OJA/51/2003 1 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD O.J.APPEAL No. 51 of 2003 In COMPANY PETITION No. 210 of 2002 For Approval and Signature: HONOURABLE MR.JUSTICE M.S.SHAH and HONOURABLE MR.JUSTICE K.A.PUJ ================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? Yes 2 To be referred to the Reporter or not ? Yes 3 Whether their Lordships wish to see the fair copy of the judgment ? No 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? No 5 Whether it is to be circulated to the Company judge ?Yes ================================================= SATELLITE TELEVISION ASIAN REGION LIMITED & 1 - Appellant(s) Versus KUNVAR AJAY DESINER SAREE(P) LTD. - Opponent(s) ================================================= Appearance : MR SN SHELAT with MR CL SONI for Appellant(s) : 1 - 2. MR SN SOPARKAR with MRS SWATI SOPARKAR for Opponent(s) : 1, ================================================= CORAM : HONOURABLE MR.JUSTICE M.S.SHAH and HONOURABLE MR.JUSTICE K.A.PUJ Date : 05/09/2007 CAV JUDGMENT (Per : HONOURABLE MR.JUSTICE M.S.SHAH) OJA/51/2003 2 JUDGMENT This appeal is directed against the judgment and order dated 25.4.2003 of the learned Company Judge dismissing Company Petition No.210 of 2002 for winding up Kunvar Ajay Designer Saree (P) Ltd. hereinafter referred to as “the respondent- Company” or “the Company”. 2. The case of the appellant-petitioning creditors is that the first appellant is engaged in the business of telecasting entertainment and other programmes and also commercials on various satellite television channels. Star India Private Ltd. (the second appellant herein) is an independent representative in India for procuring the advertisements to be broadcast on Star Channels being run by the first appellant. The second appellant accordingly procures instructions for advertisements from advertisers for telecast on Star Channels belonging to the first appellant. On 25.10.2001 and 24.12.2001, the respondent-Company entered into two agreements with the second appellant for booking of commercial slots for telecasting its products on Star Channels. As per the agreements, the respondent-Company agreed to pay the invoice amounts within 30 days and in case of delayed payments interest at the rate of 2% p.m.. In pursuance of the above agreements, the respondent-Company's commercials were telecast on Star Channels on selected dates, times and during selected programmes from November 2001 to June 2002. After telecast of the advertisements, the second appellant raised invoices from time to time for total amounts of Rs.19,91,78,218/- (Rs.19.92 crores approx.). In June 2002 the respondent-Company issued post- dated cheques in favour of the second appellant towards clearing of outstanding dues, out of which, the first five cheques were honoured, but the next two cheques were dishononoured and the OJA/51/2003 3 JUDGMENT next cheque drawn by the respondent-Company in favour of the second appellant for Rs.1.10 crores was also dishonoured by the bankers of the respondent-Company in June 2002. After filing of the criminal complaint by the second appellant against the respondent-Company under Section 138 of the Negotiable Instruments Act, 1881, a Director of the respondent- Company had a meeting with the second appellant on 14.8.2002, at which the respondent-Company agreed to pay a sum of Rs.19.87 crores in full and final settlement of its dues in respect of advertisements telecast on Star network upto June 2002. This was also recorded in the letter dated 19.8.2002 (Annexure-D to company petition). On 2.9.2002, the Director of the respondent- Company had another meeting with the second appellant and while confirming that a sum of Rs.19.87 crores was owed by the respondent-Company to the second appellant in respect of advertisements telecast upto 30.6.2002, the payment schedule was revised as under :- (a) Rs.4 crores to be paid by 31.12.2002; (b) Rs.15 crores to be paid by 20 equal monthly installments of Rs.75 lakhs each commencing from September 2002; (c) The final installment would be of Rs.87 lakhs and odd amount; This revised payment schedule as indicated at the meeting on 2.9.2002 was incorporated in the respondent- Company's letter dated 3.9.2002 (Annexure-E) to the second appellant. However, on 27.9.2002 (Annexure-F), the respondent- Company informed the second appellant that “due to financial OJA/51/2003 4 JUDGMENT problem as well as dull market we are unable to pay Rs.75 lakhs in September month for which we will give you Rs.One Crore each (75 Lakhs + 25 Lakhs) for the months October, November & December 2002”. Towards the above liability, the respondent-Company sent demand drafts aggregating to Rs.25 lakhs along with the letter dated 16.10.2002 (Annexure-G). While sending these drafts of Rs.25 lakhs, the respondent-Company stated in the said letter that, “the balance