Sunday, 9 December 2018

Whether agreement will come into existence even if it is to be performed at future date?

Mr. Seervai contended that the said leave and licence agreements had not come into effect/existence. He based the submission on the fact that the agreements had been terminated prior to the commencement of the terms thereof.

10. The submission is not well founded. The agreements were executed by both the parties. The mere fact that they were to be performed at a later date cannot possibly lead to the conclusion that the agreements had not come into existence and that the parties were not bound by the terms thereof. There is a fundamental difference between an agreement coming into existence and the date for the performance thereof. Merely because obligations under an agreement are to be performed at a future date, it does not follow that the agreement has not come into existence upon the execution thereof or upon the terms and conditions thereof being agreed upon.

IN THE HIGH COURT OF BOMBAY

C.P. No. 898 of 2008

Decided On: 12.02.2009

 Corporate Management Council of India P. Ltd. Vs.  Lonza India P. Ltd.

Hon'ble Judges/Coram:
S.J. Vazifdar, J.

Citation: 2009(3) ALLMR 770


1. The petitioner has sought an order of winding up of the company, inter alia, on the ground that it is unable to pay its debts. According to the petitioner, the company is indebted to it in a sum of Rs. 7,58,52,000.

2. Two identical leave and licence agreements, both dated April 3, 2008, were entered into between the petitioner and the company. Under each of the agreements, the petitioner agreed to give and the company agreed to take on leave and licence basis, an office unit, belonging to the petitioner, admeasuring 3,500 sq. ft. together with three car parking spaces. The premises and the car parking spaces are in the same building "Solitaire". The terms and conditions of the agreements are identical.

3. Under Section IV, Clause 1 of each of the agreements, an aggregate sum of Rs. 10,53,500 was payable per month towards the use of the licensed premises, the furniture, fittings, equipment, etc., therein, and the car parking spaces in the compound of the building. Section IX, Clauses 5, 6 and 7 of the agreements read as under:

Section IX

5. This licence is granted for a fixed period of 60 months ending April 30, 2013. The first 36 months ending April 30, 2011, shall be a lock-in-period for both parties.

6. The liability of the licensee to pay the licence fee for the entire duration of the lock-in-period and notice period of this agreement is absolute and the same shall not be varied or reduced even if any item of the said furniture, fixture, fitting or equipment is damaged, destroyed or discarded.

7. If the licensee shall terminate this agreement prior to expiry of lock-in period or subsequent notice period then in that event the licensee shall be liable to pay to the licensor a sum equal to the balance period left of the lock-in period or notice period licence fee. The licensor shall be entitled to recover such amount from the security deposit.

4. The petitioners paid stamp duty of Rs. 50,100 in respect of each of the agreements. The company paid a sum of Rs. 5,00,000 as earnest money under each agreement.

5. The company by its letter dated April 16, 2008, informed the petitioner that the premises were too big for its needs; that the current changed business climate on account of slow down of the global economy had resulted in a change in its global strategy which had an impact on its proposed expansion plans in India and that it was therefore not in a position to give effect to the said agreements. The company terminated with immediate effect, the said agreements and called upon the petitioner to refund an amount of Rs. 5,00,000 paid under each of the agreements as earnest money.

6. The petitioner by its advocate's letter dated May 14, 2008, conveyed its acceptance of the termination ; stated that the company was liable to pay an aggregate amount of Rs. 7,58,52,000 being the licence fee for the balance term of the lock-in period under both the agreements and that the earnest money of Rs. 10,00,000 would be adjusted towards the said dues. The company was also called upon to pay Rs. 1,00,200 paid by the petitioner towards stamp duty. The company was called upon to pay the said sums of Rs. 7,58,52,000 and Rs. 1,00,200 within fifteen days.

7. The company by its advocate's letter dated May 23, 2008, did not deny the existence of the said agreements but contend that the same having been terminated prior to the commencement of the term of the licence and not during the lock-in period, it was not liable to pay the said sum of Rs. 7,58,52,000. The company agreed to adjust the amount paid by the petitioner towards stamp duty against the sum of Rs. 10,00,000 and called upon the petitioner to refund the balance amount of Rs. 8,99,800.

8. The petitioner through its advocate, served a statutory notice dated July 1, 2008, on the company. The further correspondence merely reiterates the rival contentions between the parties.

9. Mr. Seervai contended that the said leave and licence agreements had not come into effect/existence. He based the submission on the fact that the agreements had been terminated prior to the commencement of the terms thereof.

10. The submission is not well founded. The agreements were executed by both the parties. The mere fact that they were to be performed at a later date cannot possibly lead to the conclusion that the agreements had not come into existence and that the parties were not bound by the terms thereof. There is a fundamental difference between an agreement coming into existence and the date for the performance thereof. Merely because obligations under an agreement are to be performed at a future date, it does not follow that the agreement has not come into existence upon the execution thereof or upon the terms and conditions thereof being agreed upon.

