Esteem v. Upkar Developers (India) Pvt. Ltd.

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CO.P. No. 211/2011
Esteem v. Upkar Developers (India) Pvt. Ltd.
2013 SCC OnLine Kar 5069
(BEFORE ARAVIND KUMAR, J.)
Esteem Estate Represented by

1. Sri. G. Manoharan, Aged about 54 years, S/o late Gangaraju,
Residing at No. 2, Venkataramanappa Road, Jai Bharath Nagar,
Bangalore-560 033.
2. Sri. Suresh Menda, Aged about 53 years, S/o Mr. Shyamsundar,
residing at Flat No. C-3, Sai Dwaraka, Sriuen Aparts No. 22, 3rd
Cross, Sultan Palya, Bangalore-560 032 .…. Petitioners
Sri. Shivarudrappa Shetkar, Advocate
v.
M/s Upkar Developers (India) Pvt. Ltd., A company incorporated
under the Companies Act, 1956 Having its Registered Office at
No. 400, 9th Cross, Off. R.V. Road, Near Sonata Software, II
Block, Jayanagar, Represented by its Managing Director, Sri.
K.H. Khan .…. Respondent
Sri. Naganand, Sr. Counsel a/w Sri. Goutham and Rajeswar, Advocates
CO.P. No. 211/2011
Decided on June 28, 2013
Companies Act — S. 434(1)(a) — Prayer for winding up of company — Agreement
between parties for payment to petitioner a professional fee — A legal fiction cannot be
raised, when conditions specified do not exist, on ground that there is substantial
compliance or implied or inferred the ground that there is substantial compliance or implied
or inferred compliance of requirements to be fulfilled for raising the legal fiction, unless such
lesser or alternative compliance is permitted by an explanation or another deeming
provision — S. 434 should be strictly complied with and the service of notice should be at
the registered office of the Company, to raise the presumption under S. 434(1)(a) —
Company is insolvent, it is the duty of Court to direct a winding up and creditor is entitled to
an order ex debito justitiae — Court can only exercise its discretion in one way namely by
granting the order — Statements can be reconciled on the basis that although the matter is
‘a complete and unfettered judicial discretion’ the discretion is exercised in accordance with
certain established principles, but the principles do not bind the Court in an all or nothing
way — Creditor has a prima facie right to a winding up order which is subject to certain
exceptions — S. 433 enables Court to wind up a company if it is unable to pay its debts —
Said exercise of power is discretionary and it has to be judiciously exercised — Reciprocal
promises required to be performed as stipulated in agreement is not required to be delved
upon by this Court — It cannot be held or construed that the defence set up by the
respondent-company to be either moon shine or a frivolous one to discard it or to construe
the said defence raised by the respondent without any basis — Dismissed
Cases referred:
Sundur Manganese and Iron Ores Ltd., Yeshwantnagar, Karnataka v. Manganese Ore (India) Ltd.,
Nagpur, (2001) 4 Kar LJ 590, relied on
Divya Export Enterprises v. Producin (P) Ltd., ILR 1990 Kar 1610, relied on
Amalgamated Commercial Traders (P) Ltd. v. A.C.K. Krishnaswami; Madhusudan Gordhanda & Co. v.
Madhu Wooken Industries (P) Ltd.; Shakti Prakash Metal Finishers (P) Ltd., Bangalore v. Hindustan
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Machine Tools Ltd. (Hmt. Ltd.) Bangalore, 2001 (6) Kar LJ 467; Iba Health (P) Ltd. v. Infor-Drive
Systems Sdn. Bhd, 2010 AIR SCW 6282
ORDER
Petitioner is seeking for winding up of the respondent company contending interalia
that it has failed to pay to the petitioner, its legitimate dues and respondent Company
has become insolvent and as such, it is just and equitable to pass an order of winding
up.
2. Heard the arguments of learned Advocates appearing for the parties namely, Sri.
Shivarudrappa Shetkar for petitioner and Sri. S.S. Naganand, learned Sr. Counsel
appearing on behalf of Sri. Rajeshwar for respondent. Perused the averments made in
the company petition, annexures appended thereto and the statement of objections
filed by the respondent.
3. It is the contention of Mr. Shivarudrappa, learned Advocate appearing for
petitioner that respondent company is in the business of developing lands and it owns
a property measuring 36 acres 3 guntas of land at Kengeri, Mysore Main Road,
Bangalore-560 060 and it intended to develop the same by entering into a joint
development agreement and was on the look out for prospective and superior
developer who could make huge investment and make proper use of the land and
petitioners being professional agents/mediators in the field of real estate and
development of land, their services came to be engaged by the respondent company.
