Case: The Pradeshiya Industrial &amp; Investment Corporation of U.P Vs. North India Petrochemicals Limited &amp; Another

The first respondent, North India Petrochemicals Limited (hereinafter referred to as NIPL) filed awindinguppetition (Company Petition No. 1 of 1 993) before the High Court of Allahabad, Lucknow Bench, Lucknow under Sections 433, 434 and 439 of the Companies Act, 1956 (hereinafter referred to as the Act)3.On July 1, 1988 a Shareholders Agreement or Promoters Agreement was entered into. That superseded earlier agreements which recorded that the grant of a Letter of Intent for the manufacture of 15, 000 tonnes per a nnum of Phthalic Anhydride in favour of the. However, the said Letter of Intent was to be used, utilised and implemented in collaboration with M/s Dalmia Dairy Industries Limited (Respondent 2 herein). The collaboration agreement or the promoters agreement contemplated that a new company would be brought into existence called the Northern India Petrochemicals Limited. Clause 3 of the agreement provided that initial authorised capital would be Rs 5 lakhs which would be issued in equity shares of Rs 10 each while the subscribed capital of the company would be such as would b e decided by the Board of Directors of the Company from time to time4.Clause 6 of the said agreement contemplated that each party would ensure that its respective shareholdings in thep equity capital of the company shall be 26% plus 10 equity shares for PICUP (the appellant herein) and 25% minus 10 equity shares for second respondent, Dalmia Dairy Industries Limited5.Clause 7 of the agreement further provided that the Board would consist of 13 Directors out of which 4 were to be nominated by PICUP, the appellant herein and 3 by the second respondent, Dalmia Dairy Industries and the remaining 6 Directors were to be appointed as per the provisions of the Act6.Clause 13(a) stated that the appellant, Dalmia Dairy Industries Limited will contribute equal sums as may be required, from time to time, for the purpose of preliminary and exploratory and other expenses. These contributions are to form part of the share capital agreed to be contributed by each party under the agreement7.Northern India Petrochemicals Limited came to be incorporated on March 12, 19858.Differences arose between the second respondent and the appellant. The second respondent got the disputes referred to arbitration as per clau se 27 of the promoters agreement dated July 1, 1988 by letter dated December 19, 1991. The second respondent nominated the former Chief Justice of Delhi High Court, Justice Shri Shiv Prakash Narain, as their arbitrator. Thereafter the appellant nominated Shri D.N. Jha, former Chief Justice of Allahabad High Court. These two arbitrators appointed Shri Justice M.H. Kania (former Chief Justice of this Court) as Chairman9.On January 6, 1992, the first respondent issued a notice under Section 434 of the Act to the appellant. It was stated that an amount of Rs 140.33 lakhs had been spent on the project. The notice further stated that an amount of Rs 72.50 lakhs was payable by the appellant under the terms of the promoters agreement. That amount had not been forthcoming. On that ground it is alleged that the appellant was indebted to the tune of Rs 72.50 lakhs as on November 30, 1991 which the appellant was called upon to pay as its share contribution of NIPL within three weeks of the receipt of the notice10.On January 29, 1992 the appellant replied to the notice denying its liability to pay the amount of Rs 72.50 lakhs. It was stated therein that the disputes raised by second respondent M/s Dalmia Industries Limited had already been referred to arbitration and as such is pending adjudication. Hence, NIPL was not entitled to take any action11.In thewindinguppetition it is alleged that the sum of Rs 72.50 lakhs is a debt payable by the appellant to the first respondent. The debt arose on the basis of the promoters agreement between the appellant and the second respondent for promoting the firsty referred to above12.It is further alleged that the appellant is liable to pay towards certain expenses for exploratory work. Those expenses will be adjusted and treated as subscription to the share capital. The appellant has agreed to subscribe by way of equity participation in the share capital. That amount ought to be paid. There is a breach of promoters agreement for the failure to pay these amounts, namely, the dues on account of share capital and the expenses for exploratory work. It was alleged that the said sum of Rs 72.50 lakhs was due. Therefore, the first respondent claimed to be a creditor13.It may be noted, as stated above, that the second respondent has already referred the dispute to arbitration under clause 27 of the