of Rs.75 lakhs will be cleared before the end of this month (October 2002) as mentioned in the letter (dated 27.9.2002)”. As the respondent-Company did not release the balance payment, the second appellant sent a statutory notice dated 18.10.2002 to the respondent-Company under Section 434 of the Companies Act, 1956 calling upon the respondent-Company to pay Rs.20.25 crores (including Rs.19.87 crores being the outstanding dues and Rs.37 lakhs and odd amount being the interest accrued thereon upto 30.9.2002). The notice stated that in case of the respondent-Company's failure to pay the said amount within 21 days from the date of receipt of the notice, the second appellant shall file a winding up petition against the respondent-Company. The above notice was received by the respondent-Company on 21.10.2002, but it neither complied with nor replied to the said notice. Therefore, the appellants filed the winding up petition on 20.11.2002. 3. The company petition came up for preliminary hearing on 25.11.2002 when the learned Company Judge passed the following order :- “Notice returnable on 17.12.2002.” OJA/51/2003 5 JUDGMENT On 14.12.2002, – Advocates of the appellants issued a public notice in two Gujarat newspapers (as translated in English) which read as under:- Public Notice KUNVAR AJAY DESIGNER SAREE PVT. LTD. The general public is hereby informed that, Kunvar Ajay Designer Saree Pvt. Ltd. (Company) having their registered office at B-1, Thakkar Palace, Race Course Road, Surat – 395002 and who have outstanding dues of Rs.21,96,50,532/- to be paid to our client, namely Satellite Television, Asian Region Ltd. and Star India Pvt. Ltd. for advertising their products such as Dandi Salt, Kunvar Ajay Sarees and Friendly wash Detergent powder on Star TV network. Against the company and its Directors over and above the criminal proceedings under Section 138 read with Section 142 of the Negotiable Instruments Act, 1881, for dishonour of cheque, our clients have also filed Company Petition No.210 of 2002 against the Company before the Hon'ble High Court of Gujarat for winding up, for appointment of Liquidator and other ancillary reliefs. If any person, financial institution and/or firm and/or association of persons and/or company enters into any transaction in any manner with the Company to grant loan, make investment or any proceedings for taking over the Company or for merger/amalgamation with the Company and any other proceedings or transaction with the Company in relation to its movable properties and/or immovable properties including the brand name/(names) – Dandi Salt, Kunvar Ajay Sarees and friendly wash detergent powder, if any one makes any such deal then against such Company my clients will file suit for making recovery, which they have filed before the Hon'ble Gujarat High Court in Company Petition No.210 of 2002. Accordingly on any kind of transaction, our clients will have their first claim. Dt.14.12.2002 Kadam & Co. Advocates, 1st Floor, Pittale Prasad, 17, Shankersheth Road, Grant Road 5), Mumbai – 400 007. OJA/51/2003 6 JUDGMENT 4. Thereafter the respondent-Company filed Company Application No.407 of 2002 contending that even before the hearing of the show cause notice issued on the company petition, the appellants published a notice of winding up of the respondent- Company in the newspapers without directions of the Company Court. Therefore, besides harming reputation of the respondent- Company it amounted to abuse of the process of the Court requiring summary dismissal of the company petition with exemplary costs. The appellants herein resisted the application by filing reply pointing out that Mr Suresh Chand Agarwal, Managing Director of the respondent-Company had a long meeting with the second appellant on 03.12.2002 when the representatives of other advertising agencies and TV channels were also present. During the said meeting, it was stated by the said Director that they were expecting loans from the banks and financial institutions against mortgage of the Company's assets. The appellants, therefore, deemed it necessary to inform the members of the public about the claim of the appellants against the respondent-Company so that the future multiple legal proceedings can be avoided and, therefore, with a bonafide and genuine intention, the appellants issued the above public notice dated 14.12.2002 in two Gujarati newspapers. It was submitted that the notice was informative and cautionary in nature, that the respondent-Company had admitted its liability and thereafter failed to discharge the same and was also facing proceedings under Section 138 of the Negotiable Instruments Act and, therefore, there was no defamation of the respondent- Company. It was also submitted that reference to the winding up petition was not a notice of winding up, as alleged, and finally the appellants' stated