispute as regards indebtedness is bonafide or not. Apart from the finding of this Court in paragraph 6 above that it cannot be held at this stage that the amount claimed in the petition is due and/or payable to the petitioner by the respondent and that the dispute raised by the respondent is, in my view, bonafide for the aforestated reasons, this Court is also of the view that the defence raised by the respondent, that section 73 will not apply to the issue of shares by the respondent company, raises a genuine bonafide dispute and atleast prima 27