Petitioner using its long standing experience introduced M/s Era Land Marks India
Limited, New Delhi for entering into a joint development agreement in respect of the
above said land with the petitioner and for the said purposes petitioners negotiated
and mediated with said developer for a very good offer being given to the respondent
Company which was the highest offer made by any developer during the said period.
It is contended that pursuant to such negotiation, respondent company entered into a
joint development agreement on 5-7-2008 with M/s Era Land Marks India Limited,
New Delhi and same was duly registered.
3.1. It is contended by the learned counsel that pursuant to the said joint
development agreement entered into, it was agreed to by the respondent company to
pay 1.25% of the agreed land value as on the date of joint development which was Rs.
200 crores, as professional fee to the petitioner namely, a sum of Rs. 2,50,00,000 was
agreed to be paid and accordingly an agreement was entered into between petitioners
and respondent on 26-4-2008 vide Annexure-B. It is contended that out of said
amount of Rs. 2,50,00,000 a sum of Rs. 33,00,000 was paid to one Sanjay Byanna
and a sum of Rs. 28,00,000 to one Sri. Jeevaraj and Rs. 23,00,000 was paid to each of
the petitioners. Thus, the balance of Rs. 1,43,00,000 was to be paid by the respondent
company to the petitioner.
3.2. It is contended that out of 1.25% professional fee, 0.25% was to be paid soon
after laying of the first building foundation of the project and contend that the project
operation is in full swing and newspaper advertisements have been published inviting
prospective purchasers to book their flats. However, the respondent company was not
intending to pay the above said amount though certificate issued by BMRDA indicted
that project had commenced. It is contended by the learned counsel that only due to
the efforts put in by the petitioner in solving all the differences between the
respondent company and the developer and making the project to fall on the right
track, the respondent company is enjoying its fruits without making the agreed
payment of Rs. 1,43,00,000 to the petitioner after having benefited by the
professional services rendered by the petitioner in introducing the abovesaid
developer.
3.3. It is contended that repeated requests to the respondent to pay the said
amount did not yield any result and as such, legal notice came to be issued on 17-1-
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2011 calling upon the respondent to pay the entire outstanding amount and untenable
reply has been given on 1-2-2011 by the respondent. It is further contended that
respondent company is unable to pay its debts and hence liable to be wound up. It is
also contended that respondent company is deemed to be unable to pay its debt.
Hence, petitioner seek for an order of winding up of the respondent company.
4. Per contra, Sri. Naganand, learned senior counsel appearing on behalf of Sri.
Rajeshwar, for respondent would contend that petitioner has miserably failed to
establish that on the date of issuance of statutory notice the registered office of the
respondent company was located at the address mentioned in the said notice dated 17
-1-2011 or in the address mentioned in the cause title of the present petition, but on
the other hand respondent has produced the extract of the master company details
obtained from the website of the Ministry of Corporate Affairs as per Annexure-R-1
which would indicate the registered office of the respondent company is at 41/1,
UIPAR Mansions, R.V. Road, Basavanagudi, Bangalore, Karnataka - 560 004, and not
at the address either specified in the statutory notice or in the address depicted in the
cause title of the petition. As such he contends that there is no substantial compliance
of S. 434(1)(a) of the Companies Act, 1956 and as such the petition is liable to be
dismissed. Even otherwise on merits he would contend that present petition has been
filed under S. 433(e) and petitioner has to necessarily establish any one or all the
ingredients of S. 434(1)(a) to (c) and contends that undisputedly petitioner has not
been able to demonstrate the alleged debt due having been admitted by the
respondent or demand made by petitioners as contemplated under 434(1)(a) has not
been complied by respondent enabling the petitioner to seek for winding up of
respondent-Company under S. 434(1)(a). He would further contend that even under
Clause (c) of 434(1) petitioner has not been able to demonstrate that said provision is
attracted and it has not been proved by the petitioner that respondent is not
commercially solvent by producing any material to enable this court to arrive at a
conclusion that respondent company is unable to pay its debt both contingent and
prospective liabilities since it has become commercially insolvent and as such on this
ground also petitioner is not entitled for the relief.
