In the High Court of Punjab and Haryana, Chandigarh CAPP NO. 14 OF 2009 (O&M) Date of Decision: November 10, 2009 Vasu Tech Limited …Appellant Versus M/s Ratna Commercial Enterprises Limited …Respondent CORAM: HON’BLE MR. JUSTICE M.M. KUMAR HON’BLE MR. JUSTICE JASWANT SINGH Present: Mr. Ashwani Kumar Chopra, Senior Advocate, with Ms. Rupa Pathania, Advocate, for the appellant. Mr. Sudhir Makkar, Advocate, and Mr. R.N. Raina, Advocate, for the respondent. 1. To be referred to the Reporters or not? 2. Whether the judgment should be reported in the Digest? M.M. KUMAR, J. This appeal filed under Section 483 of the Companies Act, 1956 read with Rule 11 of the Company (Court) Rules, 1959, has been filed challenging order dated 22.4.2009, passed by the learned Company Judge in Company Petition No. 13 of 2007, admitting the company petition for winding up of Vasu Tech Limited-appellant Company and directing publication of the factum of admission in the Indian Express, Times of India (Delhi Edition), and Dainik Bhaskar (Haryana Edition) as also in the Official Gazette of State of Haryana. CAPP No. 14 of 2009 (O&M) 2. Facts of the case may first be noticed. The appellant Company has claimed that it had invented a new technology, namely, ‘Versatile System on Chip’, which overcomes the limitations of traditional microprocessors. In 1999, when the said invention was at a conceptual stage, ICICI Venture Funds Management Company Limited (ICICI) had shown its interest and agreed to give financial support for the development of new technology. However, in 2001 there was a change in the funding policy of ICICI and it withdrew the financial support from the appellant Company. This led the appellant Company to borrow the funds from the market. 3. In 2003, Mr. Pradip Burman, who is one of the two Directors of M/s Ratna Commercial Enterprises Limited-respondent Company, agreed to give financial support to the appellant Company. At the first instance, an Inter-Corporate Deposit of Rs. 2.0 crores in three instalments with interest @ 12% per annum was advanced by the respondent Company to the appellant Company. It has come on record that the respondent Company had advanced total loan of Rs. 540,893,273/- to the appellant Company from time to time and these short term loans were to be repaid after one year or at least with the close of the financial year. The appellant Company also issued various post dated cheques for the re-payment of the loan and also issued receipts acknowledging advancement of the loan from time to time. 4. In March 2004, Mr. Dhruv Varma, Managing Director of the appellant Company promoted a company, namely, Vasucorp Inc. in the State of Delaware, USA for commercialisation and launching 2 CAPP No. 14 of 2009 (O&M) of the new technology globally. It has been asserted that Mr. Pradip Burman of respondent Company was appointed as a Director in Vasucorp Inc. on 27.6.2004 and he was also attending the Board and management meetings in the United States. It is claimed that on 10.8.2004, 1.05 million shares of Vasucorp Inc. were transferred to M/s Wogan Technologies, which is a Corporation owned and controlled by Mr. Pradip Burman. On 11.3.2005, again 0.65 million shares were transferred. It has been asserted that the aforementioned shares were transferred because Mr. Pradip Burman was showing keen interest in conversion of the loans advanced by the respondent Company to the appellant Company into equity and the loans taken from time to time were to be adjusted against the shares to be transferred. 5. On 31.3.2005, Mr. Pradip Burman agreed to take over the ICICI’s interest in the appellant Company and the loan amount of Rs. 2.0 crores, advanced by the ICICI was repaid by the respondent Company by buying the equity investment of ICICI in the appellant Company. In that regard, a loan agreement was executed between the parties on 15.4.2005 (P-4). As per the agreement, the respondent Company took over equity investment of ICICI in the appellant Company to the tune of 7,38,234 shares for a sum of Rs. 2,25,48,000/- on the understanding that it would be transferred to Mr. Dhruv Verma. On 15.4.2005 itself, another share pledge agreement was also signed between M/s R.L. Varma and Sons, HUF as pledgers, the respondent Company as pledgee and the appellant Company as 3 CAPP No. 14 of 2009 (O&M) confirming party. A deed of guarantee in favour of the respondent Company was also executed. 