1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O.C. J. COMPANY PETITION NO.589 OF 2009 Sharada Kapoor and others ...Petitioners. Versus VIP Industries Limited ...Respondent. ...... Mr.Virag Tulzapurkar, Senior Advocate with Mr. Vishal Kanade with Ms Shruti Maniar i/b M/s. Solomon & Co. for the Petitioners. Mr. J.P. Sen i/b M/s.Federal & Rashmikant for the Respondent. ...... CORAM : DR. D.Y. CHANDRACHUD, J. 27th /30th November, 2009. P.C.: 1. The Petitioners are owners of two shops viz. shop Nos.3 and 4 situated in a building known by the name of Saryu situated at Linking Road, Santacruz (West) Mumbai. Following a letter of intent, a leave and licence agreement was entered into between the Petitioners and the Respondent on 7th February, 2008. Under the terms of the agreement, the Petitioners granted on licence to the 2 Respondent the two shops for a term of sixty months commencing from 7th February, 2008. The licence fee was to be Rs.2,50,000/- per month for the first thirty six months and thereafter Rs.2,87,500/- for the remaining period of twenty four months. A security deposit of Rs. 50 lacs was paid by the Respondent to the Petitioners. Clause 5 of the agreement provided that at the end of the licence period or the earlier termination / determination thereof the security deposit would be returned to the Respondent without interest, but only against the Respondent handing over vacant possession of the licensed premises to the Petitioners. The Petitioners were, however, entitled to adjust any outstandings payable towards the licence fee and to retain at the end of the term a sum of Rs.2 lacs towards electricity, water and telephone bills until such period as the Respondent obtained receipts for the payment of all these charges. Under Clause 9(e) and Clause 10(f) the obligation to obtain a licence and permission for the conduct of business was to be the sole responsibility of the Respondent. For that purpose however the Petitioners agreed to grant all necessary “no objections” to the Respondent. The agreement contained a lock in 3 period inasmuch as it provided that subject to a termination for non payment of the licence fee, the Petitioners as licensors were not entitled to terminate the agreement during the period of licence and the Respondent as licensee was not entitled to terminate the agreement during the period of thirty three months from the commencement of the licence. 2. A no objection certificate was issued by the co-operative society to the Petitioners for granting the premises on licence to the Respondent for the purpose of carrying out a retail business and commercial activities. 3. The premises were used and licence fee was paid for the period between March and November 2008. No payment has been made for the period commencing from December 2008. Apart from the agreement of licence, an Amenities agreement was also entered into on 7th February 2008, by which the Respondent agreed to pay to the Petitioners, an amount of Rs.5 lakhs each month as user charges 4 for the amenities provided in the premises. The amount payable under the amenities agreement has also not been paid. The Petitioners issued notices on 18th December 2008 and 29th December 2008 calling upon the Respondent to pay the licence fee and user charges. By a reply dated 13th January 2009, the Respondent contended that after the agreements were executed, the Petitioners were requested to furnish copies of the plans sanctioned by the Municipal Corporation in order to ascertain that the premises could be used for the purposes of a shop and not only as a clinic and since according to the Respondent, during the course of renovation, it was found that the area of the premises was not 610 sq.ft. as represented. The Respondent called upon the Petitioners to refund the security deposit of Rs.50 lakhs stating that simultaneously vacant and peaceful possession of the premises would be handed over. On 12th March 2009, the Petitioners addressed a statutory notice under Sections 433 and 434 of the Companies Act, 1956, calling upon the Respondent to pay an amount of Rs. 57.58 lakhs under the Leave and Licence agreement and the Amenities agreement and to hand over possession 5 of the premises. In a reply dated 25th March 2009, the Respondent inter alia claimed that the use of the premises had been discontinued upon the Respondent being informed that the Municipal Corporation may initiate criminal proceedings under the Maharashtra Regional and Town Planning Act, for a change of user of the premises without its permission. 4. The claim in the petition for winding up is for the payment of licence fee under the leave and licence agreement and the user charges under the Amenities agreement for the period between December 2008 and March 2009, and from April to June 2009, together with service tax thereon. An amount of Rs.3,70,800/- has been claimed by way of penalty at the rate of Rs.12,500/- per day of default, besides which, liquidated damages have been claimed at the rate of Rs.15 lakhs per month, amounting to Rs.11,87,500/-. 5. Three defences have been urged at the hearing of the Company Petition for and on behalf of the Respondent. Firstly, it has 6 been submitted that the contract between the parties stood frustrated since the premises were incapable of being used as a shop. Secondly, it has been submitted that it was not the obligation of the Respondent to obtain the permission of the Municipal Corporation for a change of user. Thirdly, on 12th March 2009 when the statutory notice was addressed to the Respondent, no dues were outstanding. 