4.1. He would further elaborate his submission to contend that even on facts it can
be noticed that petitioner is basing its claim by virtue of an alleged agreement or
memorandum which has been signed by the respondent company's Managing Director
dated 26-4-2008 and by itself it has no legs to stand inasmuch as there are certain
conditions which ought to have taken place even according to the petitioner and the
said conditions stipulated therein having not taken place same cannot be enforced
since it is term of the contract that what is agreed to is conditional. He would also
submit that under clause 3.4(b) amount had to be paid to HUDCO by the developer
M/s Era Landmarks India Limited, New Delhi which has not been paid and as such
there was no obligation on the part of the respondent to adhere to the terms
stipulated in contract or agreement dated 26-4-2008.
4.2. He would submit that the dispute between the parties being a bonafide dispute
and when there is no obligation on the part of the respondent to pay any amount to
the petitioner under the alleged contract or agreement dated 26-4-2008 and when
there is a dispute with regard to entitlement of the petitioners to such payment, the
defence raised in the statement of objections is to be construed as a ‘bonafide
dispute’, which cannot be resolved in the present petition and as such petitioners have
to work out their remedy in appropriate proceedings before a jurisdictional forum. He
would also submit that the limitation with regard to enforcement of alleged debt due
by respondent to petitioner being in dispute same cannot be examined by this court in
the present petition.
4.3. He would also contend that no presumption can be drawn under 434(1)(a) that
respondent-company is unable to pay its debt for being ordered to be wound up,
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unless the petitioner - company has pleaded and proved to the satisfaction of the
Court that in the facts of the case, such a situation has arisen namely, the respondent
- company is unable to pay its debt by taking into account the contingent or
prospective liabilities of the respondent company. He draws the attention of the court
in the instant case petitioner has neither pleaded nor proved these aspects and as
such petitioner is not entitled for the relief sought for.
5. At the request of petitioner's counsel, the matter was listed on 21-6-2013 and a
memo has been filed by the learned counsel for the petitioner enclosing the photocopy
of the ‘returned cover’ which contains an endorsement ‘no such company’ which is
claimed to have been despatched by the learned counsel for the petitioner through
courier to the registered office of the respondent-company and the visiting cards of the
tenants said to be in occupation of the said premises to contend that registered office
of the respondent-company is not located in the address available with the ROC
depicting the registered office of the respondent-company as mentioned therein. He
would also draw the attention of the Court to the reply notice dated 22-2-2012 issued
by the respondent-company whereunder the respondent-company itself has admitted
that its registered office is at the address to which the statutory notice has been
issued and hence, it does lie in the mouth of the respondent-company to contend
contrary to its own admission. Hence, he prays for rejecting the contention raised in
this regard and prays for an order of winding up of the respondent-company be
passed.
6. Having heard the learned Advocates appearing for the parties and on perusal of
the pleadings as well as the documents appended thereto and after bestowing my
careful attention to the oral arguments advanced by the respective learned Advocates,
I am of the considered view that following points would arise for my consideration:
(1) Whether the statutory notice dated 17-1-2011 - Annexure-E issued by
petitioner is contrary to S. 434(1)(a) of the Companies Act, 1956?
(2) Whether the petitioner has made out a case for winding up of the respondent-
company under S. 434(e) and 439 of the Companies Act, 1956?
OR
Whether the defence set up by the respondent company is frivolous and not a
bonafide dispute so as to reject the same and grant the prayer sought for by
petitioner?
FACTUAL MATRIX:
7. Petitioner and respondent-company represented by its Managing Director entered
into an agreement on 26-4-2008 - Annexure-B whereunder it was agreed that
respondent would pay to the petitioner a professional fee of 1.25% (exclusive of
service tax) on the value of land agreed for joint development which was valued at Rs.
200 Crores. It was also agreed that 1% of the professional fee would be released on
the same day in proportionate to release of funds towards advance of Rs. 35 Crores by
the developer - M/s Era Land Marks India Limited, New Delhi, which was agreed to be
released after getting such advance payment from the developer. It was further
agreed that respondent would pay the remaining 0.25% soon after the first building
foundation of the project. In other words, the total professional fee agreed to be paid
by respondent to petitioner was Rs. 2.50 Crores. The petitioner also agreed for the
respondent making payment of Rs. 33,00,000 directly to M/s Sanjiv Bayana of Delhi
from out of the total professional fee of Rs. 2.5 Crores.