11. Significantly, even the company advocate's letter dated April 16, 2008, did not suggest the same. The second paragraph of the letter which is contrary to Mr. Seervai's submission, reads thus:

As per the agreements, the term of the license would have commenced from May 1, 2008, upon us being put in possession of the premises at Solitaire 7 and 8.
12. The letter in fact admits the existence of the agreements. It correctly states that only the term of the licence would have commenced on May 1, 2008.

13. Mr. Seervai's reliance upon the company's e-mail message dated May 1, 2008 (exhibit 1 to the further affidavit filed on behalf of the company) is of little assistance to the company, in respect of the contention merely because it states that the license as contemplated under the agreements had not yet commenced.

14. I am unable therefore to accept this contention to be a bona fide defence.

15. Mr. Seervai then relied upon Section 55 of the Maharashtra Rent Control Act, 1999, which reads as under:

55. Tenancy agreement to be compulsorily registered.-(1) Notwithstanding anything contained in this Act or any other law for the time being in force, any agreement for leave and licence or letting of any premises, entered into between the landlord and the tenant or the licensee, as the case may be, after the commencement of this Act, shall be in writing and shall be registered under the Registration Act, 1908 (XVI of 1908).

(2) The responsibility of getting such agreement registered shall be on the landlord and in the absence of the written registered agreement, the contention of the tenant about the terms and conditions subject to which a premises have been given to him by the landlord on leave and licence or have been let out to him, shall prevail, unless proved otherwise.

(3) Any landlord who contravenes the provisions of this section shall, on conviction, be punished with imprisonment which may extend to three months or with fine not exceeding rupees five thousand or with both.

16. Mr. Seervai submitted that as the agreements have not been registered, the company's contention that they had not come into existence till the commencement of the licence period, must be accepted in view of Sub-section (2) of Section 55.

17. This submission must be rejected at least on two grounds. Firstly, the company cannot be permitted to take advantage of its own wrong. It is the company that terminated the agreement and expressly indicated that it would do nothing further in respect thereof. It is important to note that the termination by the letter dated April 16, 2008, was before the expiry of the period of four months within which the agreements could have been registered. It is not the company's contention that the petitioner had refused to register the agreements.

18. Secondly, and more important, is the fact that the reliance upon Section 55(2) in the facts of the present case, is entirely misconceived. Under Section 55(2) if the agreement is not registered "the contention of the tenant about the terms and conditions subject to which a premises have been given to him by the landlord on leave and licence or have been let out to him, shall prevail, unless proved otherwise". The term "contention" in Section 55(2) refers to contentions of fact and not of law. Construction of the terms and conditions of a contract are questions of law. A court cannot be bound by an erroneous construction of the contract.

19. In this case, there is no dispute between the parties as to the terms of the agreements. It is not the company's case that any terms other than those contained in the said leave and licence agreement were agreed upon between the parties. In other words, the submission was not based on the existence of an independent term. The first contention raised by Mr. Seervai was based on the construction of admitted terms. I have held this construction to be erroneous. There is nothing in Section 55 which remotely suggests that even an incorrect interpretation of an agreed/admitted term is binding on the licensor.

20. Mr. Seervai further submitted that even between May, 2008 and September, 2008, the prices had remained the same. Therefore, the petitioner ought to have mitigated the loss by entering into leave and licence agreements with other parties. To substantiate the contention that the prices were the same, Mr. Seervai relied upon paragraph 6 of a further affidavit filed on behalf of the company dated February 4, 2009, wherein it is alleged that the prevailing market rate in the months of April and May, 2008, was in the region of Rs. 275 to Rs. 295 per sq. ft. and the rent for the quarter July to September, 2008, also remained in the region of Rs. 275 per sq. ft. It is further stated that the company had "reliably learnt" that several leave and licence agreements had been executed for office spaces in the area, where the petitioner's premises were located.

21. I refused to adjourn the matter to permit the petitioner to file a reply to this affidavit though it was filed only a day before the hearing and instead directed Mr. Purohit to proceed on the basis of denials as I found that paragraph 6 of the said affidavit is of no assistance to the company.

22. Firstly, there are no particulars about the agreements referred to in paragraph 6 of the said affidavit. Even the source of the alleged reliable information is not disclosed. It is merely stated that several leave and licence agreements had been executed "in the area" where the petitioner's premises are located. It is not even suggested that the premises referred to therein are comparable to the said premises.