6. The contention of the Petitioners is that under clauses 9(e) and 10(f) of the leave and licence agreement, it was the obligation of the Respondent to obtain all licences and permissions. Thus, any permission that was required for change of user was to be obtained by the Respondent. Moreover, it is an admitted position that the premises are situated in the R-2 Zone and Regulation 52(4) of the Development Control Regulations permits the use of the premises as a shop or for retailing business. Moreover, it was submitted that the assessment extract issued by the Municipal Corporation shows that the premises have been assessed as a shop. Finally, it was submitted that on the date of the issuance of the statutory notice, there was a 7 debt due and payable by the Respondent to the Petitioners. The Respondent has in its submission erroneously proceeded on the basis that on the date of the notice, it was entitled to receive back the security deposit of Rs.50 lakhs. The security deposit was liable to be returned only as against the handing over of vacant possession and the entitlement to receive Rs.50 lakhs had not fastened on the date of the statutory notice. 7. The relevant provisions of the Leave and Licence agreement have already been adverted to in the earlier part of the judgment. Amongst the salient provisions of the agreement, were the following: (i) The Respondent agreed to pay to the Petitioners a sum of Rs. 2.50 lakhs for the initial period of thirty six months and a sum of Rs. 2,87,500/- for the remaining period of twenty four months; (ii) An amount of Rs.5 lakhs per month was payable under the Amenities’ agreement; (iii) An amount of Rs.50 lakhs was paid by the Respondent as an interest-free security deposit; (iv) The Respondent was entitled to a return of the security deposit without interest only 8 against handing over vacant possession of the premises to the Petitioners; (v) The return of the security deposit was subject to the right of the Petitioners to deduct the outstanding liability towards licence fee and to withhold an amount of Rs.2 lakhs towards the payment of electricity, water and telephone bills; (vi) There was a lock-in period under the agreement under which the Respondent was not entitled to terminate the agreement during a period of thirty three months from the commencement of licence. The Petitioners were not entitled to terminate the agreement at any time during the period of the licence subject to the right to terminate on account of a breach by the Respondent of the conditions of licence; (vii) The Respondent assumed the obligation to procure all licences and permissions for the business and the Petitioners were to co-operate in granting all necessary no objections; (viii) The agreement provided for the payment of liquidated damages in the event of a failure on the part of the licensee to handover possession of the premises or, in the alternative, on the failure of the licensor to refund the security deposit upon the termination of the licence inspite of the licensee being ready 9 to hand over vacant possession. 8. Clauses 9(e) and 10(f) of the leave and licence agreement provide as follows : “9. The Licensee hereby covenants with the Licensors as under : (e) To procure all such licensees/permits from the relevant authorities, as may be necessary to carry on the intended business in the Licensed Premises.” “10. The Licensors do and each of them doth hereby covenant with the Licensee as under: (f) Obtaining of all licenses and permissions, for the business, shall be the sole responsibility of the Licensee. In this connection all necessary ‘No Objections’ shall be granted by the Licensors to the Licensee for the obtaining of any such licenses and the Licensee will bear all the costs, charges and expenses in this respect. Licensee shall indemnify and keep the Licensors and each of them indemnified against any loss, damages, cost, charges and expenses suffered or incurred by the Licensors, on account of the Licensee failing to obtain any of the necessary licenses / permission / N.O.Cs etc. required for carrying out their business in the Licensed Premises.” Under Clauses 9(e) and 10(f), the duty to obtain all licences and permissions for the business was the sole responsibility of the 10 Respondent as licensee. The document in question, is a business document executed between the parties. The interpretation of the document must be such as facilitates the business understanding which is reflected in the terms of the document. The Respondent assumed to itself the responsibility to obtain all licences and permissions, which will include the obligation, if any, to obtain permission from the Municipal Corporation for a change of user. The obligation of the Petitioner as licensor was to furnish a no objection. In the face of these clauses, it is not open to the Respondent to assert that it was not liable to pay the licence fee for want of permission from the Municipal Corporation for change of user. Plainly, the obligation to obtain such a permission was assumed by the Respondent under the terms of the agreement. Besides this, at no stage did the Respondent call upon the Petitioners to agree in submitting an application or a no objection to the Municipal Corporation for the grant of permission for change of user. The defence that permission for changing the use of the premises was not obtained by the Petitioners, is an after thought. The Respondent took 11 possession of the premises and used them between March and November 2008. Neither during this period, nor thereafter were the Petitioners called upon to move the Municipal Corporation or to furnish their no objection. The Petitioners have relied upon an inspection extract of the Municipal Corporation furnished by the Assistant Assessor and Collector which shows that the premises which form the subject matter of the agreement have been assessed as a shop. In any event, it is an admitted position that the premises fall in the R-2 Zone. Under Development Control Regulation 52(4), the user of the premises as a shop or as a retailing business is clearly permissible. There is no evidence whatsoever to indicate that Municipal Corporation had at any time raised an objection to the user of the premises in question. All these reasons are indicative of the fact that the issue relating to the change of user was set up by the Respondent purely with a view to avoid compliance with its obligation to pay under the leave and licence agreement. Plainly, there was no frustration of the contract. 