8. The basis for entering into such contract between the parties was on account of
the land measuring 36 acres 4 guntas situated at Kengeri village, Bangalore South
Taluk which had been converted for residential purposes being available with the
promoters/directors of the respondent-company and they were on the look out of a
developer with repute and who was capable of investing huge amount and was
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approached by the petitioner who agreed to use their expertise in the field of real
estate and secure a developer. In this direction, the petitioner has introduced M/s Era
Land Marks India Limited, New Delhi, to the respondent-company and after
negotiation and discussion, the offer made by the said developer to the respondent-
company which was the highest offer by any developer made during the said period
came to be accepted by the respondent-company and accordingly a joint development
agreement came to be entered into between respondent-company and M/s Era Land
Marks India Limited, New Delhi on 5-7-2008 - Annexure-A which was duly registered
in the office of Sub Registrar, Kengeri. Prior to the execution of said joint development
agreement, agreement dated 26-4-2008 - Annexure-B referred to herein above came
to be entered into between the petitioner and the respondent-company.
9. It is not in dispute that pursuant to the agreement dated 26-4-2008 - Annexure-
B entered into by the respondent-company with the petitioner, the following amounts
have been paid:
i) Rs. 33 lakhs paid to Sri. Sanjiv Bayanna ii) Rs. 28 lakhs paid to Sri. Jeevaraj iii)
Rs. 23 lakhs paid to each of the petitioners Thus, in all, Rs. 1,07,00,000 was paid by
the respondent-company under the agreement dated 26-4-2008 - Annexure-B. On
these factual aspects, there is no dispute between the parties.
CONTENTIOUS ISSUE:
10. The claim of the petitioner is: under agreement dated 26-4-2008 - Annexure-B
the respondent-company was required to pay to the petitioner the balance amount of
Rs. 1,43,00,000 immediately after laying of the first building foundation of the project
to be constructed by the developer as per the joint development agreement and
despite laying of the foundation to the first building of the project having been
completed as per the permission granted by the Bangalore Mysore Infrastructure
Corridor Local Planning Authority and said amount has not been paid which was due to
them despite demand made by petitioner. Thereafter petitioner issued statutory notice
demanding payment of the balance amount and due to non compliance of said
demand by the respondent-company, present petition seeking winding up of the
respondent-company has been filed contending that respondent is unable to pay its
admitted debt.
11. Respondent has contended that joint development agreement entered into
between respondent and M/s Era Land Marks Limited on 5-7-2008 came to be
modified and an addendum (supplementary) agreement came to be executed between
the parties on 28-10-2009 and the amount agreed to be paid by the said developer to
HUDCO towards the outstanding loan amount of the respondent, having not been
complied with by the said developer there was improper fulfillment of the condition
stipulated and in view of the same the petitioners would not be entitled to contend
that all the conditions stipulated in the agreement entered into with them on 26-4-
2008 - Annexure-B by respondent is to be complied and as such respondent-company
contended that it is not liable to pay the professional fee of 1.25%. It was also
contended that under the joint development agreement, developer was to get 37%
undivided interest and on account of subsequent development, the said percentage
got reduced to 29.5% and so also the security deposit to be paid by developer to
respondent came to be reduced from Rs. 35 Crores to Rs. 25 crores and hence it is
contended that payments made to the petitioner is itself a excess payment and as
such, they are not entitled to any further payment.
RE: POINT No. (1):
12. The learned counsel for the petitioner has vehemently contended that
respondent itself has admitted its registered office is at the address mentioned in
cause title and as such, it cannot now turn around and contend that its registered
office is not at that address but elsewhere.
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13. The Division Bench of this Court in THE SUNDUR MANGANESE AND IRON ORES
LIMITED, YESHWANTNAGAR, KARNATAKA v. MANGANESE ORE (INDIA) LIMITED,
NAGPUR reported in 2001 (4) Kar. LJ 590 has held that when a petition is filed under
S. 433(e) the notice of demand if not sent to the registered office but to the
administrative office cannot be held to be sufficient compliance with the statutory
requirement to raise a presumption that company is unable to pay its debts. It has
been held as under:
“7. The language employed in S. 434(1)(a) of the Act is significant. While the
section provides that the mode of service can be either by ‘registered post or
otherwise’, it does not provide the place of service as ‘at the registered office or other
office’, but specifically states as ‘at its registered office’. Further, while the
requirement ‘a demand under his (creditor's) hand’ is explained in sub-section(2) as
including a demand signed by an agent or legal adviser duly authorise, there is no
such explanation in regard to the requirement relating to service at ‘registered office’
by clarifying that service at an administrative office of branch office will also be service
at registered office. In the absence of any explanation or further deeming provision
enabling the interpretation of the words ‘delivered at its registered office’ as meaning
‘delivery at the administrative office’, it is not possible to hold that service of notice at
an office other than registered office as sufficient compliance with S. 434(a)(a)
requiring service at registered office.
