CLASS ACTION SUIT-INDIAN CONTEXT

The Indian civil law does not provide for class action case against the entity in case of recovery of damages or other relief as strictly available in UK and USA.

The Order I Rule 8 as set in the Civil Procedure Code, 1908, which appear to have some semblance of codification of the class action suit or representative suit reads as follows:

  1. One person may sue or defend on behalf of all in same interest. –

(1) Where there are numerous persons having the same interest in one suit, —

(a) one or more of such persons may, with the permission of the court, sue or be sued, or may defend such suit, on behalf of, or for the benefit of, all persons so interested;

(b) the court may direct that one or more of such persons may sue or be sued, or may defend such suit, on behalf of, or for the benefit of, all persons so interested.

(2) The court shall, in every case where a permission or direction is given under sub-rule (1), at the plaintiff’s expense, give notice of the institution of the suit to all persons so interested, either by personal service, or, where, by reason of the number of persons or any other cause, such service is not reasonably practicable, by public advertisement, as the court in each case may direct.

(3) Any person on whose behalf, or for whose benefit, a suit is instituted, or defended, under sub-rule (1), may apply to the court to be made a party to such suit.

(4) No part of the claim in any such suit shall be abandoned under sub-rule (1), and no such suit shall be withdrawn under sub-rule (3) of rule 1 of Order XXIII, and no agreement, compromise or satisfaction shall be recorded in any such suit under rule 3 of that Order, unless the court has given, at the plaintiff’s expenses notice to all persons so interested in the manner specified in sub-rule (2).

(5) Where any person suing or defending in any such suit does not proceed with due diligence in the suit or defence, the court may substitute in his place any other person having the same interest in the suit.
(6) A decree passed in a suit under this rule shall be binding on all persons on whose behalf, or for whose benefit, the suit is instituted, or defended, as the case may be.

Explanation: For the purpose of determining whether the persons who sue or are sued, or defend, have the same interest in one suit, it is not necessary to establish that such persons have the same cause of action as the persons on whose behalf, or for whose benefit, they sue or are sued, or defend the suit, as the case may be. 

In contra, the Rule 23 as set in the Federal Rule of Civil Procedure of USA with regard to class actions reads as follows:

Rule 23. Class Actions

(a) PREREQUISITES. One or more members of a class may sue or be sued as representative parties on behalf of all members only if:

(1) the class is so numerous that joinder of all members is impracticable;

(2) there are questions of law or fact common to the class;

(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and

(4) the representative parties will fairly and adequately protect the interests of the class.

 

(b) TYPES OF CLASS ACTIONS. A class action may be maintained if Rule 23(a) is satisfied and if:

(1) prosecuting separate actions by or against individual class members would create a risk of:

(A) inconsistent or varying adjudications with respect to individual class members that would establish incompatible standards of conduct for the party opposing the class; or

(B) adjudications with respect to individual class members that, as a practical matter, would be dispositive of the interests of the other members not parties to the individual adjudications or would substantially impair or impede their ability to protect their interests;

(2) the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole; or

(3) the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy. The matters pertinent to these findings include:

(A) the class members’ interests in individually controlling the prosecution or defense of separate actions;

(B) the extent and nature of any litigation concerning the controversy already begun by or against class members;

(C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; and

(D) the likely difficulties in managing a class action.

                  ……………………………………………

The Order I, Rule 8 of the CPC, 1908 appears to be rudimentary in apposition to Rule 23 of the Federal Rule of Civil Procedure of USA. Further, the section 9 as set in the Civil Procedure Code, 1908 reads as follows:

  1. Courts to try all civil suits unless barred.-The Courts shall (subject to the provisions herein contained) have jurisdiction to try all Suits of a civil nature excepting suits of which their cognizance is either expressly or impliedly barred.

Explanation 1.—As suit in which the right to property or to an office is contested is a suit of a civil nature, notwithstanding that such right may depend entirely on the decision of questions as to religious rites or ceremonies.

Explanation Il—For the purposes of this section, it is immaterial whether or not any fees are attached to the office referred to in Explanation I or whether or not such office is attached to a particular place.

Thus, any Indian Act, Rule and Regulations etc. which expressly or impliedly bars action under the CPC, 1908 cannot be taken as representative suit or class action suit vide Order I, Rule 8 of the CPC, 1908.

