company petition to wind up the company for not discharging debt despite notice = Once the contract itself is rendered illegal, any claim based thereon would also be tainted. The debt claimed by the petitioner firm on the basis of the said contract cannot therefore be said to be a 'legally recoverable debt'. Section 433(e) of the Act of 1956 provides for a company being wound up by the Company Court if it is unable to pay its debts. Debts, in this context, would inevitably mean and constitute 'legally recoverable debts'. Once a debt is rendered unrecoverable owing to its illegal status, Section 433(e) of the Act of 1956 cannot be pressed into service for the winding up of a company on the ground that it did not pay such an illegal and unrecoverable debt.


THE HON'BLE SRI JUSTICE SANJAY KUMAR        

COMPANY PETITION NO.93 OF 2012      

28-01-2013

M/s.Jayanth Pharma Chem  

M/s.Kekule Pharma Ltd.,

<GIST:

>HEAD NOTE:  

Counsel for petitioner: Dr.P.Bhaskara Mohan

Counsel for respondent:Sri S.Ravi, learned senior counsel for Sri V.Kishore,
learned counsel for respondent.

?CASES REFERRED:    
  1) (1994) 2 Mah LJ 1715

ORDER:
        M/s.Jayanth Pharma Chem, Hyderabad, a registered partnership firm
represented by its Managing Partner, Smt.Rambathri Hema, filed this petition
under Sections 433(e) & (f), 434(1)(a) and 439 of the Companies Act, 1956 (for
brevity, 'the Act of 1956') r/w Rule 95 of the Companies (Court) Rules, 1959, to
wind up M/s.Kekule Pharma Ltd., Hyderabad, the respondent company.  
        It is the case of the petitioner firm that the respondent company entered
into a trade contract with it under letter dated 08.04.2010, whereby it agreed
to pay 1% on its net turnover (excluding taxes, duties, etc.) towards charges
for the services rendered by it to the company. These services allegedly
pertained to dealing with trade, import/export of pharmaceutical intermediaries,
chemicals and allied products/services. The petitioner firm claims that,
pursuant to the letter dated 08.04.2010, it had provided services to the
respondent company by procuring raw-materials and selling the products of the
company. These services were said to have been provided till 31.03.2011. The
respondent company, by letter dated 09.07.2011, terminated the service contract
with effect from 01.04.2011. According to the petitioner firm, the letter dated
09.07.2011 demonstrates that the respondent company admitted its liability to
pay service charges to it at the rate of 1% on the net turnover from April, 2010
to March, 2011. The petitioner firm alleges that the net turnover of the
respondent company for the financial year 2010-11 was Rs.48,24,56,839/- and its
servicing charges, at the rate of 1% thereof, came to Rs.48,24,568/-. Out of
this amount, a sum of Rs.17,94,000/- was said to have been paid by the
respondent company. As per the statement of account produced by the petitioner
firm, the respondent company was still due and liable to pay it a sum of
Rs.23,11,990.50 ps. as on 31.03.2011, with interest thereon. The petitioner firm
issued statutory notice dated 05.12.2011 under Section 434 of the Act of 1956
calling upon the respondent company to pay the said sum within three weeks.
Having received the said notice, the respondent company replied under letter
dated 18.01.2012 with a counter claim that the petitioner firm was due and
liable to pay it the sum of money specified therein. As the respondent company
did not pay the amount claimed by it, the petitioner firm filed the present
petition seeking its winding up, alleging that it was unable to pay its debts.
        Notice before Admission was ordered in the matter on 28.06.2012.
Thereupon, Sri V.Kishore, learned counsel, entered appearance for the respondent
company and filed a counter. Apart from other aspects raised therein on the
merits of the matter, the crucial issue highlighted in the counter is that three
out of the four partners of the petitioner firm, viz., Sri R.Muralidhar,
Smt.V.Srilakshmi and Dr.K.Sridhar, served as the whole time Technical Director,
Finance Director and Executive Director respectively of the respondent company
at the relevant point of time. They were stated to have worked for the
respondent company in that capacity during the financial year 2010-11. Pertinent
to note, the Managing Partner of the petitioner firm, Smt.Rambathri Hema, is the
wife of Sri R.Muralidhar, the whole time Technical Director of the respondent
company. The respondent company contended that the so-called contract entered
into by the petitioner firm and the respondent company, evidenced by the letter