23. Further, it is important to note that there is not even a whisper regarding the terms of the alleged agreements referred to in paragraph 6 of the further affidavit. The most glaring omission in this regard pertains to the clause providing a lock-in period such as Clause VIII in the said leave and licence agreements.

24. Mr. Seervai also relied upon the said e-mail message dated May 1, 2008, as it called upon the petitioner to proceed with leasing his offices to other parties. Mr. Seervai submitted that the petitioner's claim is only in damages which as on date are not quantified and that there is nothing to indicate the quantum of damages.

25. Let me assume that the clause providing payment during the lock-in period is similar to a maximum liquidated damages clause. Even then, it will make little difference in the facts of the present case and in particular, considering the nature of the agreements.

26. The only manner in which damages in a leave and licence agreement can be mitigated is by actually letting out the premises again. A licensor may not necessarily want to let out the premises to another person.

27. The agreements of leave and licence cannot be equated with agreements for the sale of goods or properties. In an agreement for sale it is normally easy to ascertain the damages, if any. In the case of leave and licence agreements, it is not so. Whereas, a party may be willing to sell an asset to anyone, a party would be particular about the person with whom he enters into a leave and licence agreement. In an agreement for sale it would not normally matter who pays the consideration so long as it is paid or payment is secured. On the other hand, a party may understandably and justifiably insist on several terms in a leave and licence agreement other than the term as to the price/compensation. The choice of the licensee itself is of crucial importance to any licensor. The mere fact that a particular licensor offers a better price is not the sole consideration. The licensee may well refuse to enter into the agreement with a particular licensor for a variety of reasons, including his reputation, his financial capacity to honour the terms of the agreement throughout the tenure of the agreement and the purpose for which the premises are to be used. On the contrary, a licensor may well agree to a lower license fee for a particular licensee for a variety of very valid reasons including the licensees reputation. Even if the purpose is common for, e.g., commercial, the licensor may not agree to let the premises for certain types of commercial activities. Again, the other terms and conditions would play a significant part in a leave and license agreement. For example, a licensor may insist on a lock-in period as in this case. He may not agree to a short duration at all.

28. It is thus not always possible or easy to assess the loss in the case of a breach of a leave and licence agreement by the licensee. Indeed, for these reasons, it is not always necessary for a licensor to mitigate loss in the case of a breach of a leave and licence agreement by the licensee. Unlike in the case of a sale it would not always be permissible to compel a licensor to let the premises to another with a view to mitigating the loss.

29. There is nothing on record in the present case which even remotely indicates that similar agreements could have been entered into or that there were prospective licensees who were willing to enter into similar agreements. For instance, there is nothing to indicate that any other licensee was willing to accept all the terms and conditions of the said agreements including as to the lock-in period.

30. I will now speculate as far as I possibly can, in favour of the company. I will presume that the petitioner would be bound to mitigate the loss even by taking a calculated risk and even without insisting on all the clauses in the present leave and licence agreement including the clause as to the lock-in period. It is not the respondent's case that there is no difference in the price as of today.

31. Mr. Seervai's contention that the price immediately upon termination ought to be considered, is not well founded. A licensor understandably and necessarily would not enter into a leave and licence agreement with any party without ascertaining the suitability and reliability of a party and endeavouring to obtain terms desired by him. This cannot be done immediately. It would take time.

32. Thus, considering this fact also, the maximum I would be inclined to speculate in favour of the company at this stage is by assessing the loss at 50 per cent. This speculative exercise is only for the benefit of the company and only with a view to show some leniency in arriving at the quantum of deposit to be ordered.

33. It is important to note in the present case that the company refused to pay not only the amount due under the lock-in clause but even the difference between the rate stipulated in the contract and a rate which may be arrived at upon termination thereof by it. There is a blanket and an absolute refusal to pay any amount on the ground that the agreement had not come into existence. This contention has already been rejected.

34. It is not even the company's case that there is no difference in the rates. It is also pertinent to note that the petitioner has in fact invited offers from third parties albeit after the filing of this petition and after the matter had been argued on an earlier occasion, but had received no offers. The company has not attempted to establish that offers would be received. By an order dated January 23, 2009, I recorded that the petitioner was agreeable to the company procuring any offer from any third party to take the premises on leave and licence basis. The respondent did not avail of this offer.

35. Thus, in the facts and circumstances of this case, the petitioner's case cannot be rejected on the ground that it did not mitigate the loss or that the loss could have been mitigated.

36. Lastly, Mr. Seervai submitted that, in any event, the company is in a position to pay the said amount and therefore the petition is liable to be dismissed as it is an abuse of the process of law.

37. I am unable to agree. Once a court comes to the conclusion that there is no bona fide defence, it is not open to the company to state that in any event a petition for winding up ought not to be entertained as it is in a position to meet the petitioner's claim.