In case of Kesha Appliances P. Ltd. And Ors. vs Royal Holdings Services Ltd. And Ors the Hon’ble Bombay High Court (2006 (1) BomCR 545) held following:

  1. I am of the opinion that on plain and simple reading of section 15Y and 20Aof the Act all the cases arising out of the breach and Take Over Regulation must fall within the exclusive domain of SEBI and cannot be complained in the court of Law by virtue of express bar contained under section v of the SEBI Act. I am also of the further opinion that there is no doubt that there is a common law right in a share holder to apply for rectification of the share register even though it is not his own share in respect of which he is seeking rectification but still the said right if it flows from the provisions of Take Over Regulations then undoubtedly it would fall within the exclusive Jurisdiction of SEBI and not within the Jurisdiction of this court in view of the express bar contained under the aforesaid statue. I am of the further opinion that the enactment of the amendment of Take Over Regulation of Amending provisions of SEBI (Substantial Acquisition of Shares and Take Over) Second Amendment (Regulation 2002) w.e.f. 9.9.2002 by providing for the remedy under sub clause (c) and (d) of the Regulation 44 the board has been empowered to give effective relief of Rectification of Share Register by declaring cancellation of the Allotment and / or by directing the company not to give an effect to the transfer if they are found to be in contrary to the Take Over Regulation.

“       

In contra, the ex CJI A. M. Ahmadi in his declaration as witness citing the provision of Order I Rule 8 of the CPC, 1908 in case of M/s Satyam Computer Services, Ltd. before United States District Court Southern District of New York has declared following while representing M/s J. Sagar Associates in support of the motion of PWC:

  1. Therefore, the procedural Law in India would accommodate the plaintiffs having a common interest to sue in a single suit under Indian Law after obtaining the permission of the court. This requirement of permission is for the court to be satisfied that the carriage of proceedings is in right hands that can be trusted to protect the interest of the class they seek to represent. A judgment entered in such a representative action binds the members of the class as res judicata. The same appellate/review procedure that applies to an individual lawsuit applies to a judgement issued in a representative action.

         “

The Memorandum of Law submitted before United States District Court Southern District of New York  by the Defendant, Pricewaterhouse Coopers Private Limited  and Ors in Support of their Motion to Dismiss the Consolidated Class Action  as forum non conveniens extensively quotes from ex CJI,  Ahmadi declaration. The said Memorandum of Law quotes  following:

While the Second Circuit has held that the absence of a U.S.-style class action mechanism does not render an alternative forum inadequate, see Aguinda v. Texaco, Inc., 303 F.3d 470, 478 (2d Cir. 2002), India in fact has a class action procedure. A person who was injured by relying upon a defendant’s fraudulent statements may initiate a class action lawsuit on behalf of all those similarly situated with the permission of the Indian court. See Ahmadi Decl. ¶¶ 20-24 (citing Civil Procedure Code, 1908, Order I, Rule 8 (attached to the Declaration of Fraser L. Hunter, Jr. (“Hunter Decl.”) as Exhibit 1)); Declaration of Arvind P. Datar in Support of Mot. to Dismiss by Def. Satyam Computer Services Ltd. (“Datar Decl.”) ¶¶ 25-27, 29. The court will grant permission to proceed as a “class” provided that (1) the parties are “numerous,” (2) have the “same interest” in the litigation, (3) notice of the class action is given to persons sharing the same interest in the litigation as prescribed by Indian law. See Ahmadi Decl. ¶¶ 20- 21; Datar Decl. ¶¶ 26-27. As in the U.S., the outcome of the class action is binding on all class members. See Ahmadi Decl. ¶ 22; Datar Decl. ¶ 29.

 

Mr Sandeep Parekh visiting professor of law at the IIM Ahmedabad has declared the following in case of class action against M/s Satyam Computer Services, Ltd.  Before United States District Court Southern District of New York:

III. SUMMARY OF CONCLUSIONS

  1. To summarise the conclusions explained in detail below:
  2. Private parties have no right to sue to recover damages resulting from the Satyam fraud under Indian statutory or common law because the Indian civil courts have no power to hear disputes where, as in this case, SEBI is empowered to act (discussed at Section IV, paras. 12 to 23 infira);
  3. Satyam investors will not be able to use the representative action procedure to recover damages because Indian law bars their substantive claims in civil court and the representative action is only a procedural mechanism that cannot create any substantive rights (discussed at Section V, paras. 24 to 29 infra);

It is in this background the specific provision in form of Section 245 under the Companies Act, 2016 has been enacted to enable class action by shareholders in case of defraud by the company.