6. The appellant Company has claimed that it was regularly paying interest on the amount advanced by the respondent Company on quarterly basis, which was paid upto 31.3.2005. However, Mr. Pradip Burman, who was taking keen interest in the project of the appellant Company, showed his desire that the respondent Company would be interested in taking a part of those shares, which were to be transferred by Vasucorp Inc. to Vasu Tech Limited-appellant Company, by way of transfer in adjustment of the loans given to the appellant Company. Since the proposal of Mr. Pradip Burman was acceptable to Vasucorp Inc., accordingly in June 2005 a request was made to treat the advances as interest free or to defer the payment of interest for two years. The request was accepted by the respondent Company and on 31.8.2006 a Memorandum of Understanding was executed for deferring the payment of interest till March 31, 2007. 7. On 9.5.2006, Mr. Dhruv Varma of the appellant Company sent a e-mail to Mr. Pradip Burman informing him as under:- “This refers to our discussions regarding allotment of shares for the loans that you have given to Vasu Tech till date: 1. You will subscribe to an additional 4mn shares of Vasucorp. 2. I will subscribe to an additional 1mn shares of Vasucorp. 4 CAPP No. 14 of 2009 (O&M) 3. For the loans that you give beyond those existing as on date, for every Rs 1 crore an additional 350,000/- shares in Vasucorp will be transferred to you by me. This transfer will be restricted to 1.45 mn shares, beyond which the shares will be given by Vasu Tech out of the shares it holds in Vasucorp. 4. Vasu Tech will be issued 8mn shares in Vasucorp. A sum of $2mn and a royalty free license for the Indian Market will form the balance consideration for the transfer of technology and the Intellectual Property from Vasu Tech to Vasucorp. 5. The primary shareholders of Vasu Tech will be Dhruv Varma & associates and Pradip Burman & associates. (There is a buy back agreement with Trafag after which they will cease to be shareholders). The break up of shareholding in Vasu Tech between Dhruv Varma & associates and Pradip Burman & associates will be as follows: Dhruv Varma & associates----- 53.75% Pradip Burman & associates-----46.25% -Regards, Dhruv” 8. The aforementioned e-mail was replied on the same date by Mr. Pradip Burman, the contents of which being relevant to the present controversy are reproduced as under:- “Dear Dhruv, Re: Your e-mail of May 9th 5 CAPP No. 14 of 2009 (O&M) According to my records, which has been confirmed by our office in Delhi, the outstanding loans as of Ist May 2006 is Rs. 48.87 Cr. This includes the Rs. 2.25 Cr paid to ICICI Ventures for release of your 7,38,234 shares of Vasutech, lying with me. Here are the calculation for shares: Rs. 27 Cr. @ 1.5% for every Cr. Of 7m = 2.835m Rs. 10 Cr @ 175,000 for every Cr. =1.750 Rs. 3 Cr @ 250,000/Cr =0.750m ------------- Rs. 40 Cr. ------------- 5.335 ----------- ----------- Rs. 10 Cr. @ 350,000/Cr. =3.500m ------------- Rs. 50 Cr ------------- ----------- 8.835m ----------- Total Due 8.835 (assuming 50 Cr loan) Less in hand 3.450 ------------- 5.385 m Now Due ------------- Any additional loans – 350,000 shares/Cr. From VasuCorp until your holding is 3 m. In addition 46.25% of Vasutech shares to be offered at par with 2-1/2% royalty on all sales connected with the VSoC. You may kindly confirm the above. With regards (Pradip Burman)” 6 CAPP No. 14 of 2009 (O&M) 9. It is claimed that the consolidated amount that was advanced by the respondent Company up till 30.9.2006 was secured by the appellant company by giving the respondent Company post dated cheques dated 1.4.2007 under a covering letter of 30.9.2006. Thereafter certain e-mails were exchanged for concluding the contract of issuance of equity against the loans advanced by the respondent Company. Eventually, on 10.10.2006, Mr. Pradip Burman sent an e- mail with regard to conversion of shares intimating current outstanding of the appellant Company and shares due as on 30.9.2006. It was disclosed that outstanding loans of about Rs. 60.0 crores were to be converted into 8.885 million shares of Vasucorp Inc. Mr. Dhruv Varma of the appellant Company was called upon to accept and confirm the said position, which he had done vide e-mail dated 11.10.2006 by accepting the proposal of Mr. Burman. It has been claimed that once the offer and acceptance between the parties has taken place, novation of contract took place for the amount advanced by the respondent Company. On 6.12.2006, final confirmation was received from Mr. Burman through e-mail. It has been asserted that between 27.9.2006 to 11.10.2006 post dated cheques were issued by the appellant Company under various covering letters stating the amount of loans along with furnished calculation of interest and break up of principal amount and interest being paid as also the amount of tax deducted at source. However, after 10.10.2006, no cheques/covering letters were issued to the respondent Company for the amount advanced till 10.10.2006. It has been further claimed that between 11.10.2006 to 6.12.2006 additional 7 CAPP No. 14 of 2009 (O&M) fresh amounts were advanced and these additional amounts were novated on 6.12.2006. 