1999-(098)-COMPCAS -0755 -KAR Companies Act Judgements

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1999-(098)-COMPCAS -0755 -KAR

MANGANESE ORE (INDIA) LTD. v. SANDUR MANGANESE AND IRON ORES LTD.

Company Petition No. 168 of 1998, decided on March 26, 1999.

IN THE KARNATAKA HIGH COURT

M/s. Sundaraswamy, Ramdas and Anand for the petitioner.

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Vivek Chandy for the respondent.

JUDGMENT

M. F. SALDANHA J. – This is a case wherein the petitioners have alleged that the respondents are indebted to them to a sub-stantial extent and that despite various demands including through a statutory notice the amount is still outstanding and that consequently, the petitioners are justified in applying for the winding up of the respondent-company principally on the ground that it is incapable of paying its debts. Briefly stated, in paragraph 14 of the petition, the petitioners allege that an amount of Rs. 43,23,504 was the outstanding debt and it is on this basis that they have presented this petition. The respondents have appeared through their learned counsel and they have challenged the maintainability of this petition principally on two grounds, the first being that the service of statutory notice in the manner prescribed under the Companies Act is a condition precedent for the presentation of a petition for winding up or more importantly, for the grant of the reliefs asked for as the presumption of commercial insolvency flows from non-compliance with the provisions of the statutory notice and, secondly, on the ground that there are certain serious defects in the pleadings. A third point was also argued, namely, that there is a discrepancy with regard to the actual amount due as different figures have been set out at different times and that consequently, if there is uncertainty with regard to this important head, the petition itself is liable to fail because the court would not be in a position to hold that a prescribed amount constituted the unpaid liability.

I shall dispose of the third objection first because it emanates from the contention canvassed by the respondents’ learned counsel that there has to be a level of certainty with regard to the outstanding debt and he has placed reliance on a decision reported in Tube Investments of India Ltd. v. Rim and Accessories (P.) Ltd. [1990] 3 Comp LJ 322 (Mad). He has drawn my attention to the fact that as often happens, various figures have been set out in the correspondence and in the calculations and he contends that there is no definite manner in which this court will be able to hold that any of these figures truly represent the correct state of affairs and that consequently, the court would have to conclude that it is impossible to quantify the debt exactly in which case the petition would have to fail. The petitioners’ learned counsel has drawn my attention to the decision of the Supreme Court in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries (P.) Ltd, AIR 1971 SC 2600; [1972] 42 Comp Cas 125, wherein, the Supreme Court at para. 21 has very clearly held that even if the court has to adopt a sifting process, in order to arrive at a figure which represents the undisputed debt, merely because there is some discrepancy or variation in respect of some of the other figures, that is no ground on which the petition should fail. He has also drawn my attention to an earlier decision of this court in Hegde and Golay Ltd. v. State Bank of India ILR 1987 Kar 2673 wherein, at para. 28 once again the court has gone into the aspect of whether a petition would still be maintainable if there is some dispute with regard to the precise amount due and specifically at para. 21, the court has concluded that even if through a process of elimination a sub-stantial part of the debt is established the cause of action would still survive.

In fairness to the respondents’ learned counsel, I must concede that normally a court would expect the petition to be very clear and very exact with regard to the correct quantum of the debt because this is not a civil suit and the court does not embark upon the procedure of recording evidence and examining the documents and in this background, if there are variations, discrepancies or doubts, there may be situations in which a court would dismiss the petition outright on the ground that it would be necessary to reconcile the exact position in the course of a regular trial or enquiry. At the same time, the courts have taken cognisance of the attendant situation which is more akin to the realistic and practical view of the matter in so far as in the course of business transactions, there may be various additions, alterations and the like over a period of time and, therefore it would be open in a given situation for the respondent to demonstrate to the court that the outstanding pleaded is not the correct one. The typical situation is where a payment has been made and which has not been accounted for or reflected and where certain credits have got to be adjusted and this is a matter of simple mathematics and to my mind would not be fatal to the petitioner. All that the court has, therefore, got to adopt is a simple process of reconciliation and if through such a process it is possible to quantify the outstanding, then the petition would still survive. In the present case, I have looked at the nature of the objection pleaded under this head and I do not find any real difficulty in being able to quantify the exact and correct outstanding as per the record. This objection, therefore, does not survive

With regard to the principal objection canvassed namely, that the statutory notice was not addressed to the registered office and that it does not conform to the legal requirements, the respondents’ learned. counsel drew my attention to the decisions in N. L. Mehta Cinema Enterprises (P.) Ltd. v. Pravinchandra P. Mehta [1991] 70 Comp Cas 31 (Bom) and Dytron (India) Ltd., In re [1990] 69 Comp Cas 757; [1993] 1 Comp LJ 200 (Cal) in support of his contention that admittedly, in the present instance the statutory notice not having been addressed to the registered office and delivered there, it is a fatal infirmity. These two cases are only representative because his contention, was that this has been the consistent view whenever such a point has been pleaded and his submission was that the principal reason for it is because the deeming fiction which works heavily against the respondent once the statutory notice has been served and the period of twenty-one days elapses and noncompliance is established, is entirely based on the assumption that the registered office of the company has received due notice. Also, what he submitted was that these provisions are mandatory which presupposes that the rule of strict compliance will apply and he also contended that if there is any laxity as far as this aspect of enforcement is concerned, it could lead to very dangerous consequences in so far as mischievously a notice may be served on an office of the company other than the registered office and if for any reason it does not come to the notice of the registered office in time or if there is delay in compliance, the company would have to face the very embarassing situation of a winding, up proceeding in the High Court. Effectively, what was pointed out to.,me was that there is good reason why the courts have consistently held that non-service of statutory notice on the registered office is fatal to a welding up petition and he submitted that the only remedy available to the petitioner is to withdraw the petition and comply with the provisions of law.