8. It is well-settled that a legal fiction can be raised as provided under a statute,
only when the conditions stipulated for raising such legal fiction are strictly and fully
complied with. Where the specific requirements are not complied with, no legal fiction
will arise. A legal fiction cannot be raised, when the conditions specified do not exist,
on the ground that there is substantial compliance or implied or inferred the ground
that there is substantial compliance or implied or inferred compliance of the
requirements to be fulfilled for raising the legal fiction, unless such lesser or
alternative compliance is permitted by an explanation or another deeming provision.
As observed by the Supreme Court in Commissioner of Income-tax, Bombay City-II v.
Shakuntala, a legal fiction cannot be created by travelling beyond the language of the
section by which it is created. Therefore if a creditor wants the benefit of the legal
fiction under S. 434(1)(a) that a Company is unable to pay its debts, he has to strictly
fulfil all the conditions stipulated therein for raising such legal fiction.
9. The Courts have consistently held that requirements of S. 434 should be strictly
complied with and the service of the notice should be at the registered office of the
Company (and not any other office), to raise the presumption under S. 434(1)(a).”
14. Though a valiant attempt has been made by the learned counsel for the
petitioner to drive home the point that respondent itself has in its reply notice
admitted that its registered office is at the address reflected in the statutory notice
and the memo filed on 21-6-2013 would also evidence this fact would not be a ground
to accept the said plea, since consent does not confer jurisdiction.
15. The certificate of incorporation of respondent-company as per Extract produced
at Annexure R-1 along with Statement of objection would indicate that registered
office of the Respondent-Company is located at No. 41/1, Uipar Mansion, R.V. Road,
Basavanagudi, Bangalore and not at the address shown in the statutory notice. Hence,
there is non-compliance of Mandatory requirement of S. 434(1)(a) of Companies Act.
16. In that view of the matter, point No. (1) has to be answered against the
petitioner and in favour of the respondent.
RE: POINT No. 2:
17. The petitioner is seeking for winding up of the respondent - company on the
ground that it is unable to pay the debt due to the petitioner in a sum of Rs. 1.43
Crores due under the agreement dated 26-4-2008 - Annexure-B. Respondent to stave
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off such a claim has filed detailed statement of objections contending interalia that a
bonafide dispute exists with regard to such payment and the basis for the petitioner to
claim the said amount is based on the joint development agreement dated 5-7-2008
itself having encountered rough weather and litigation having arisen thereunder, the
claim of the petitioner recedes to the background and on that score and also on
account of there being a serious dispute both with regard to limitation to make such a
claim by the petitioner and there being no amount due by the respondent to the
petitioner, proceedings for winding-up is not maintainable.
18. Respondent has contended that agreement dated 26-4-2008 entered into with
the petitioner has ceased to be in operation on account of subsequent development
namely, the respondent's undivided interest getting reduced from 37% (as per original
agreement dated 5-7-2008) to 29.5% (as per Addendum agreement dated 28-10-
2009), security deposit payable by developer to respondent being reduced from Rs. 35
Crores to Rs. 25 Crores and HUDCO loan which was to be cleared by the developer
within 90 days not having being cleared as the prime reasons for not paying the
amount of the petitioner. In the light of this defence raised by the respondent, it
requires to be examined as to whether the said defence is a substantial one, a
bonafide dispute and it is not a moon shine defence to stave off the creditor namely,
petitioner. In this background, before examining the facts on hand, let me state the
law laid down by this Court and by the Hon'ble Apex Court in this regard.
19. It has been held in DIVYA EXPORT ENTERPRISES v. PRODUCIN PRIVATE LTD.,
reported in ILR 1990 KAR 1610 that whenever respondent-company comes forward
and sets forth its defence, company Court will have to examine the nature of
respective cases pleaded by the parties and if a prima facie case is made out by the
petitioner, then, the onus of disproving it by showing that the defence is in good faith
and one of substance would shift on such respondent. It has been held as under:
“17. If the respondent company pleads a defence in good faith and puts forth a
substantial case against the petitioner's claim, the petition for winding up will be
rejected. A mere assertion of a debt payable by the respondent company is not
sufficient to attract the discretion of the Court in favour of the petitioner. The principle
governing the exercise of Court's discretion is extracted in the decision of the Division
Bench of this Court in HEGDE & GOLAY LIMITED v. STATE BANK OF INDIA.