10. After 11.12.2006, certain differences alleged to have cropped up between the promoters of Vasucorp Inc. and Mr. Pradip Burman. Consequently, he threatened Mr. Dhruv Varma that the cheques which were issued as collateral security would be presented and action would be initiated in the event of dishonouring of the cheques. It has also been pointed out by the appellant Company that on 14.12.2006 and 15.12.2006 two draft agreements titled “Agreement” and “Memorandum of Understanding” were handed over to Mr. Dhruv Varma to sign on dotted lines without any negotiation or discussion. It is alleged that these agreements were completely one sided, unethical and a clear attempt on the part of the respondent Company to oust the appellant Company from the Vasucorp Inc. and with a view to take over all the powers, management and control into their hands and to bind the promoters to refund the entire amount advanced in addition to the transfer of major share holding free of cost. The said agreements were not acceptable to Mr. Dhruv Varma. 11. On 19.12.2006, Mr. Pradip Burman resigned from the Board of Vasucorp Inc. and thereafter seven cheques for a total sum of Rs. 4,31,193/- were presented to the bankers, which were cleared. On 5.1.2007 a legal notice was sent by the respondent Company which was duly replied by the appellant Company on 3.2.2007. The appellant Company requested for return of post dated cheques dated 1.4.2007. However, without waiting for 1.4.2007, the respondent 8 CAPP No. 14 of 2009 (O&M) Company filed Company Petition No. 13 of 2007 in this Court on 19.2.2007 seeking winding up of the appellant Company on the ground that it has failed to pay debts and the total amount repayable at the time of filing of the petition, which was more than Rs. 54.00 crores with interest at the rate of 12% per annum. In the Company Petition the respondent Company has also asserted that the appellant Company had committed various defaults and breaches of understanding between the parties, including the terms of the loan agreement and failed to pay the loan amount with interest as per the stipulations contained therein. Reference was made to various Clauses of the agreement in paragraph 14 of the petition. The respondent Company took the stand that issuance of share capital in the Vasucorp Inc. was independent of the loan transaction and was not in lieu of the loan amount advanced by it. It was also stated that Mr. Pradip Burman, Managing Director of the respondent Company separately paid the share money for purchase of the share in Vasucorp Inc. and it has nothing to do with the loan transaction. It was further averred that the appellant Company issued various post dated cheques for payment of outstanding loan amount and some cheques were replaced by some fresh cheques because on the dates the said cheques matured, the appellant Company did not have adequate funds and request was made to the respondent Company to accept fresh cheque in lieu of the outstanding amounts. A list of such cheques issued by the appellant Company was also placed on record as Annexure P-10. 12. In the Company Petition it was also pleaded by the respondent Company that some of the cheques were presented for 9 CAPP No. 14 of 2009 (O&M) clearance and two cheques were returned dishonoured for insufficiency of funds in the account and after issuing statutory notice under Section 138 read with Section 142 of the Negotiable Instruments Act, 1881 proceedings under Section 138 read with Section 142 of the aforesaid Act were also instituted before the Chief Metropolitan Magistrate, New Delhi. Thereafter the appellant Company made payment against three dishonoured cheques through pay order under the cover of its letter dated 23.1.2007. In the said letter, the appellant Company also informed the petitioner-respondent Company that it shall be sending demand drafts against the remaining two cheques, which were never received. Finally it was stated that the appellant Company is indebted to the petitioner-respondent Company and has become commercially insolvent company unable to discharge its lawful liability. Thus the appellant Company is liable to be wound up. 13. The appellant Company filed its detailed written statement opposing the petition for winding up by pointing out the aforementioned factual position. The appellant Company denied the allegations that it has become insolvent and that its business has come to stand still. It was also pointed out by the appellant Company that a Civil Suit (O.S) No.570 of 2007 was filed by it in the High Court of Delhi seeking a prohibitory and mandatory injunction against the petitioner-respondent Company. Though initially an interim injunction from presenting the cheques was issued, however, subsequently, the injunction was vacated by the Delhi High Court vide its order dated 15.6.2007, on an appeal preferred by the 10 CAPP No. 14 of 2009 (O&M) petitioner-respondent Company. Against the order of Division Bench of Delhi High Court, the appellant Company filed SLP. Initially, Hon'ble the Supreme Court stayed the order of the Division Bench of Delhi High Court. Meanwhile, the petitioner-respondent Company presented the cheques and, thus, the SLP was finally dismissed. The suit filed by the appellant Company was also withdrawn. 