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M/s. Texon UK Ltd. (M/S.) v/s Agra Leather Board Pvt. Ltd.

    CP No. 63 of 1999

    Decided On, 24 March 2005

    At, High Court of Delhi

    By, THE HONOURABLE MR. JUSTICE A.K. SIKRI

    For the Petitioner: Sanjeev Sachdeva, Vibhav Srivastava, Advocates. For the Respondent: Rajiv Shakdhar, Sanjeev Kumar, Advocates.



Judgment Text

A.K. Sikri, J.

1. The petitioner alleges that the respondent company is indebted to it in the sum equivalent of Pound Sterling 70,737.15 along with interest calculated at the rate of 18% P.A. thereby making a total of Pound Sterling 1,02,568.65 which is equivalent to Indian Rs. 72,11,601-78 p. The exchange rate prevailing at the time of filing of the petition, as per the petitioner, was 1/- equal to Rs. 70.31. The petitioner avers that in spite of admitting this liability and undertaking to pay the amount, the respondent has failed to make the payment even when statutory notice was served and, therefore, present petition under Sections 433(e) and 434 of the Companies Act is filed seeking winding up of the respondent company.

2. The averments made in the petition are:

The petitioner is a company incorporated under the laws of England and is in the business of manufacture and export of high class shoe materials and other allied goods to countries all over the world. The respondent approached the petitioner for purchase of goods on credit which were supplied and delivered on various dates against bills of exchange duly accepted by the respondent. On various occasions the respondent company promised to make the payment of the entire amount due and payable but failed to clear the admitted dues. Memorandum of Understanding (MOU) dated 24.10.1997 was signed between the parties as per which respondent acknowledged its debt and requested the petitioner to accept return of some allegedly ‘slow moving stock’ of Pound Sterling 10,000. To maintain a good business relation, the petitioner agreed to accept the goods provided they were sent by 31st December, 1997. MOU further provided that respondent shall make the payment of balance amount within a period of 24 months commencing January, 1998 as per the following schedule:

January 1998 to March, 1998 Pound 1,500 per month; April, 1998 to June, 1998 Pound 2,500 per month; July, 1998 to December, 1999 Pound 2,792 per month. The respondent as per the aforesaid clauses of the MOU remitted 1500 on 27.3.1998. However, it failed to clear the balance amount of 70,737.15 and also failed to return slow moving stock worth 10,000.

3. Legal notice dated 2.6.1998 was accordingly sent to the respondent calling upon to make payment of aforesaid admitted amount along with interest @ 18% p.a. within 21 days. In reply dated 7.7.1998 sent by the respondent, the respondent admitted having entered into the MOU and also that part payment was made but tried to wriggle out its liability by alleging that agreement was not legally binding. This led the petitioner to file the present petition.

4. The respondent company has contested the petition on the ground that there is no debt, either in law and on facts, payable by the respondent to the petitioner, much less, an admission of debt, as alleged by the petitioner. It is also stated that the petitioner has failed to disclose the complete and correct facts in the petition. According to the respondent the petitioner who was interested in setting up, in collaboration with the respondent, an Export Promotion Unit in the Export Promotion Zone at Tabaram in Chennai (Tamil Nadu), entered into three Agreements, particulars whereof are as under:

(a) The Co-operation Agreement dated 3rd November, 1993;

(b) An Agency Agreement dated 28th May, 1993; and

(c) A registered user agreement dated 28th May, 1993.

5. Under these agreements, the petitioner agreed to supply machinery, raw material required for manufacture of shoe components and the technical knowhow for conversion of raw material into a final product i.e. shoe components. Apart from the above, under the registered user agreement, the petitioner permitted the respondent to use its trade mark. Under the co-operation agreement dated 3rd November, 1993 the respondent was obliged to source the raw material required for manufacture of shoe components exclusively from the petitioner. The respondent was prohibited from purchase of raw material from any third party except with a prior written consent of the petitioner. Reliance in this regard is placed on Clauses 6.1 to 6.3, 7.1. and 7.2 of the Co-operation Agreement dated 3rd November, 1993.

6. The aforesaid agreements were accorded approval by Reserve Bank of India vide their letter dated 30th August, 1994. Consequently, a supplementary agreement was executed between the parties on 2nd December, 1994. During the course of the implementation of the aforesaid agreements, the petitioner committed several breaches which broadly fell under the following categories.

(i) Poor quality and/or sub-standard raw material supplied.

(ii) Over-invoicing/over-charging.