12 9. There is no merit in the submission that on the date of the statutory notice, there were no dues outstanding from the Respondent. In the statutory notice dated 12th March 2009, the claim related to the period between the months of December 2008 and March 2009 and for the period between April and June 2009. The claim consisted of the licence fee payable at the rate of Rs. 2.50 lakhs per month and the user charges payable at the rate of Rs.5 lakhs per month. In addition, a claim has been made in respect of penalty and liquidated damages. Counsel appearing on behalf of the Respondent submitted that the computation erroneously proceeded on the basis that both the penalty and liquidated damages were payable for the same period. Even if, for the purposes of the Petition for winding up, the claim on account of penalty and liquidated damages is excluded from consideration, there is yet a debt due and payable. The debt consists of unpaid licence fee and user charges, which were admittedly payable. 10. The fallacy in the submission of Counsel for the Respondent 13 lies in the assumption that was made that the Respondent was entitled to a refund of the security deposit on the date of the statutory notice. Clause (5) of the agreement provided as follows : “The Licensee has, simultaneously with the execution hereto pay to the Licensors a sum of Rs.50,,00,000/- (Rupees Fifty lacs only) by way of interest free Security Deposit. At the desire of the Licensors, the payment of full amount of Security Deposit is made to the first named Mrs Sharda Kapoor. However, as agreed and understood clearly that the liability for the repayment of the Security Deposit shall be joint and severally of all the Licensors. The Licensors confirm that at the end of the licence period, or earlier termination / determination thereof the said Security Deposit will be returned to the Licensee without interest, only against the Licensee handing over vacant charge of the Licensed Premises to the Licensors.” These provisions show that the liability to return the security deposit would arise upon the licensee handing over vacant possession of the premises to the licensor. The licensee was subject to a lock in period of thirty three months under clause (7) of the Agreement which had not expired. On the date of the statutory notice, therefore, the Petitioners as licensors were not liable to return the security deposit. The entitlement of the Respondent to seek refund of the security 14 deposit arose only when possession of the premises was handed over. The entitlement of the Respondent to receive the security deposit and the corresponding liability of the Petitioners to refund the security deposit did not fasten on 12th March 2009 when the premises were in possession of the Respondent. Even in response to the statutory notice, the Respondent did not state that it was ready and willing to handover possession. In these circumstances, the defence to the effect that there were no dues outstanding on the date of the statutory notice is misconceived and will have to be rejected. 11. For the reasons indicated earlier, it is evident that there is a debt due and payable by the Respondent to the Petitioners. The Respondent has failed to pay the debt despite the issuance of a statutory notice under Sections 433 and 434 of the Companies Act, 1956. The Company is evidently unable to pay its debts. The Petition for winding up would, therefore, require to be admitted. However, in order to enable the Company to establish its bona fides and to avoid the consequences that emanate from the admission of a Petition for 15 winding up, it would be appropriate to furnish an opportunity to the Company to secure the claim by the deposit of an amount of Rs. 52.50 lakhs. This amount represents the outstanding licence fee and user charges for the period between December 2008 and June 2009. The Petitioners would upon deposit being effected have to be relegated to the remedy of filing a suit in the appropriate forum for the recovery of their dues. In the event of the deposit being made, the amount deposited shall stand transferred to the credit of the suit. The petition for winding up shall stand admitted on default of deposit. 12. Hence, the petition for winding up shall be governed by the following order: -(i) The Respondent shall within a period of four weeks from today, deposit an amount of Rs. 52.50 lakhs with the Prothonotary & Senior Master upon which, the Petition for winding up shall stand dismissed; -(ii) The Petitioners would be at liberty to file a suit before the 16 appropriate Court for the recovery of the outstanding arrears on account of licence fee and user charges and the amount that is deposited under clause (i) above, shall thereupon stand transferred to the credit of the suit; -(iii) In the event that the Respondent fails to deposit the amount as directed in clause (i), the Petition for winding up shall stand admitted and shall thereupon be advertised in two local newspapers viz. Free Press Journal, Maharashtra Times and Maharashtra Government Gazette. In that event, the Petitioners to deposit Rs. 10,000/- with the Prothonotary and Senior Master towards the publication charges; -(iv) The Advocate appearing on behalf of the Respondent shall furnish intimation of deposit to the Company Registrar failing which the Company Registrar shall upon the expiry of the period stipulated for effecting deposit proceed on the basis that there has been a default of compliance; 17 -(v) Upon the deposit being effected, the Petitioners would be at liberty to apply before the Court in which the suit has been instituted for the withdrawal of the amount and any such application shall be considered and dealt with by the Court in which the suit has been instituted. There shall accordingly be an order in these terms. ......