The Section 12 of the Consumer Protection Act, 1986 reads as follows:

  1. Manner in which complaint shall be made. —

(1) A complaint in relation to any goods sold or delivered or agreed to be sold or delivered or any service provided or agreed to be provided may be filed with a District Forum by—

(a) the consumer to whom such goods are sold or delivered or agreed to be sold or delivered or such service provided or agreed to be provided;

(b) any recognised consumer association whether the consumer to whom the goods sold or delivered or agreed to be sold or delivered or service provided or agreed to be provided is a member of such association or not;

(c) one or more consumers, where there are numerous consumers having the same interest, with the permission of the District Forum, on behalf of, or for the benefit of, all consumers so interested; or

(d) the Central or the State Government, as the case may be, either in its individual capacity or as a representative of interests of the consumers in general.

 …………………………..

The section 12 (c) of the said consumer act provides for class action with the permission of the District Forum. However, the section 12 (d) of the act enables the Central or the State government to act as parens patriae or as representative of the consumers in general. The Central government has filed as representative of consumer in general, in case of Union of India vs Nestle India Limited before the National Consumer Disputed Redressal Commission (CC No.-870 0f 2015) alleging that the “Maggi noodles” manufactured and sold by Nestle India Ltd are defective goods, as they contain excess quantity of lead and also contain MSG which is a health hazard and is not permissible.

The CPC, 1908 need to be amended in line with the USA Federal Rule 23 of Civil Procedure to provide for strict and transparent class action against defaulting entity.

Rajni Sinha,

Advocate, Bombay High Court

7738080174

FOREIGN ARBITRATION AWARD-FEMA

The Share Holder Agreement (SHA) between Indian entity and foreign entity in majority of cases of transfer of share to foreign entity provides for exit option for foreign investor, which may ex facie violate provision of FEMA, 1999. The foreign arbitration award requires remission of money to an entity outside India, it ex facie appear that RBI’s power under the FEMA, 1999 cannot be negated.

In Srm Exploration Pvt. Ltd. vs N & S & N Consultants S.R.O. , 2012, the Hon’ble Delhi High Court held following:

  1. We have perused the provisions of FEMA, 1999 Section 3 thereof prohibits dealing in or transferring of any foreign exchange save as otherwise provided therein or under the Rules & Regulations framed thereunder without general or special permission of RBI. We are unable to find any provision therein voiding the transactions in contravention thereof. We may mention that the predecessor legislation to FEMA namely FERA 1973 vide Section 47 prohibited entering into any contract or agreement directly or indirectly evading or avoiding any operation of the said Act or any provision thereof. However, Sub Section (3) thereof also provided that such prohibition shall not prevent legal proceedings being brought in India for recovery of a sum which apart from the provision of FERA would be due. However, the legislature while re-enacting the law on the subject has chosen to do away with such a provision. We are of the view that the same shows a legislative intent to not void the transaction even if in violation of the said Act. Thus, we are of the opinion that the plea of the appellant Company in this regard is without any force.

The RBI Circular No.-86 dated 9th January, 2014 issued under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 states following with regard to exit option of Foreign Investor:

………………………………………

  1. b) After the lock-in period, as applicable above, the non-resident investor exercising option/right shall be eligible to exit without any assured return, as under:

(i) In case of a listed company, the non-resident investor shall be eligible to exit at the market price prevailing at the recognised stock exchanges;

(ii) In case of unlisted company, the non-resident investor shall be eligible to exit from the investment in equity shares of the investee company at a price not exceeding that arrived at on the basis of Return on Equity (RoE) as per the latest audited balance sheet. Any agreement permitting return linked to equity as above shall not be treated as violation of FDI policy/FEMA Regulations.

………………………………..

In terms of above circular optionality clauses granting assured returns on FDI appears to be prohibited. It is doubtful whether the said circular would be applicable to cases where a foreign investor founds its claim in breach of contract. Plainly, if an investment is made on representations which are breached, the investor would be entitled to its remedies including in damages.

 The RBI Circular No.-4 dated 15th July, 2014 issued under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 amended certain provision of The RBI Circular No.-86 dated 9th January, 2014 with regard to exit option of Foreign Investor:

“                                                                                                  Annex 2

c.f. Annex to
A.P.(DIR Series) Circular No. 86 dated January 9, 2014

Earlier condition

Revised condition

Para 2(b) (ii) In case of unlisted company, the non-resident investor shall be eligible to exit from the investment in equity shares of the investee company at a price not exceeding that arrived at on the basis of Return on Equity (RoE) as per the latest audited balance sheet. Any agreement permitting return linked to equity as above shall not be treated as violation of FDI policy/FEMA Regulations.