(iii) Supplies effected without requisitions from the respondent.

(iv) Delivery of consignment contrary to the agreement with respondent. The consignments of raw material were despatched by air while the respondent required them to be dispatched by the sea as the latter mode of delivery was much cheaper.

(v) Supplies of raw material made contrary to specifications.

(vi) Frequent interruption of supplies.

7. These breaches were a subject matter of correspondence between the petitioner and the respondent, some of which are appended to the reply being letters/faxes dated 3.12.1996, 2.3.1996, 21.3.1996, 16.12.1996, 25.11.1997, 25.2.1998 and 26.2.1998 and letters/faxes dated 6.2.1996, 16.2.1996, 22.10.1997, 10.11.1997, 2.1.1998, 26.2.1998 and 6.4.1998.

8. The consequent result of the breaches committed by the petitioner was that disputes arose between the parties. Resultantly, the petitioner, who was interested in continuing its presence in the Indian Market without seeking a fresh Reserve Bank of India approval, decided to enter into a new arrangement and/or agreement with the respondent. The said new arrangement was as follows:

(a) that the existing business would be conducted through a new company incorporated in India by the name of Gar Tenon Footwear Ltd. (GTFC);

(b) that GTFC would have an equity capital of Rs. 15,00,000/- which would be brought in by Garreth, the Chairman of respondent. Mr. G.P. Seth has as a matter of record brought in a total of Rs. 14,15,000/- and the balance Rs. 85,000/- was kept available by Shri G.P. Sethi for investment as equity at the behest of the Board of Directors of GTFC;

(c) that respondent would loan machinery received from petitioner to GTFC;

(d) that respondent would permit GTFC to use the premises on which the above referred machinery was affixed at a monthly rent of Rs. 15,000/- as against the market rent of approximately Rs. 55,000/- per month;

(e) that GTFC would remit a sum equivalent in Pound Sterling to respondent as per the agreed schedule out of the profits it earned which, in turn, would be remitted to Texon Ltd. i.e. the petitioner;

(f) that Mr. G.P. Seth, Chairman of respondent would be the Chairman of GTFC;

(g) that Texon would nominate their representative Mr. Brian Peart on the Board of Directors of GTFC so as to ensure an optimum production and sale of its product which would ensure sufficient funds for GTFC’s own purposes and remittance to Texon. In this regard, the respondent craves leave to rely upon a business advertisements dated 12th October, 1997 and 18th November, 1997 issued by the petitioner and GTFC respectively. The copies of advertisements dated 12th October, 1997 and 18th November, 1997 are annexed hereto;

(h) that respondent would scale down the oustanding balances in its books of accounts by making an immediate down payment of Pound 36,000. A sum the respondent remitted in January, 1998. The rationale and reasoning which prompted the petitioner to evolve the new arrangement/agreement were largely three-fold;

(i) the above arrangement was arrived with an understanding that Texon would by ensuring the success and/or profitability of the new company (i.e. GTFC) be able to earn the sums allegedly agreed to be remitted and do away with the cross claims of the respondent;

(ii) it would enable Texon a continuity of business without availing fresh RBI approval; and

(iii) it would ensure its continued presence in the shoe component market in India and prevent the entry of its competitors in the international market which was an eventuality, it would have to face, in the event of break in business.

9. The underlining understanding between the parties was that the respondent would assist and collaborate in setting up a new company i.e. GTFC and that the monies to the petitioner would be paid out of the profits earned by the GTFC. The respondent fulfilled its part of the obligation by having its promoter director i.e. Mr. G.P. Seth, bringing in a substantial part of the equity i.e. Rs. 14.15 lakhs and permitting the use of machinery and land and building owned by the respondent. The intention of parties. is reflected in a fax dated 22nd October, 1997.

10. In these faxes, there is a clear discussion about promotion of new company and it is, inter alia, mentioned therein that business of the new company should be profitable to ensure that the schedules of repayment are complied with. Even these faxes mention the payment schedule and before stating the said schedule, this very clear stipulation is made in the following terms ALB debt repayment schedule based on the profits of GTFC. Thus according to the respondent clear understanding between the parties was that new company ‘GTFC’ would be set up; in setting up this company the respondent would assist and collaborate; and that the money would be paid to the petitioner only out of the profits of this company. Otherwise, according to the respondent, the goods supplied were of poor/sub-standard quality; there was over-invoicing/over-charging; supplies effected were without requisition from the respondent and supply of raw material was contrary to the specifications and, therefore, no amount as payable by the respondent.