14. In the rejoinder filed by the petitioner-respondent Company, it has been admitted that two suits for recovery under Order XXXVII Rule 1 of the CPC were filed by it in the Delhi High Court, one for recovery of Rs. 20.00 crores and other for recovery of Rs. 40.00 crores and the application for leave to defend were pending. 15. After noticing the above mentioned factual background and hearing the counsel for the parties, the learned Company Judge formulated five propositions and come to the following conclusions:- “1. Winding up is not a mode of recovery of debt or amount payable by the company; 2. It is the discretion of the Court to order winding up which should be last resort; 3. It is the inability of the Company to pay its debts which attracts the provisions of Section 433 (e )of the Companies Act. Inability is in the nature of commercial insolvency; 4. If there is a bona fide dispute regarding the payment of the debt, there cannot be neglect to pay within the meaning of Section 434(1) (a) of the Companies Act. The bona fide dispute means the defence of the Company is substantial and raises 11 CAPP No. 14 of 2009 (O&M) triable issues which can be more conveniently adjudicated upon in a regular Forum in a civil suit; and 5. The Creditor has both the remedies of filing civil suit as well as a winding up petition, if there is no bona fide dispute with regard to the sum payable. It is prudent to apply the afore-noted principles to the facts of the present case. It has come on record that the petitioner-Company has advanced loan amount of more than Rs.54.00 crores as principal carrying interest at the rate of 12%. Various post dated cheques were issued by the respondent-Company towards the re-payment of the loan and interest. Some of the cheques have been dishonoured and criminal proceedings under Section 138 of the Negotiable Instruments Act have been filed. The respondent- Company while re-paying the amount has made deductions of T.D.S which itself is an acknowledgment of debt and its liability to pay the loan/interest. As a matter of fact, the respondent-Company has admitted the receipt of loan and also issuance of various cheques to the petitioner-Company in paragraph 8 of its reply. It has also admitted various cheques having been issued towards the payment of the loan/interest. The only defence of the respondent-Company is that there has been a subsequent arrangement between the parties for 12 CAPP No. 14 of 2009 (O&M) investment in another company of the respondent, namely, Vasucorp Inc. USA and the loan amount was agreed to be converted into equity shares in the said Company for which the novation of contract is pleaded based upon various e-mails dealt with in detail here-in- above. However, no material has been placed on record by the respondent that number of shares equivalent to the amount of loan and interest accrued thereon have been allotted to the petitioner-Company or on its behalf. The plea of novation of contract though raised, has not been substantiated on the record. To the contrary there is written loan agreement between the parties followed by various cheques issued towards its repayment. Even the attempt of the respondent Company to seek injunction against the petitioner-Company from encashing the cheques issued by the respondent-Company and the discharge of loan/interest has failed up to the Hon'ble Supreme Court and eventually, the suit filed by the respondent-Company seeking restraint order against the petitioner-Company from presenting cheques for encashment has been withdrawn. The petitioner has already filed two civil suits for recovery where the leave to defend is yet to be granted by the concerned Civil Court. Be that as it may, the defence raised in the present petition is not substantial one. The specific plea raised in paragraphs 20 and 21 of the winding up petition that the 13 CAPP No. 14 of 2009 (O&M) functioning of respondent-Company has come to stand still and it is unable to pay its debts has been simply denied by the respondent-Company. No material has been placed on record to establish that its worth is equal or more than its liability and also that the Company is still functioning and has substantial and sufficient resources to pay its debts. Even the balance-sheet for the relevant period has not been placed on record to rebut the specific allegations made in the winding up petition that the Company is unable to pay its debts. There is huge outstanding against the respondent-Company. Its substratum, the financial health and functionality has not been disclosed. In view of the totality of the circumstances, I am of the considered view that this is a fit case where this petition is to be admitted. Petition is admitted. The factum of admission be published in the Indian Express, Times of India (Delhi Edition) and Dainik Bhaskar (Haryana Edition) as also in the Official Gazette of State of Haryana.” 