Note: For the above purpose, RoE shall mean Profit After Tax / Net Worth; Net Worth would include all free reserves and paid up capital.

(iii) Investments in Compulsorily Convertible Debentures (CCDs) and Compulsorily Convertible Preference Shares (CCPS) of an investee company may be transferred at a price worked out as per any internationally accepted pricing methodology at the time of exit duly certified by a Chartered Accountant or a SEBI registered Merchant Banker. The guiding principle would be that the non-resident investor is not guaranteed any assured exit price at the time of making such investment/agreement and shall exit at the price prevailing at the time of exit, subject to lock-in period requirement, as applicable.

(ii) In case of an unlisted company, the non-resident investor shall be eligible to exit from the investment in equity shares, Compulsorily Convertible Debentures (CCDs) and Compulsorily Convertible Preference Shares (CCPS) of the investee company at a price not exceeding that arrived at as per any internationally accepted pricing methodology on arm’s length basis, duly certified by a Chartered Accountant or a SEBI registered Merchant Banker.

The guiding principle would be that the non-resident investor is not guaranteed any assured exit price at the time of making such investment/agreements and shall exit at the fair price computed as above at the time of exit, subject to lock-in period requirement, as applicable.


All the above provision of RBI under FEMA relates to the transfer of shares per se from foreign investor back to the Indian entity if same is under put option. However, in majority of SHA such transfer of share back to Indian Entity is under damages clause in case of breach of agreement. It is a fair commitment of Indian investee in the SHA in relation to an investment and a downside protection of an investment of foreign investor, rather than an assured return or exit price.

It can be appreciated, the transfer of share back to Indian investee through damages clause of SHA and its award through foreign arbitration appear to be intentional to bypass the RBI guidelines for assured exit price. This circumstances appear to violate common rule i.e. the rule which prohibits one to accomplish indirectly, what the law forbids doing directly.

In Venture Global Engineering v. Satyam Computer Services Ltd., the Hon’ble Supreme Court went by the shareholders’ agreement (SHA) which expressly provided that the laws in force in India including the Companies Act would apply. This was held to be in the nature of a non-obstante clause which “would override the entirety of the agreement including sub-section (b) which deals with the settlement of the dispute by arbitration.

In recent judgment of Hon’ble Delhi High Court in case of NTT DOCOMO INC vs Tata Sons Limited, it was held that:

  1. As far as the Award itself is concerned, the interpretation placed by the AT on the clauses of the SHA was consistent with the intention of the contracting parties and not opposed to any provision of Indian law. There is nothing in the SHA as interpreted by the Award that renders it void or voidable under the ICA or opposed to either the public policy of India or the fundamental policy of Indian law. The AT’s interpretation of the various provisions of the FEMA and the regulations thereunder have also not been shown to be improbable or perverse. What was invested by Docomo was US $ 2.5 billion and what it will receive in terms of the Award is only 50% of that amount. The Court finds that no ground under Section 48 of the Act is attracted to deny the enforcement of the Award.

In another recent judgment of Hon’ble Delhi High Court in case of Cruz City 1 Mauritius Holdings vs Unitech Limited it was held that:

  1. The reliance placed by Unitech on the RBI circulars dated 09.01.2014 and 14.07.2014 is also misplaced. In terms of RBI’s circular dated 09.01.2014 optionality clauses granting assured returns on FDI are proscribed. However, it is doubtful whether the said circular would be applicable to cases where a foreign investor founds its claim in breach of contract. Plainly, if an investment is made on representations which are breached, the investor would be entitled to its remedies including in damages. The aforesaid circulars proscribe assured return instruments brought in India under the guise of equity. However, in the present case, Cruz City is only seeking to enforce its obligations against Burley, an overseas entity.
  2. Even if it is accepted that the Keepwell Agreement was designed to induce Cruz City to make investments by offering assured returns, Unitech cannot escape its liability to Cruz City. Cruz City had invested in Kerrush on the assurances held out by Unitech and notwithstanding that Unitech may be liable to be proceeded against for violation of provisions of FEMA, the enforcement of the Award cannot be declined

 

The obvious parting comment can be that foreign arbitral award cannot be contested on the ground of FEMA, 1999 violation if the SHA do not stipulate same and the payment back to investor for transfer of share is set as damages under the SHA.