11. Challenging the Minutes of Understanding dated 24.10.1997, as inadmissible, which according to the respondent cannot be relied upon, submission of the respondent is that it is an inchoate/incomplete document which cannot bind parties for the following reasons:

(a) It does not reflect the understanding and/or agreement arrived at between the petitioner and the respondent. The real and actual understanding between the parties is known only upon perusal of fax dated 22nd October, 1997 and letters dated 5th November, 1997, 10th November, 1997, 19th November, 1997 and taxes dated 2nd January, 1998 and 6th April, 1998 and bank statement of 1998.

(b) The said minutes of understanding were thus deliberately so drafted to include the new company i.e. GTFC as a party which, upon its incorporation, would act on the basis of the agreement between parties as reflected in fax dated 22nd October, 1997 and subsequent correspondence dated 10th November, 1997, 2nd January, 1998 and 6th April, 1998.

(c) GTFC was incorporated on 5th November, 1997. Thus on the date of the recording of the minutes of understanding i.e. 24th October, 1997, GTFC was not even born i.e. was not incorporated.

(d) Admittedly the first instalment of Pound Sterling 1500 (INR 100,000) was remitted out of the profits of GTFC.

12. For this respondent has relied upon faxes dated 2.1.1998 and 6.4.1998 which are filed as Annexure R-7 with the reply and bank statement of the respondent which is filed as Annexure R-8. Apart from contesting the petition on merits, the respondent has also raised objection to the maintainbility of the petition which is filed through Shri Pankaj Sachdeva as Power of Attorney holder. It is contended by the respondent that the petition is instituted, signed and verified by Shri Pankaj Sachdeva based on a Power of Attorney dated 31.3.1998, a perusal whereof would show that it is based on Board of Directors’ Resolution of the same date. However, the petition was not accompanied by the Resolution of the Board of Directors. After the objection was taken by the respondent, the petitioner along with rejoinder filed the Minutes of the Meeting of the Board of Directors dated 31.3.1998. But these minutes do not give the time at which the meeting was held; minutes have been certified as true by the Chairman whereas the same requires certification by the Secretary, signatory to the minutes apart from J.N. Flening, is one Mr. A.J. Siddons, whereas the minutes show the name of one J. Siddons as the Secretary. However, the Power of Attorney was required to be executed by the Directors. Another objection is stated that Power of Attorney is not stamped as per the Stamp Act. On the basis of the aforesaid averments in the reply, learned Counsel for the respondent submitted that the petition should be dismissed inasmuch as-

(a) Firstly, there is no admission of debt, instead respondent had cross claims.

(b) Secondly, the Minutes of Understanding dated 24th October, 1997 is inchoate and incomplete document. GTFC on the said date was not born i.e. not even incorporated.

(c) Third, the new arrangement and/or agreement i.e. that the monies would be paid to the petitioner out of the profits of GTFC is set out in fax dated 22nd October, 1997, 5th November, 1997, 10th November, 1997 and 19th November, 1997, fax dated 2nd January, 1998 and 6th April, 1998 and the bank statement of 1998. The said documents form part of the same transaction and have to be read along with the Minutes of Understanding dated 24th October, 1997 to arrive at the true import and effect of the said minutes of understanding dated 24th October, 1997. The respondent in his regard has relied upon the judgment of the Supreme Court in the case of S. Chhatanatha v. Central Bank of India reported as AIR 1965 SC 1856.

13. It was also contended that contemporaneous documentary evidence which is to be read along with Minutes of Understanding would show that the language of the minutes is not what it purports to be as it is contrary to the contemporaneous conduct of the parties and facts. The respondent in this regard relied upon the judgment in Balumal v. Venkata Chelapathi Rao, AIR 1955 Madras 78 and Chhutu v. Kayam Khan, AIR 1953 Bhopal 18. It is also contended that GTFC is a separate legal entity which ought to have been impleaded as party, even though it has common promoter i.e. Shri G.P. Seth. This is more so, given the fact that GTFC was run and managed by the petitioner along with one of the estranged sons of Sh. G.P. Seth, with the precise purpose of ensuring control over the business carried out by the petitioner in India. The respondent has also placed reliance upon the judgment of the Supreme Court in the case of Electronics Corporation of India v. Secretary, Revenue Department reported as VI (1999) SLT 187=1999 (4) SCC 45.

14. Therefore, according to the respondent there are bona fide disputes and the parties should be relegated to the Civil Suit to enable the respondent to substantiate its credible defence and respondent, in such suit, would be taking plea of a right to take off and limitation.