As against this position, Mr. Naganand, learned counsel who represents the petitioners, submitted that the petitioners have acted in good faith because at all times they were dealing with the office of the respondents to which the registered notice was addressed. He submits that this office is not a branch office but that it is an office of the company from where considerable administrative functions are handled and that the petitioners were under the bona fide impression that this was the correct office to which a statutory notice was required to be addressed. The second limb of his argument is that the notice has in fact reached the registered office of the company because the company has acted on it and the company’s learned counsel in response to the notice has appeared before this court and he, therefore, contended that this is a case where the principle of sub-stantial compliance would be applicable. He, thereafter, advanced another submission, namely, that out of abundant caution the petitioners have addressed a subsequent notice to the registered office of the respondent-company and that, therefore, this court can take note of the fact that even if the respondents insist on technical compliance, this has been duly met. As regards this last argument, Mr. Chandy submitted that there may be other situations in which a court would permit corrective steps but his contention was that the statutory notice is more or less on par with notice under section 80 of the Code of Civil Procedure, 1908, or in other words, notice that is to precede the litigation and he submitted that it would be a dangerous precedent if the court were to permit a virtual mandatory obligation, namely, the need to give prior notice to be bypassed on the ground that the notice was sent after the litigation was commenced. Elaborating on this argument, Mr. Chandy submitted that the spirit behind the requirement of prior notice emanates from the fact that it is intended to forewarn the party of the intending consequences if the case is to be taken before a judicial forum and to thereby forestall a possible litigation by affording the party the opportunity of taking corrective action. Learned counsel submitted that all of this will be completely frustrated if a party is allowed to first approach the court and then serve the notice because the notice itself becomes redundant and is, therefore, of no consequence. Concentrating on the sphere relating to the corporate sector, he pointed out to me that the mere filing of a winding up petition has very adverse consequences on the respondent-company and that is one of the reasons why a statutory notice followed by a time gap of twenty-one days is prescribed by law and he submitted, therefore, that under no circumstances should the court uphold the plea that the subsequent notice cures the earlier impediment.

As far as this aspect of the case goes, I need to point out that the sub-mission canvassed on behalf of the respondents will have to be upheld. I am conscious of the fact that the doctrine of curability applies in several situations and even in the strict field of criminal law, the Code of Criminal Procedure, 1973, admits a situation whereby many an irregularity can be regularised and, therefore, does not vitiate the proceeding. Those parallels cannot hold good as far as the present situation is concerned because where the law postulates a specific procedure, non-observance of that procedure would ipso facto vitiate the proceeding and if that is the position, the litigation would be stillborn or non est and incapable of being cured, rectified or revived. The concept of prior notice is required to be upheld by virtue of the principle of strict compliance as regards this aspect. Prior and subsequent are contradictory terms and are not capable of being reconciled. It would be very clear that if a party approaches the court without waiting for the period of twenty-one days to elapse, the petition would have to be dismissed on the ground of prematurity and it would not be open to the petitioners to contend that the court should allow the party to keep it pending and treat it as having been filed at a later date merely because even if the period of twenty-one days had elapsed, there was no compliance. Under these circumstances, the defence pleaded that by virtue of the service of the second notice during the pendency of these proceedings, the earlier infirmity is cured or obliterated cannot be upheld.

There is, however, one other aspect of the matter which has somehow not been considered in any of the earlier decisions. It is true that in numerous cases, the courts have upheld the contention that non-service of notice on the registered office of the company is fatal but the aspect of sub-stantial compliance has really not been examined in depth. Whereas the objective is to ensure that the notice is served on the registered office of the company which is the nerve centre for a variety of reasons, the question arises as to whether in that small category of cases where the notice is served in good faith on an office that is sufficiently large and sufficiently important and where administrative functions are carried out and from where the notice is bound to be forthwith transmitted to the registered office, it could be held that there is sub-stantial compliance with the requirements. What effectively happens in such a situation is that notice has been given to the company, the notice has reached one of its important administrative centres since it has been transmitted to the registered office from there, it would really be a case of service on the registered office through another office. I do not for a minute propose to defend such dubious procedures because there is always the possibility of the notice not being transmitted to the registered office but the greater danger is the fact that during the intervening time period due to delays in transmission, communication, etc., the company loses the benefit of the twenty-one days grace period. Consequently, under normal circumstances the court would always uphold the requirement of service on the registered office directly. There is, however, a microscopically small number of cases such as the present one where the facts indicate that the petitioners acting in good faith could genuinely have formed the impression that the office to which they addressed the notice was the registered head office. Also, a court would be quick to ascertain as to whether the notice remained there or whether it got lost or whether it was transmitted to the registered head office and acted upon. If the answer to the last question is in the affirmative, and the court is satisfied about the bona fides of the petitioners and the fact that there is sub-stantial compliance with the procedural requirements, then alone could it be regarded as a sub-stantial compliance. The reason for it is because the two concepts of sub-stantial compliance and strict compliance on these special facts would virtually merge and, therefore, the breach would not be a fatal one. I hasten to add, however, that the courts would be very slow in permitting such a situation to hold good and one of the valid reasons for it would be that it is of equal consequence that the court should not be hypertechnical by forcing the petitioners to withdraw the petition, serve the notice and reapproach the court after a few weeks thereby multiplying the number of company petitions that the court has to handle. In the present situation, to my mind, the fact that the notice was served on the administrative office which the petitioners say in their opinion passed off as the registered head office and the fact that the notice was transmitted to the registered head office without any time lag are circumstances that could save the present petition.