“A basic question arises, does the Court have a discretion under Ss. 222(e) and
223? The general rule is that where a petitioning creditor can prove that his debt is
unpaid and the company is insolvent it is the duty of the Court to direct a winding up
and the creditor is entitled to an order ex debito justitiae. On the other hand, it has
been said that the latter is phrase which means no more than that in accordance with
settled practice the Court can only exercise its discretion in one way namely by
granting the order. These statements can be reconciled on the basis that although the
matter is ‘a complete and unfettered judicial discretion’ the discretion is exercised in
accordance with certain established principles, but the principles do not bind the Court
in an all or nothing way. In accordance with these principles the creditor has a prima
facie right to a winding up order which is subject to certain exceptions.”
Again, Palmer is quoted, as to the exceptional circumstances under which discretion
to wind up would not be exercised:
“(1) Where the petitioner's debt is less than $ 200;
(2) The debt is bona fide disputed by the company;
(3) the company has paid or tendered payment of the petitioner's debt;
(4) the winding up is opposed by other creditors; and
(5) the company is in the process of being wound up voluntarily.”
Words of caution against invoking the Court's jurisdiction to pressurize a company
are found in the decision of the Supreme Court in AMALGAMATED COMMERCIAL
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TRADERS P. LTD. v. A.C.K. KRISHNASWAMI:

“It is well settled that a winding up petition is not a legitimate means of seeking to
enforce payment of the debt which is bonafide disputed by the company. A petition
presented ostensibly for a winding up order but really to exercise pressure will be
dismissed, and under circumstances may be stigmatised as a scandalous abuse of the
process of the Court. At one time petitions founded on disputed debt were directed to
stand over till the debt was established by action. If however, there was no reason to
believe that the debt, if established, would not be paid, the petition was dismissed.
The modern practice has been to dismiss such petitions. But, of course, if the debt, is
not disputed on some substantial ground, the Court may decide it on the petition and
make the order.”
18. The test applied by the Supreme Court in the above case was, whether the non-
payment of the claim by the respondent company was a cloak to hide its inability to
pay its debts.
19. When a prima facie case is made out by the petitioner, the respondent may
putforth a substantial defence against it; if such a defence is bone fide, Court's
discretion will be to dismiss the petition.
20. In MADHUSUDAN GORDHANDA & CO. v. MADHU WOOKEN INDUSTRIES
PRIVATE LTD., the principles are again stated (at 2605):
“The principles on which the Court acts are first that the defence of the company is
in good faith and one of substance, secondly, the defence is likely to succeed in point
of law and thirdly the company adduces prima facie proof of the facts on which the
defence depends.”
21. When can a dispute be termed as a bona fide on? When is it to be treated as
substantial? These questions are difficult of a precise answer in abstract. These are in
the realm of facts and each case would churn out different answers. But the Court can
refer to certain tests envisaged in similar circumstances, though not exactly under the
provisions of the Companies Act. In the case of a suit filed under Order 37 of the Code
of Civil Procedure, the defendant has to seek leave of the Court to defend against the
claim. It has been held that if the defence could be honest and bona fide, leave should
be granted; a decision whether the defence pleaded is bona fide or honest at the initial
stage of a suit, can only be hazardous; but, still, the Court is called upon to apply its
judicial mind on this question. Similarly is the situation when, the respondent
company is asked to show cause against a winding up order, at the initial stage; the
respondent, here, has to show cause as to why the petition filed should not be
advertised; such an advertisement has adverse effects on the reputation of a company
and therefore, it is given an opportunity to show cause against ordering the
advertisement- (vide: THE NATIONAL CONDUCTS (P) LTD. v. S.S. ARORA). Therefore,
whenever the respondent company comes forward and sets forth its defence, this
Court has to examine the nature of the respective cases pleaded by the parties and if a
prima facie case is made out by the petitioner, the respondent should shoulder the
onus of disproving it, by showing that its defence is in good faith and one of
substance, and it is likely to succeed in point of law.”
20. The Division Bench of this Court in the case of SHAKTI PRAKASH METAL
FINISHERS PRIVATE LIMITED, BANGALORE v. HINDUSTAN MACHINE TOOLS LIMITED
(HMT LIMITED) BANGALORE Reported in 2001 (6) KAR. L.J 467 has held that violation
of the terms of the contract cannot ipso facto come within the purview of S. 433 of the
Companies Act for winding up and non payment to bill amount under a contractual
agreement cannot be said to be an admitted debt even when it is disputed. It is held
as under:
“7. On consideration, we find that as per the averments there is a contract between
the appellant and the respondents and the same has to be dealt with as per the terms
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of the agreement. Any violation of the terms of the contract cannot ipso facto come
within the purview of S. 433 of the Companies Act for winding up of the company. It is
also seen that it is not the legislative intention that Company Court should be
converted itself into an ordinary Civil Court and proceed to hold a trial at the instance
of individual claiming to be a creditor of the company on the basis of a contract. Under
the circumstances, no directions as prayed for can be issued. It is also seen that non-
payment of bill amount under a contractual agreement cannot be said to be an
admitted debt even when it is disputed. That apart, debt is something which is
borrowed by a person on settled terms and conditions and settled rate of interest and
it can also be resettled between the parties. Be that as it may. In any view of the
matter and in the facts of the given case, in cannot be invoked. As discussed, we do
not find any error or illegality in the order of the learned Single Judge so as to call for
any interference. This writ appeal is dismissed.”