16. On 4.5.2009, while issuing notice of motion, the Division Bench stayed publication of the petition as directed by the learned Company Judge vide his order dated 22.4.2009. 17. Mr. Ashwani Kumar Chopra, learned Senior counsel has vehemently argued that there is a novation of contract which was entered into between the appellant Company with the petitioner- respondent Company on 15.4.2005. In that regard he has referred to 14 CAPP No. 14 of 2009 (O&M) various e-mails, which have been placed on record as Annexures R-1 to R-3, to substantiate his argument. According to him, those e-mails clearly shows complete novation of contract resulting in replacing the loan agreement dated 15.4.2005 with the new agreement. Commending adversely on the view taken by the learned Company Judge, Mr. Chopra has submitted that the issue although has been raised before the learned Company Judge but has not been dealt with. He further submits that the learned Company Judge has failed to properly consider and appreciate those e-mails and other documents placed on record, which clearly establish that there was novation of contract. 18. The other submission made by Mr. Chopra is that the defence of the appellant company before the learned Company Judge is substantial and there is a bona fide dispute which can be adjudicated upon only by way of a regular suit instead of initiation of proceedings under Section 433(e) & (f) read with Section 434 and 439 of the Companies Act, 1956 and Rule 9 of the Company (Court) Rules, 1959. He has argued that the learned Company Judge has failed to correctly apply various propositions of law culled out from the judgments cited and considered by him. In the background of the aforesaid argument, Mr. Chopra has prayed for setting aside of the order admitting the Company Petition and directing its advertisement. 19. Mr. Sudhir Makkar, learned counsel for the petitioner- respondent Company has opposed the appeal and vehemently argued that there was no novation of contract because the talks through e- mails were entirely independent of the loan agreement in writing, 15 CAPP No. 14 of 2009 (O&M) dated 15.4.2005. He has drawn our attention to the order dated 15.6.2007 passed by the Appellate Bench of the Delhi High Court against order dated 28.3.2007 passed in a suit filed by the respondent- appellant. While referring to covering letter dated 29.11.2006, which is much after the so called novation of contract, which is alleged to have taken place on 11.10.2006, Mr. Makkar has submitted that the respondent-appellant Company was not expected to issue 16 cheques along with the covering letter. A reference has been made to a sample of one such letter dated 29.11.2006, which has been read out to the Court and reads thus:- “29.11.2006 The Chairman M/s Ratna Commercial Enterprises Pvt. Ltd. New Delhi Reg: SHORT TERM LOAN Dear Sir, Please find enclosed herewith the following cheques towards repayment of short term loan of Rs. 50,00,000/- (Rupees Fifty lacs only) along with interest @ 12% p.a for the period 16 CAPP No. 14 of 2009 (O&M) 1 381120 01.01.2007 42074 Interest @ 12% per annum for the period 29/11/2006 to 31/12/2006 on Rs. 50,00,000/- less TDS @ 22.44% i.e. Rs. 12173/- 2 381121 01.04.2007 114746 Interest @ 12% per annum for the period 01/01/2007 to 31/03/2007 on Rs. 50,00,000/- less TDS @ 22.44% i.e. Rs. 33,199/- 3 381122 01.04.2007 50,00,000 Repayment of loan. We hope you will find the above in order. We shall be grateful if you can provide us with your income tax PAN number for our records and for issue of TDS certificates. Thanking you, for VASU TECH-LIMITED (ARUNA VARMA) DIRECTOR” 20. Mr. Makkar has argued that none of these letters have even remotely suggested that the cheques were not expected to be 17 CAPP No. 14 of 2009 (O&M) encashed or that they were being issued as collateral in lieu of the equity shares which were to be allotted to the petitionr-respondent in the appellant Company. Our attention has been drawn to various letters dated 27.9.2006, 11.10.2006, 19.10.2006, 31.10.2006, 22.11.2006, 29.11.2006 and 6.12.2006.