15. Learned Counsel for the petitioner on the other hand submitted that the aforesaid defence of the respondent was totally sham. There was admission of liability in view of clauses contained in MOU, execution whereof is accepted by the respondent. The ground of non-payment on the specious plea that it was to be paid from out of the profits of a new company is frivolous as there was no such understanding between the parties that the money would be paid to the petitioner out of the profits generated from the expected business of the new company. It was submitted that respondent had attempted to take the said defence in its letter dated 10.11.1997. It was categorically denied by the petitioner in its reply dated 19.11.1997.

16. It is, thereafter, that respondent acted on the said MOU and remitted one instalment as per the understanding. Learned Counsel for the petitioner also submitted that both the respondent company and the alleged new company are owned by the same persons. The Directors of the respondent company are:

(1) Mr. G.P. Seth, (2) Mr. Gaurav Seth, and (3) Mr. Utsav Seth.

17. The Directors of the new company are: (1) Mr. Utsav Seth and (2) Mr. G.P. Seth. This clearly shows that both the companies are owned by the same persons and as such the plea that the understanding was subject to the new company generating business and remitting amount which in turn would be paid is false and baseless.

18. Learned Counsel also pointed out that in January, 2003 the petitioner came to know that the respondent company with the intention to defeat the present petition has sold immovable property known as Gaur House, Nehru Nagar, Agra some time in March, 2002 and petitioner was, therefore, forced to move an application under Section 537 of the Companies Act for declaring the said sale as illegal. It was contended that in the reply filed by the respondent, sale to Mr. Manoj Kumar Goel for Rs. 48 lakhs was admitted but it has been stated that the property was mortgaged with M/s. Seth Ramji Dass and Sons Pvt. Ltd. vide an equitable mortgage and the fact is that the said mortgagee company is owned by Shri G.P. Seth and, therefore, entire transaction is shrouded in mystery. Thus the petitioner’s contention is that the defence raised is totally sham and, therefore, be rejected.

19. I have considered the respective submissions. The claim of the petitioner is based on supplies of goods made to the respondent through various invoices against bills of exchange duly accepted by the respondent company. The petition is founded on the MOU signed between the parties on 24.10.1997 whereby the respondent company promised to pay the amount in question to the petitioner as per the schedule indicated therein which has already been noted above. According to the petitioner, in furtherance of said MOU, one instalment of Pounds 1500 was also given on 27.3.1998 and, therefore, balance amount has to be paid in view of clear acknowledgement by the respondent in the said MOU. On the other hand respondent has given its own version and background under which MOU was arrived at and also endeavoured to give its own interpretation to the said MOU. This has already been taken note of above and need not be repeated. What is to be examined is as to whether this defence is bona fide and raises tradable issues which are required to be settled. According to the respondent even this MOU, which was read in its entirety, was not an absolute admission of the debt which was payable in all circumstances but there were many strings attached to it. No doubt, it states that a sum of 72,263 is payable by the respondent to the petitioner and how it is to be paid is also mentioned. However, this aspect cannot be read in isolation and consideration will have to be bestowed on the entire agreement. Many other things were also settled in the said agreement. Other clauses, relevant for our purposes, are as under:

'The ALB Agency Agreement-Premature termination of the ALB agency agreement in consideration of a new agreement with the new company GTFC-

The machinery on Loan to ALB. The machinery to be taken back from ALB and supplied to the new company on a ‘Loan Basis’ at today’s value with the option to purchase at depreciated price (in accordance with the arrangements set out in the original agreement with ALB). The Co-operation Agreement to terminate the Technical Knowhow Collaboration Agreement, together with the Registered user agreement, with ALB and new Texon UK Ltd. agreements to be made with the new company, GTFC.

(A letter is required from ALB’s Chairman for the termination/transfer of all three agreements)

Texon UK Ltd.

xxx xxx xxx

Marketing and Sales support, at international level, to be organised by joint efforts, and locally, Brian Peart to be in a position to oversee the new company’s operations and to create customer confidence.

Quarterly meetings to be held between Utsav Seth and Texon UK Ltd. management either in Leicester or Madras to monitor activities and plan for future growth.

This MOU forms the basis of an agreement and new contracts.'

20. It was thus agreed between the parties that there would be pre-mature termination of the ALB agency agreement in consideration of a new agreement with the new company proposed, namely, GTFC. It was also agreed, simultaneously, to terminate Technical knowhow, Collaboration agreement together with Registered user agreement with ALB and new Texon UK Ltd. agreements to be made with the new company, GTFC.