21. The Apex Court in IBA HEALTH PVT. LTD. v. INFOR-DRIVE SYSTEMS SDN. BHD
Reported in 2010 AIR SCW 6282 has held that existence of ‘bonafide dispute’ implies
the existence of substantial ground for the dispute raised and in such circumstances
where it is bound that contested debt is doubtful company Court should not entertain
a petition for winding up. It has been held therein as follows:
“24. Reference was also made to another decision in Shailendra Dania v. S.P. Dubey
[(2007) 5 SCC 535]: (AIR 2007 SC (supp) 208: 2007 AIR SCW 3553), where a
similar question arose in connection with the eligibility for promotion wherein
differential service experience based on differential educational qualifications had been
prescribed and longer period of service experience was prescribed for diploma holder
Junior Engineers in comparison to degree holder Junior Engineers for the post of
Assistant Engineer. Explaining the rationale behind the permissibility of making such a
distinction, this Court held that the difference between the service qualifications has
been an essential criterion for promotion based on interest of an establishment. While
considering the said question, this Court had also the occasion to consider the
possibility of two views being taken while interpreting a particular set of service rules.
In such a situation, this Court held that the rules should be interpreted in consonance
with the practice followed by the department for a long time. In fact, while arriving at
such a conclusion, this Court had also the occasion to consider the earlier case of N.
Suresh Nathan (AIR 1992 SC 564: 1992 AIR SCW 181) (Supra).”
22. S. 433 of the Companies Act enables this Court to wind up a company if it is
unable to pay its debts. Said exercise of power is discretionary and it has to be
judiciously exercised. If the respondent pleads putting forth defence that claim of the
petitioner is genuinely disputed and if it can be construed as a bonafide dispute, the,
this Court would be loath in exercising the said discretion for ordering winding up of
the company.
23. In the light of what is stated above, let me examine the facts on hand to
answer point No. (2) formulated herein above.
24. It is not in dispute that reason for respondent entering into a contract dated 26-
4-2008 - Annexure-B with the petitioner and claiming the amount is the joint
development agreement the respondent has entered into with M/s Era Land Marks
India Limited, New Delhi. Under the agreement dated 26-4-2008 (Annexure-B)
respondent had agreed to pay to the petitioners a total sum of Rs. 2.50 Crores. The
conditions stipulated therein which would entitle the petitioner to claim the said
amount from respondent's are extracted herein below:
“1. We agree to pay your Professional fee of 1.25% (one & quarter percent plus
service tax) on value of the land agreed for Joint Development. The lump sum value of
the land is about Rs. 200.00 Cr. (Rupees Two hundred Crores only)
2. Necessary TDS shall be deducted from the Professional fee.
-----------------------------------------------------------------------------------------------------------------------------------------------------------
3. However we will release 1% (One percent) of the Professional fee on the same
day in proportionate to release of funds towards advance of Rs. 35.00 Cr. (Rupees
Thirty five Crores only) from M/s ERA LANDMARKS INDIA LIMITED, New Delhi. The
payment shall be released after getting advance payment from Developers. Remaining
0.25% (Quarter percent) shall be paid soon after the first building foundation of the
project at Kengeri.
4. The total Professional fee payable is Rs. 2.50 Cr. (Rupees Two Crores fifty lakhs
only). This is in full and final settlement of your claim for the said deal as spelt in your
above referred letter.
5. As per your above cited letter Rs. 33,00,000 (Rupees Thirty three lakhs only)
shall be directly paid to M/s Sanjiv Bayana of Delhi from the total professional fee of
Rs. 2.5 Cr. (Rupees Two Crores Fifty lakhs only) and the balance Rs. 2.17 Cr. (Rupees
Two Crores Seventeen lakhs only) shall be paid to you in full and final settlement of
the deal.”