in paragraph 9 of their counter affidavit as under:- OJA/51/2003 7 JUDGMENT “Without prejudice to the aforesaid and without admitting the applicant's (i.e. respondent-Company herein) contention that the respondents (appellants herein) have abused the process of Court, if this Hon'ble Court endorses the applicant's contention, then I most respectfully submit to this Hon'ble Court that taking into consideration the legitimacy of the respondents' claim against the applicant and the degree of loss, harm and damage that would be caused to the respondents (i.e. appellants herein) on account of grant of relief in favour of the applicant (i.e. dismissal of winding up petition), the same may be condoned by this Hon'ble Court. After hearing the learned counsel for the parties, the learned Company Judge by judgment dated 25.4.2003 dismissed the winding up petition on the ground that the advertisement dated 14.12.2002 was an abuse of the process of the Court. Hence, this appeal. 5. Mr SN Shelat, learned Senior Counsel with Mr CL Soni for the appellants have made the following submissions :- 5.1 The advertisement in question was not and cannot be construed as an advertisement under Rule 96 of the Company (Court) Rules. 5.2 In any case, there was no abuse of of the process of the Court. That the respondent-Company had admitted its liability to pay Rs.19.87 crores and failed to pay any amount against the said liability except Rs.25 lakhs, and which correspondence was on the record of the winding up petition and the respondent-Company did not reply to the statutory notice dated 18.10.2002 (which was served upon it on 21.10.2002) and the respondent-Company chose not to file any reply on merits – these facts were sufficient to OJA/51/2003 8 JUDGMENT indicate that the Company had no defence on merits and, therefore, issuance of the advertisement as abuse of the process of the Court was pleaded malafide only to escape the otherwise certain winding up of the respondent-Company. It is also submitted that the Company had already lost its reputation in the market as the respondent-Company is heavily indebted to various other broadcasters, such as SET Rs.243 lakhs, Doordarshan Rs.171 lakhs, Sri Adhikari Brothers Rs.58 lakhs etc. and that the said broadcasters had also filed complaints against the respondent- Company with the Indian Broadcasting Foundation (IBF), which is the largest organization representing television broadcasters in India, founded to protect and secure interests of the Indian television industry and that the said IBF has blacklisted the respondent-Company banning telecast of its advertisements on all television channels and that the Directors of the respondent- Company had also failed to remain present before the learned Magistrate's Court due to which arrest warrants were issued and since the arrest warrants could not be executed, the police authorities of Ring Road Police Station, Surat had submitted that report to the Metropolitan Magistrate's Court at Andheri. 5.3 Reliance is placed on several authorities, more particularly in M/s Madhusudan Gordhandas and Co. vs. Madhu Woolen industries Pvt. Ltd., AIR 1971 SC 2600 (para 13) and in National Conduits vs. SS Arora, AIR 1968 SC 279 in support of the submission that whether any act of the petitioning creditor would amount to abuse of the process of the Court, would always depend on the facts of a given case, including the defence of the respondent-Company on the merits of the dispute and that advertisement by itself would not amount to abuse of the process of the Court if the surrounding circumstances do not support such an inference or if surrounding circumstances run counter to such an inference. OJA/51/2003 9 JUDGMENT 6. On the other hand, Mr Soparkar for the respondent- Company has opposed the appeal and relying on certain decisions discussed hereinafter, has submitted that publication of the advertisement in question by itself amounted to an abuse of the process of the Court and, therefore, it was not necessary for the respondent-Company to file any reply on merits. It is also submitted that it was not necessary for the respondent-Company to file any counter affidavit on merits either in the winding up petition or in the present appeal and that if at all the Court considers it necessary that a counter affidavit should be filed on merits, the matter may be remitted back to the learned Company Judge for deciding this question afresh. 