There is one other procedural head that was furiously debated by the petitioners’ learned counsel, namely, the fact that the pleadings are not strictly in order. Relying on the decision in Gaya Textiles Pvt. Ltd. v. Star Textile Engineering Works Ltd., AIR 1968 Cal 388 and Mool Chand Wahi v. National Paints (P.) Ltd. [1986] 60 Comp Cas 402 (P&H), the respondents’ learned counsel submitted that the verification is not in strict compliance with the requirements and that the affidavit is not in accordance with Form No. 3 and rule 18B of the Companies (Court) Rules. While Mr. Naganand contended that the affidavit is in compliance with the rules and that the verification of the exhibits was not required to be separately done because they are referred to in the body of the petition and are covered by the affidavit, I need to observe that there is again considerable substance in the objection canvassed. It has unfortunately become the order of the day particularly in our High Court to resort to several shortcuts and when it comes to a question of drafting of pleadings and presentation of the case papers, to again short circuit the requirements of the rules. These, however, are not so gross in the present instance nor do they constitute such serious breaches as would justify dismissal of the petition on these grounds nor for that matter would it justify a court refusing to look at certain parts of the pleadings of the petitions merely because of these blemishes which I would only term as minor irregularities. Suffice it to say, however, that I would like to see the Bar and the office of this court pay more attention to these aspects because laxity of this type is certainly not in order, while in the present petition I hold that this is not a good enough ground to dismiss the petition, at the same time it is a situation which the court far from approves of.

Mr. Naganand advanced certain submissions with regard to the merits of the case and he relied on the decisions in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries Pvt. Ltd., AIR 1971 SC 2600; [1972] 42 Comp Cas 125 and Hegde and Golay Ltd. v. State Bank of India [1987] ILR Kar 2673. Though Mr. Chandy has dealt with these arguments, I refrain from going into them for only one reason, namely, that the respondents had filed a short reply wherein they had canvassed what they stated were certain preliminary objections on points of law and Mr. Chandy submitted that in the respondents respectful submission they genuinely believe that these preliminary objections were sub-stantial ones which were bound to be upheld and that was why the respondents have not filed their reply on the merits. While such a procedure is permissible, I have pointed out to the respondents’ learned counsel that it may be a risky procedure because a situation could arise where the preliminary objections are overruled or do not succeed in which case, the respondents would be left virtually defenseless. It was at this stage that he advanced the sub-mission that if for any reason the court were to hold against the respondents on the preliminary objections, they be permitted to file their reply on the merits. I have taken note of the fact that the preliminary objections are neither baseless nor are they frivolous and having regard to that position, I do not propose to refuse the respondents the opportunity of filing their objections on the merits which is why I refrain from dealing with the submissions which learned counsel advanced under the last head because the stage for that is yet to come after the objections are filed.

Since this court is effectively dealing with situations that often arise before the company courts, I need to deal with one more familiar situation, namely, that even in those cases where the petitioners take the trouble to check up from the office of the Registrar or from other reliable material the address of the registered office, situations arise whereby this information turns out to be incorrect or outdated, the classical one being where the registered office has been shifted and the change has not been intimated to the Registrar. The question arise whether in such situations because of the physical fact that the statutory notice has been addressed to an office of the company that is not or no longer is the registered office, the petitioners should be penalised and made to withdraw the petition and refile it. Again, this is a gray area but that is precisely the reason why this court has laid down the aspect of good faith and bona fides as opposed to a mischievous situation where the notice is deliberately addressed to a quarter where it would not come to the notice of the company as also the fact that if there are faults or if there are clandestine changes the company should not be allowed to benefit therefrom and that is the precise reason why the court would still uphold the maintainability of the petition on the ground of sub-stantial compliance.

In the light of the aforesaid findings, the preliminary objections do not survive and are overruled. The respondents are given four weeks’ time to file their objections and to furnish a copy thereof to the petitioners’ learned counsel. The petition to be relisted for admission on June 16, 1999, when learned counsel on both sides will be heard on the merits on the question of admission.

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