promoters agreement for adjudication claiming specific performance of the promoters agreement and in the alternative for damages for breach of contract. The said amount is the basis for thewindinguppetition as it is one of the claims in the statement of claims before the arbitrators. One further fact requires to be noted; the promoters agreement had already cancelled as per notice dated October 31, 199214.In view of the above, the appellant denied the liability to pay the amount on various grounds not only in the company petition but also before the arbitrators. Inter alia it was urged that thewindinguppetition was not maintainable. The claim itself was doubtful. It was a matter which required adjudication. Therefore, it was not a debt as contemplated within the meaning of Sections 433 and 434 of the Act. Respondent 1 is not a creditor15. Before the learned Single Judge four preliminary objections were taken:(1)The petition does not comply with the requirement o f the Company Rules insofar as Rule 21 which is mandatory in character is not satisfied.(2)Inasmuch as a creditor is seeking relief the application has to be accompanied by an application under Section 439(8) of the Act. There is alsoe of Section 439(8) and as such Rule 97 of the Company Rules had been breached(3) There was no presentation in accordance with Rule 95(4) When a notice to show cause why the petition should not be admitted was initially issued, the notice wasn the prescribed form. In spite of it, publicity had been given in the newspapers in order to pressurise the appellant to yield to the demand16.These preliminary objections were overruled by an order dated January 28, 1993. ; Thereafter in dealing with the question whether the petition deserved to be admitted or not it was concluded that a prima facie case had been made out for admission. However, the advertisement was suspended till further orders. Aggrieved by the same, an appeal was preferred to the Division Bench. The preliminary objections which were raised before the learned Single Judge were reiterated. They were overruled17.Another objection taken was as to the maintainability of the appeal. That was overruled on the ground that the orde r of the learned Single Judge was likely to require the respondents to face thewindingupproceedings. Therefore, an appeal would lie under Section 483 of the Act18.As to the admissibility of thewindinguppetition, the Division Bench is of the vie w that promoters agreement had in fact been entered into. The company is the beneficiary of the agreement. As a beneficiary it could claim that amount. From the material on record it is seen that no specific plea had been taken to show the circumstances under which the amount had not been paid by the appellant. Accordingly, the appeal came to be dismissed19. Hence, the present special leave petition.

Court's reasoning:
As seen from the earlier narration, the promoters agreement was entered into between the appellant and Respondent 2, Dalmia Industries Limited. Only under that agreement the first respondent, North India Petrochemicals Limited, was floated. As per clauses 6 and 13(a) the appellant will have to pay its share of contribution to the first respondent. It is the case of the first respondent that already an amount of Rs 140.33 lakhs has been spent on this project. Therefore, towards each share the appellant is liable to contribute a sum of Rs 72.50 lakhs which, according to it, is a debt29.It is beyond dispute that the machinery for windingupwill not be allowed to be utilized merely as a means for realising its debts due from a company30. Examined in the light of the above, we are unable to uphold the judgments of the courts below on the facts narrated above. Our reasons are as under: The basis of the claim of the first respondent for Rs 72.50 lakhs is the promoters agreement dated July 1, 1988. This agreement has been cancelled by the appellant by notice dated October 31, 1992. Though the learned Single Judge of the High Court referred to this aspect he had not pursued it further. He has not considered as to what would be the consequence31.We are informed that the financial position of the appellant is sound. It is the largest financial corporation of the State of Uttar Pradesh. It has rendered financial assistance of Rs 1024.83 crores till March 1992 to more than 100 industrial units and has also promoted joint sector projects. It is profitmaking financial corporation and is paying dividend as seen from the balance sheet for the year, (filed along with special leave petition). The assets of then are Rs 5, 26, 35, 36, 568. The reserves are Rs 17, 60, 15, 222. The profits earned by the appellant before payment of tax is Rs 7.40 crores and after meeting its financial liabilities, Rs 2.78 crores.