Rajni Sinha

Advocate, Bombay High Court

7738080174

Limitation in Winding Up Petition: Period and Defense

The legal position of limitation period in winding up petition is no more res Integra. The various High Courts has taken a view that if the debt itself was barred by general law of limitation, then the petition for winding up on account of that debt would be barred. The limitation period is 3 years as provided under the Limitation Act, 1963 for various type of transaction.

Principles on which the court acts in winding up petition are –

  1. The defense of the company is in good faith and one of substance;
  2. The defense is likely to succeed on point of law;
  3. The company adduces prima facie proof of the facts on which the defense depends’

(Madhusudan Gordhandas & Co vs Madhu Woollen Industries Pvt. Ltd, 1971 AIR 2600, 1972 SCR (2) 201)

At the stage of admission in a winding up petition under Section 433 of Companies Act, 1956, before deciding as to whether winding up proceedings should be initiated, the Court has to ascertain whether, inter alia, (1) the claim made by the creditor is barred by limitation or (2) whether it is legally enforceable. If the claim made by the creditor is, on the face of it, not one which can be enforced, it is unnecessary to examine whether the claim is genuine and whether the respondent has a bonafide and reasonable defence on merits.

CONDONATION OF DELAY:

Any application, other than an application under any of the provisions of Order XXI of the Code of Civil Procedure, 1908, may be admitted after the prescribed period, if the appellant or the applicant satisfies the Court that he had sufficient cause for not making the application within such limitation period. (Section 5 of the Limitation Act, 1963).

WINDING UP TIME LIMIT UNDER DISABILITY:

The period of limitation is subject to provisions of extension in case of disability, and the postponement in case of acknowledgment or part payment, of fraud or mistake. Otherwise after lapse of a fixed period of time, as prescribed under the Limitation Act, 1963 an action is not maintainable. The fraud is one of disability under the section 17 of the Limitation Act, 1963.

Fraud: As Disability

“Fraud” as is well known vitiates everything (Fraus omnia vitiate).  Fraud and justice never dwell together.

“Fraud” and collusion vitiate even the most solemn proceedings in any civilized system of jurisprudence. It is a concept descriptive of human conduct. Michael Levi likens a fraudster to Milton’s sorcerer, Comus, who exulted in his ability to, ‘wing me into the easy hearted man and trap him into snares’. It has been defined as an act of trickery or deceit. In Webster’s Third New International Dictionary “fraud” in equity has been defined as an act or omission to act or concealment by which one person obtains an advantage against conscience over another or which equity or public policy forbids as being prejudicial to another. In Black’s Legal Dictionary, “fraud” is defined as an intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or surrender a legal right; a false representation of a matter of fact whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury. In Concise Oxford Dictionary, it has been defined as criminal deception, use of false representation to gain unjust advantage; dishonest artifice or trick. According to Halsbury’s Laws of England, a representation is deemed to have been false, and therefore a misrepresentation, if it was at the material date false in substance and in fact.

Smt. Shrisht Dhawan vs M/S. Shaw Brothers 1991(AIR 1992 SC 1555)

Relied in:

Bhaurao Dagdu Paralkar vs State Of Maharashtra And Ors

(Appeal (civil) 5162-5167 of 2005 of Supreme Court)

As per the Commencement notification dated 12.09.2013 in terms of sub-section (3) of section1 of Companies Act, 2013 all the clauses and sections and provisions mentioned therein have commenced on 12.09.2013. The commencement of sections 447 (Sr. No.53 of said notification) has inter alia commenced on 12.09.2013.

The explanation clause to section 447 of Companies Act, 2013 defines ‘Fraud’ as follows:

Explanation.—For the purposes of this section—

 (i) “fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;

 (ii) “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled;

(iii) “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.

The section 17 of the Indian Contract Act, 1872 defines fraud as follows:

  1. ‘Fraud’ defined.—‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

(1). the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

(2)  the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent.

Explanation.—Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak or unless his silence, is, in itself, equivalent to speech.

 

The section 17(1)(a) and (b) of the Limitation Act, 1963 reads as follows:

  1. Effect of fraud or mistake.—

(1) Where, in the case of any suit or application for which a period of limitation is prescribed by this Act,—

(a) the suit or application is based upon the fraud of the defendant or respondent or his agent; or

(b) the knowledge of the right or title on which a suit or application is founded is concealed by the fraud of any such person as aforesaid; or

(c) the suit or application is for relief from the consequences of a mistake; or

(d) where any document necessary to establish the right of the plaintiff or applicant has been fraudulently concealed from him, the period of limitation shall not begin to run until plaintiff or applicant has discovered the fraud or the mistake or could, with reasonable diligence, have discovered it; or in the case of a concealed document, until the plaintiff or the applicant first had the means of producing the concealed document or compelling its production: Provided that nothing in this section shall enable any suit to be instituted or application to be made to recover or enforce any charge against, or set aside any transaction affecting, any property which—

……………………..