7. In view of the last submission, this Court specifically called upon the learned counsel for the respondent-Company to state whether it was agreeable to go back to the learned Company Judge for a fresh decision on the question whether there was an abuse of the process of the Court and on the further question whether the Company petition deserves to be dismissed on that ground after filing an affidavit-in-reply on merits. The learned counsel, however, stated that the respondent-Company would prefer to invite the decision of this Court on the contentions raised by it which had appealed to the learned Company Judge and that if at all this Court were to hold that the question could be decided only after filing of reply on merits, the matter may go back to the learned Company Judge for a fresh decision on the question whether there was any abuse of the process of the Court. 8. Before dealing with the rival submissions, we may set out the relevant statutory provisions, particularly Rules 24 and 96 of the Companies (Court) Rules, 1959, which read as under :- OJA/51/2003 10 JUDGMENT Part I - General “24(1) Where any petition is required to be advertised, it shall, unless the Judge otherwise orders, or these Rules otherwise provide, be advertised not less than fourteen days before the date fixed for hearing, in one issue of the Official Gazette of the State or the Union Territory concerned, and in one issue each of a daily newspaper in the English language and a daily newspaper the regional language circulating in the State or the Union Territory concerned, as may be fixed by the Judge. (2) Except in the case of a petition to wind up a Company, the Judge may, if he thinks fit, dispense with any advertisement required by these Rules. Part III – Winding up Winding up by the Court 96. Upon the filing of the petition, it shall be posted before the Judge in Chambers for admission of the petition and fixing a date for the hearing thereof and for directions as to the advertisement to be published and the persons, if any, upon whom copies of the petition are to be served. The Judge may if he thinks fit, direct notice to be given to the company before giving directions as to the advertisement of the petition.” 9. The position prevailing in England is explained as under in the Palmer's Company Law (para 15.235). “Advertisement of petition : Unless the Court otherwise directs, every petition is to be advertised in the Gazette not less than seven clear days (excluding Saturdays, Sunday and public holidays) after it has been served on the Company and not less than seven clear days before the date fixed for the hearing. . ...... .... ....... The Court will restrain the issuing of the advertisements when the petition is an abuse of the process of the Court, and may also decide to restrain advertisement when the petition debt is shown to be disputed. The Court must exercise a judgment in this OJA/51/2003 11 JUDGMENT matter, based upon the particular circumstances made known to it, and will effectively balance the potential for the Company suffering prejudicial publicity in consequence of the advertisement, against the anticipated detriment to the petitioner if the normal procedure of advertisement is postponed. It is an abuse of process to present a petition against a solvent Company as a means of putting pressure on it to pay a debt which is bona fide disputed, and the Court may issue an injunction restraining presentation of the petition where other forms of procedure ought first to be utilized. However, when a winding up petition has been properly presented and is not challenged, and there is no countervailing administration petition pending, or any undertaking that one will be presented, it is very doubtful whether a Judge has power to order that the winding up petition should not be advertised. Where the debt itself was undisputed and there was merely an untested cross-claim against the petitioner by the Company, this was held not to amount to an abuse of process on the part of the petitioner, and the Court refused to restrain advertisement. Where part of a debt was disputed on bona fide grounds, but an undisputed balance remained which was well in excess of the prescribed minimum figure, the petition was allowed to be presented. If the petition is not duly advertised in accordance with rule 4.11 of the 1986 Rules, the judge may order that it shall be removed from the file. Where a winding up petition is advertised prior to service, in breach of rule 4.11 of the Insolvency Rules, 1986, it will ordinarily be struck out.” It is true that the English Courts have given a wide meaning to the concept of “advertisement” in order to include even informal communication to third parties like serving a fax copy of the winding up petition to the Company's banker. ““This rigorous approach is understandable, given the commercial harm which can be inflicted upon a Company through the improper use against it of the presentation of a winding up petition. However, where the petitioner is innocent of all impropriety of purpose or conduct, and is OJA/51/2003 12 JUDGMENT presenting a petition with a view to the recovery of a debt which is not disputed, a valid distinction may be drawn by the Court, in order to deprive the