dated 08.04.2010, was hit by Section 297 of the Act of 1956, as the consent of
the Central Government and the Board of Directors of the respondent company was
not obtained prior thereto.
        In her reply to this counter, Smt.Rambathri Hema, the Managing Partner of
the petitioner firm, did not deny the aforestated facts.
        Though Dr.P.Bhaskara Mohan, learned counsel for the petitioner firm, and
Sri S.Ravi, learned senior counsel representing Sri V.Kishore, learned counsel
for the respondent company, raised several issues touching upon the merits of
the case during the course of their arguments, this Court finds it unnecessary
to deal with or adjudicate upon the same.
        Once it is admitted that at the point of time the so-called contract was
entered into by the petitioner firm and the respondent company, three out of the
four partners of the petitioner firm were Directors in the respondent company
and the fourth partner was a near relative of one of such Directors, Section 297
of the Act of 1956 would come into play. The import of Section 297(1) is that a
company cannot enter into a contract for sale, purchase, supply of goods,
materials or services with a firm in which a Director or his relative is a
partner unless the consent of the Board of Directors of the company is sought
prior thereto. The proviso to Section 297(1) further states that in the case of
a company having a paid up share capital of not less than Rupees One Crore, no
such contract shall be entered into except with the previous approval of the
Central Government.
        In the present case, the issued, subscribed and paid up share capital of
the respondent company was Rs.15,00,00,000/- during the financial year 2010-11,
as is evident from its audited balance sheet. Therefore, not only was the prior
consent of the Board of Directors required but the previous approval of the
Central Government was also mandatory. Admittedly, both these requirements were
not complied with in so far as the subject contract is concerned.
        Dr.P.Bhaskara Mohan, learned counsel, fairly conceded that the
exclusionary clause in Section 297(2) of the Act of 1956 would have no
application to the case on hand. Sub-section (3) of Section 297 of the Act of
1956 permits the execution of a contract without obtaining the consent of the
Board, for goods, materials or services in excess of value of Rupees Five
Thousand but posits that the consent of the Board should be obtained at a
meeting within three months of the entering into the contract. Sub-section (4)
of Section 297 of the Act of 1956 mandates that the consent of the Board
required under the Section shall be by way of a resolution passed at a meeting
of the Board and not otherwise. Such consent must therefore be given before the
contract is entered into or within three months thereof. Sub-section (5) of
Section 297 of the Act of 1956 provides that in the event consent is not
accorded under the said Section anything done in pursuance of the contract would
be voidable at the option of the Board of Directors of the company.
        This being the legal environment, as three out of the four partners of the
petitioner firm were the directors of the respondent company and the fourth and
last partner was no other than the wife of one such Director, the very status of
the contract becomes a preliminary issue. Admittedly, the consent of the Board
of Directors of the respondent company was not obtained prior to the entering of
the contract and even if Section 297(3) of the Act of 1956 is to be relied on,
no consent was obtained from the Board within three months of the entering into
the contract. Further, as the paid up share capital of the respondent company is
far in excess of Rupees One Crore, the proviso to Section 297(1) of the Act of
1956 would be attracted and the previous approval of the Central Government
becomes essential to validate the contract. This being the case, Section 297(5)
of the Act of 1956 would not come to the rescue of this contract. Had it been a
case of mere failure to obtain the consent of the Board of Directors, the
petitioner firm may perhaps have relied upon Section 297(5) of the Act of 1956.
But in the light of the application of the proviso to Section 297(1) of the Act
of 1956 to the case on hand, the previous approval of the Central Government was
mandatory and in the absence thereof, the contract cannot be said to be voidable
at the option of the Board of Directors of the respondent company. It is
rendered void for want of compliance with the proviso to Section 297(1) of the