The point of limitation under Section 17(1)(a) & (b) of the Limitation Act, 1963  prescribes that statutory limitation period in case of fraud shall start when the petitioner got knowledge of the fraudulent reason for non-payment of dues.  In order to invoke the aid of Section 17(1)(b) of the Limitation Act the petitioners must establish that there has been fraud and that by such fraud they have been kept away from knowledge of their right.

Acknowledgement: As Disability:

The section 18 of the Limitation Act, 1963 states that where before the expiry of the prescribed period of limitation in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, “a fresh period of limitation shall be computed from the time when the acknowledgment was so signed”. In Tilak Ram Vs. Nathu, AIR (1967 SC, 935), the Hon’ble Supreme Court deciphered the following requirements to attract Section 18 of the Limitation Act:-

[i] an admission or acknowledgment;

[ii] such acknowledgment must be in respect of a liability regarding a property or right;

[iii] acknowledgment must be made before the expiry of limitation period

[iv] it should be in writing and signed by the party against whom such right is claimed.

Whenever a debtor acknowledges his liability and promises to pay the due amount on a future date and the creditor accepts such offer, the cause of action to take legal action for the recovery of such due amount stands suspended. It is only if the debtor fails to honour his promise to make payment on the consented date that the cause of action will arise afresh or revive in favour of the creditor.

COMMON DEFENSE BY DEFENDANT COMPANY:

  1. Plea of defect in delivered goods and services:

The most prevalent type of plea raised for non-payment of dues by Defendant Company in winding up proceedings is defect in delivered goods and services. Such plea by Defendant Company is without production of any document supporting their contention. This type of argument is generally raised after issuance of statutory notice for demand in terms of the section 434 of the Companies Act, 1956, compounded with the fact that, there is not even a whisper by the Defendant Company after the receipt of the consignment that goods delivered were of inferior quality contrary to the agreed terms and conditions. The fact of the matter is that all these issues are usually raised only after service of the statutory notice for winding up, which is ex-facie a coined excuse of the Defendant Company.

 

In Joti Prasad Bala Prasad Vs. ACT Developers Pvt. Ltd. (1990) 68 CC 601 (Delhi) the defence set up by the respondent company that the goods supplied were defective and not up to the mark; the Court had noted that this defence clearly appears to be an afterthought as the respondent has failed to prove that these defects were ever communicated to the petitioner; the so called defence was accordingly rejected as it was only to ward off the winding up petition.

  1. Defense of Running Account:

In case of a decision of the High Court of Delhi in Rishi Pal Gupta v. S.J. Knitting and Finishing Mills (P) Ltd., ( 1994 (1) Com. L.J. 343 (Delhi)) it was held that in a running account each and every entry in the books of account shall have to be proved. In the said decision, a learned Single Judge of the Delhi High Court has held that if the petition is based on the running account between the parties, and in the absence of positive proof regarding each and every entry in the books of account, the appropriate remedy is not winding up of petition but a suit.

In case of  Ashoka Agencies & Business Forms Ltd. ((1999) Vol.95 Company Cases page 172 ), the petition for winding up was filed against the respondent company on the ground of its failure to pay the balance of Rs.24,32,416.01 on a running account which was acknowledged by the said company by its communication dated 21.9.1992. The company raised defence, that the said communication was not a promise to pay and at the most, it was an acknowledgement of a time-barred debt. The Calcutta High Court on the facts of the said case held that in the light of the petitioner’s affidavit that there was continuous and running transactions; there could be no presumption that the acknowledgement was of a time-barred debt. The High Court of Calcutta citing the said reasons, ordered issuance of advertisement for winding up.

  1. Defense of bonafide Dispute:

Where the debt is bonafide disputed, a Petition for winding up is not an alternative to the Suit to recover the same. The Company court provides the opportunity to the defendant company to put forth their case so as to be convinced about the prima facie case of the winding up. The decisions rendered by the various High Courts has clearly put forth the argument that winding up petition is not a legitimate means of seeking to enforce payment of debt which is bonafide disputed by the company. If there is a bonafide dispute about a debt and the defense is substantial one, the Court would not order winding-up but the defense of the company should be in good faith and one of substance.

 

Rajni Sinha

Adviocate, Bombay High Court

7738080174