insolvent debtor of a technical basis for making an application to dismiss the petition. Thus, the fact that the petitioner may have notified the debtor's bank of the presentation of the petition may be explained as having been carried out for the purpose of minimizing the risk of wasteful depletion of assets through the bank allowing the Company's account to operate at a time when, by virtue of section 127 of the Act, the disposition of the Company's property will be void. In that event, a more restricted notion of the meaning of “advertisement” was adopted in SN Group plc v. Barclays Bank plc, confining it to the formal act of advertising the petition in the Gazette, as required by rule 4.11(1).” (emphasis supplied) 10. Even where the English Courts have come to the conclusion that improper advertisement was an abuse of the process of the Court, the Courts have held that there is discretion vested in the Court to decide whether or not to strike out the petition on that ground. For instance, in Re Doreen Boards Ltd., 1996 (1) BCLC Ch D 501, the Court laid down the following principles :- “Exercise of the discretion where there has been an abuse of process. In my view there has been here a serious abuse of process. In those circumstances the Court has a discretion whether or not to strike out the petition at this stage. In deciding whether to exercise that discretion in favour of a strike out the Court should take into consideration all the circumstances. It should consider not only the need to discourage this sort of behaviour but also the extent to which a strike out would serve a useful purpose. In Re Signland Ltd. Slade J held OJA/51/2003 13 JUDGMENT that there was an abuse but in the special circumstances of that case declined to strike out. He gave leave for the substitution of an alternative petitioner. He also ordered the petitioner to pay both the company's and the other creditor's costs. It may be that if a case where the advertisement has been very limited in scope and has had no impact on the company it would be appropriate for the Court to register its disapproval in costs alone.” (emphasis supplied) Court registering its disapproval in terms of costs alone is what the Chancery Court did in Re a Company (No.00687 of 1991) (1992) BLCC (Ch.D) 133, after observing that though the advertisement of the petition (in spite of the order that no advertisement of the petition should be made) was an unwise act, it was “not a wanton act which would warrant the Court's displeasure; it is a mistake and a mistake in breach of an order, but not, as I say, contumelious.” In Re Signland Ltd. (1982) 2 All ER 609 referred to in the above case of Re Doreen Boards Ltd. (supra) Slade J, obseved that the Court should discourage premature advertisement as it would be a serious abuse of the whole process of advertisement, but also explained the principal reasons why the rules have directed that advertisement shall take place not less than seven clear days after the service on the Company – (i) to give the company an opportunity to discharge the debt in question, if it is undisputed, before advertisement takes place, and (ii) to enable the Company, if it wishes to dispute the debt, to apply to the Court to restrain advertisement. This rationale would also indicate that the Court should take a serious view of premature advertisement where the debt is disputed by the Company which is served with the winding-up petition. OJA/51/2003 14 JUDGMENT 11. The leading Supreme Court decisions on the subject are National Conduits (P) Ltd. vs. SS Arora, AIR 1968 SC 279 and M/s Madhusudan Gordhandas and Co. vs. Madhu Woolen industries Pvt. Ltd., AIR 1971 SC 2600. Noting the distinction between the position in the English law (where the creditor files the winding up petition, and the advertisement is to follow after the specified time lime from the date of service of the petition on the Company, unless the Company moves the Company Court and obtains an order of restraint against advertisement) and the Indian Law (where the advertisement is to be isssued after the order of the Court), in National Conduits case (supra), a three Judge Bench of the Apex Court considered the above quoted Company Court Rules and laid down the following principles :- “When a petition is filed before the High Court for winding up of a Company under the order of the Court, the High Court (i) may issue notice to the Company to show cause why the petition should not be admitted; (ii) may admit the petition and fix a date for hearing, and issue a notice to the Company before giving directions about advertisement of the petition; or (iii) may admit the petition fix the date of hearing of the petition, and order that the petition be advertised and direct that the petition be served upon persons specified in the order. A petition for winding up cannot be