21. The petitioner company also agreed to provide marketing and sales support at international level as well as locality. It was noted that Mr. Brian Peart of the petitioner’s company was in a position to oversee the new company’s operation and to create customer confidence. Parties agreed that there would be frequent quarterly meetings between them to monitor activities and plan for future growth. It was specifically agreed that MOU would form the basis of an agreement and new contracts. This agreement is signed by three parties, namely, the petitioner, the respondent and also the proposed new company Gaur Taxon Footwear Components Pvt. Ltd. (GTFC) which had not even been incorporated by that date. Therefore, the plea of the respondent that MOU was one package containing various terms dependent on each other and the payment clause was conditional on fulfilment of various other terms requires serious consideration.

22. It would be of relevance to remark that the position taken by the respondent regarding this MOU has not surfaced in the reply to this company petition for the first time. The respondent had, in fact, explained its position vide reply dated July 7, 1998 in reply to notice dated 2.6.1998. In that reply the respondent pointed out various breaches on the part of the petitioner in making supplies. It also explained that when the respondent threatened to terminate the agreements, in order to ensure their continued presence in the Indian Shoe Market the petitioner and British United Shoe Machinery Ltd. agreed for new arrangement wherein various things were envisaged between the parties as stated in para 3(v) of the reply and in that background tripartite MOU dated 24.10.1997 was entered into between the petitioner, respondent and GTFC. It also explained that the clear understanding was that the money is to be paid to the petitioner from the profits earned from GTFC and when payment of Pound Sterling 1500 was made to the petitioner, it was done after the receipt of equivalent funds from GTFC.

23. It is also required to be noted that vide its fax dated 22.10.1997 i.e. even before entering into MOU, the respondent had clarified its position categorically stating that understanding between the parties while entering into the said MOU was that repayment schedule was based on the profits of GTFC. It was followed by another letter dated November 10, 1997, inter alia stating as under:

'Refer to the paragraph three of your letter relating to a MOU arrived between the concerned parties. We may add that the understanding arrived at for payment of old dues is based on a discussion with your commercial senior personnel that the new company has been formed on their advice to pursue the business with fresh zeal on profitable optimism in order to off-set part of the previous losses of GTC. The ALB has now agreed through the referred MOU on an understanding that the amount to be remitted out of the profits transferred to ALB fr

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om the new company each month. The responsibility of the success and profits are an the joint control of the new company with Mr. Utsav Seth and your Mr. Brian Peart. 24. Thus, insofar as the respondent is concerned, it took a particular position before signing of the MOU and stuck to it even after signing the MOU, explaining the circumstances under which the MOU was signed. It is not the case where the respondent is trying to explain its position much after signing MOU and thus trying to wriggle out of the so-called commitment made in the MOU with some afterthought plea. The aforesaid two documents, namely, fax dated 22.10.1997 just prior to the signing of the MOU and letter dated November 10, 1997 immediately after the said MOU will have definite bearing and would clearly indicate that plea taken now is not an afterthought plea. The respondent has placed on record further document from GTFC to indicate that payments were to be received from GTFC for onward transmission to the petitioner. 25. The respondent has also placed on record debit notes which were raised against certain supplies which were not up to the mark. According to the respondent it has suffered losses. There were claims and counter claims. Under these circumstances the parties decided that new company be incorporated and on its doing business profitably with joint efforts and active cooperation of the petitioner, the petitioner would be paid out of he profits earned by the new company. The respondent has also placed on record documents which show that the petitioner was associated with the incorporation of new company. It is also the plea of the respondent that no doubt the petitioner disputed the averment that payment to it was conditional upon or in any other way connected with the transfer of profits by GTFC to the respondent in its letter dated 19.11.1997, at the same time petitioner asked the respondent in the said letter to sign confirmatory statement enclosed with that which the respondent did not sign and which shows that parties were not at ad idem. Considering the aforesaid vital aspects of the case, I am of the view that respondent deserves an opportunity to prove its defence in appropriate proceedings and defence raised is not sham but bona fide. The matter needs to be adjudicated by means of proper trial where both the parties are given chance to produce their evidence. 26. As I am not inclined to exercise my discretionary jurisdiction, I have not gone into the issue as to whether this petition, filed by Mr. Pankaj Sachdeva, is properly filed. With these observatons, which are, of course, tentative, this petition is otherwise dismissed.
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