25. It is not in dispute that petitioner was successful in ensuring that respondent -
company enters into a joint development agreement with M/s Era Land Marks India
Limited on 5-7-2008 which is at Annexure-A. The said agreement stipulates the
conditions required to be performed by each of the parties. All such reciprocal
promises required to be performed as stipulated in the agreement is not required to be
delved upon by this Court. However, some of the essential terms of the said contract
which would have a bearing on the claim of petitioners are extracted hereinbelow:
(1) The developer was required to pay a security deposit of Rs. 35 Crores to the
respondent.
(2) The undivided share to which the respondent-company was entitled determined
at 37%.
(3) Existing HUDCO loan raised by the respondent and its stake holders was agreed
to be cleared by the said developer M/s Era Land Marks India Limited within 90 days
from the date of Joint-Development agreement.
Undisputedly, petitioner had participated, negotiated and mediated for the parties
to enter into joint development agreement. In fact, petitioners themselves agree in
the present petition that they used their long standing expertise in the real estate field
and their good offices to persuade M/s Era Land Marks India Limited enter into a joint
development with the respondent-company which ultimately resulted in Joint-
Development Agreement dated 5-7-2008 coming into existence on account of the
negotiation and discussion made by the petitioner. It is because of this precise reason
the agreement dated 26-4-2008 between respondent and petitioner came into
existence whereunder respondent agreed to pay to the petitioners a professional fee of
Rs. 2.50 crores. The said contract is a contemporaneous contract entered into between
respondent and petitioner. In other words, the performance of obligations under the
said agreement was dependent on the performance of the obligations by the parties to
the Joint Development agreement dated 5-7-2008 - Annexure-A.
26. On account of various reasons, the parties namely, the respondent and the
developer could not implement the Agreement dated 5-7-2008 in its entirety and as
such they entered into an Addendum agreement on 28-10-2009 - Annexure-R2 under
which it was agreed to between the parties that:
(1) Undivided share/interest of the respondent company would be reduced from
37% to 29.5%.
(2) Security deposit payable by developer to the respondent was reduced from Rs.
35 Crores to Rs. 25 Crores.
(3) The loan amount agreed to be paid to HUDCO is not agreed to be paid by the
developer from out of the security deposit payable to the respondent.
-----------------------------------------------------------------------------------------------------------------------------------------------------------
These conditions agreed to between the parties would indicate that there was
substantial modification amongst other conditions to the original agreement dated 5-7
-2008. This would also indicate that claim of the petitioner which was based on the
Joint-Development Agreement dated 5-7-2008 got eclipsed by virtue of the
Addendum agreement dated 28-10-2009 and thereby benefits which would have
accrued to the respondent got substantially reduced. It is because of these
subsequent developments, the respondent has attempted to stave of the claim made
by petitioner contending that debt is not admitted and such a plea cannot be brushed
aside as a false defence. It is to be further noticed that respondent - company and the
developer are now at logger heads and they have ignited the arbitration proceedings
and same is pending before the Arbitral Tribunal as admitted to by the learned
Advocates appearing for the parties. In this background, it cannot be held or
construed that the defence set up by the respondent-company to be either moon shine
or a frivolous one to discard it or to construe the said defence raised by the respondent
without any basis. In that view of the matter, I am of the considered view that the
dispute raised by the respondent to deny the claim of petitioner is bonafide and one of
substance and such dispute cannot be construed as frivolous or brushed aside as a
cloak to hide its inability to pay the debt and prima facie respondent has established
that plea putforward by way of defence in the statement of objections is a bonafide
plea. In that view of the matter, point No. (2) formulated herein has to be answered in
favour of respondent and against petitioner.
27. In view of the fact that arbitration proceedings are pending between respondent
-company and the developer M/s Era Land Marks India Private Limited, New Delhi,
petitioner would be at liberty to work out its remedies after conclusion of arbitration
proceedings and liberty is reserved to the petitioner in this regard.
28. For the reasons aforestated, Company petition is hereby dismissed. Parties are
directed to bear their respective costs.
———
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Esteem v. Upkar Developers (India) Pvt. Ltd.

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Esteem v. Upkar Developers (India) Pvt. Ltd.

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SCC Online Web Edition, © 2022 EBC Publishing Pvt. Ltd.

Page 1 Thursday, April 21, 2022

CO.P. No. 211/2011

Esteem v. Upkar Developers (India) Pvt. Ltd.

2013 SCC OnLine Kar 5069

(BEFORE ARAVIND KUMAR, J.)

Esteem Estate Represented by

TRADERS P. LTD. v. A.C.K. KRISHNASWAMI:

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