Act of 1956.
        Dr.P.Bhaskara Mohan, learned counsel, contended that failure to obtain the
previous approval of the Central Government would not render the contract void.
He relied upon Section 629-A of the Act of 1956 and argued that as no specific
penalty was provided for non-compliance with the proviso to Section 297(1), the
company and every officer of the company in default of such compliance would
only be punishable with fine. He contended that the status of the contract would
not be adversely affected by the mere fact that previous approval of the Central
Government was not obtained and such non-compliance would only entail penal
consequences in terms of Section 629-A of the Act of 1956. However, perusal of
Section 629-A demonstrates that in cases where such contravention is not
penalized elsewhere in the Act of 1956, the contravention of any provision of
the Act of 1956 or of any condition, limitation or restriction subject to which
any approval, sanction, consent, confirmation, recognition, direction or
exemption has been accorded, given or granted in relation to any matter, the
company and every officer of the company who is in default thereof would be
punishable with fine. The contravention, be it of any provision of the Act or of
any condition, limitation or restriction, which formed the basis of any approval
or sanction given or granted in relation to any matter, would constitute an
independent offence for which provision is made under Section 629-A, in the
event such contravention is not penalized elsewhere in the Act. This provision
does not have the effect of wiping out the illegality of the contravening
action. It is only supplementary in nature and visits penal consequences on the
offender. The explicit language used in Section 297(1) proviso that no such
contract as detailed in Section 297(1) 'shall' be entered into except with the
previous approval of the Central Government, in the event the paid-up share
capital of the company is not less than Rupees One Crore, puts it beyond doubt
that a contract executed in violation thereof has no sanctity in the eye of law.
This Court is not persuaded to read down the import of the word 'shall' used in
Section 297(1) proviso. In consequence, compliance therewith is mandatory.
        As such, this Court finds that the subject contract which forms the basis
for the claim put forth by the petitioner firm is in violation of the statute.
Once the contract itself is rendered illegal, any claim based thereon would also
be tainted. The debt claimed by the petitioner firm on the basis of the said
contract cannot therefore be said to be a 'legally recoverable debt'. Section
433(e) of the Act of 1956 provides for a company being wound up by the Company 
Court if it is unable to pay its debts. Debts, in this context, would inevitably
mean and constitute 'legally recoverable debts'. Once a debt is rendered
unrecoverable owing to its illegal status, Section 433(e) of the Act of 1956
cannot be pressed into service for the winding up of a company on the ground
that it did not pay such an illegal and unrecoverable debt.
In this context, reference may be made to the decision of the Bombay High Court
in DABHOLKAR ENTERPRISES v. PADMA ALLOY CASTINGS (P) LTD.1.
Therein, the Bombay            
High Court held that in a petition for winding up on the ground that the company
had not paid the debt of the petitioner in spite of notice under Section 434 of
the Act of 1956, the petitioner must establish that the debt alleged against the
company is a debt which is legally recoverable. It was further held that if the
remedy of the creditor was barred under any law it would render the debt
unrecoverable and the same could not be considered a 'debt' for the purpose of a
company petition for winding up under Section 434 of the Act of 1956.
        Viewed thus, the very foundation of this company petition stands
demolished as the debt claimed by the petitioner firm as due and payable by the
respondent company is rendered illegal owing to contravention of the proviso to
Section 297(1) of the Act of 1956. The company petition filed for winding up of
the respondent company on the basis of such a debt therefore does not warrant
consideration by this Court.
        The Company Petition is accordingly dismissed. Company Application No.724
of 2012 shall stand dismissed in consequence. In the circumstances, there shall
be no order as to costs.


____________________  
SANJAY KUMAR, J.  
28TH JANUARY, 2013

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