38. In Advent Corporation P. Ltd., In re [1969] 39 Comp Gas 463 (Bom), it was contended that if a company was not commercially insolvent, winding up on non-compliance with a statutory notice under Section 434(1)(a) must be held to be mala fide and the winding up petition should not be admitted. A learned single judge of this Court held as under (page 471):

The second contention of Mr. Bhabha, viz., that no winding up order should be made unless the company is shown to be commercially insolvent, even though it may have neglected to comply with a statutory notice under Section 434(1)(a) of the Companies Act, is not only unsupported by authority but must be rejected in the face of the statutory provisions that are to be found in Sections 433 and 434 of the Companies Act. If Mr. Bhabha's contention that commercial insolvency must be established in every case were to be accepted, it would lead to the logical absurdity that, though Section 434 lays down six grounds on which a winding-up order could be made by the court, in the ultimate analysis, it boils down to only one ground, viz., actual inability to pay debt laid down in Clause (e) of Section 433. Such a construction would render all other clauses of Section 433 redundant. Moreover, if that were to be the construction to be placed upon Section 434(1)(a), there would be no reason why Section 434(1)(a) should have been enacted by the Legislature. In my opinion, therefore, it is impossible to accept Mr. Bhabha's contention on this point in the face of these statutory provisions.
39. A similar contention was raised before the same learned judge in Seksaria Cotton Mills Ltd., In re [1969] 39 Comp Cas 475 (Bom). Following the judgment in Advent Corporation P. Ltd., In re, the learned judge held (page 476):

Mr. Khambatta has sought to contend that the company is not commercially insolvent and that its financial position is not such as to be unable to pay its debts. The petitioner's debt is an undisputed debt and, as stated in Palmer's Company Law, 20th edition, page 697, the court will not listen to such a defence where the debt is undisputed. In the judgment delivered by me in Company Petition No. 80 of 1998 on September 19, 1968 (Advent Corporation P. Ltd., In re MANU/MH/0007/1968 : [1969] 39 Comp Cas 463 (Bom)), I have taken the view that once there is non-compliance with a statutory notice, and the court comes to the conclusion that there is no bona fide dispute in regard to the petitioner's debt, the creditor is entitled to a winding up order ex debito justitiae.
40. In Madhusudan Gordhandas and Co. v. Madhu Woollen Industries P. Ltd. MANU/SC/0033/1971 : [1971] 3 SCC 632 : [1972] 42 Comp Cas 125, the Supreme Court held (page 131):

20. Two rules are well-settled. First, if the debt is bona fide disputed and the defence is a substantial one, the court will not wind up the company. The court has dismissed a petition for winding up where the creditor claimed a sum for goods sold to the company and the company contended that no price had been agreed upon and the sum demanded by the creditor was unreasonable (see London and Paris Banking Corporation, In re [1874] L.R. 19 Eq. 444). Again, a petition for winding up by a creditor who claimed payment of an agreed sum for work done for the company when the company contended that the work had not been done properly was not allowed (see Brighton Club and Norfolk Hotel Co. Ltd., In re [1865] 35 Beav. 204).

21. Where the debt is undisputed the court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt (see A Company, In re [1894] 94 SJ 369 : [1894] 2 Ch. 349 (Ch. D.)). Where, however, there is no doubt that the company owes the creditor a debt entitling him to a winding up order but the exact amount of the debt is disputed the court will make a winding up order without requiring the creditor to quantify the debt precisely (see Tweeds Garages Ltd., In re [1962] 32 Comp Cas 795 (Ch. D) : [1962] Ch. 406). The principles on which the court acts are first that the defence of the company is in good faith and one of substance, secondly, the defence is likely to succeed in point of law, and, thirdly, the company adduces prima facie proof of the facts on which the defence depends.

41. The question whether the debt is undisputed or not, cannot obviously depend on the contention of the parties in this regard. The creditor is bound to say it is undisputed and the company in all probability would say it is disputed. Whether the debt is undisputed or not will depend upon the decision of the court. It can hardly be suggested that merely because the company contends that the debt is disputed, it cannot be termed to be undisputed and that it cannot be held that there is no bona fide dispute in respect of the petitioner's claim. Where a company refuses to pay an amount held by the court to be undisputed, on the ground that, according to it, the debt is disputed, it must be assumed that the company is deliberately refusing or is unable to pay the undisputed debt.

42. That the above judgments are a complete answer to Mr. Seervai's submission, is clear:

(A) Mr. Seervai however submitted that the above judgments are in conflict with the judgment of the Supreme Court in the case of Pradeshiya Industrial and Investment Corporation of Uttar Pradesh v. North India Petro Chemical Ltd. MANU/SC/0679/1994 : [1994] 79 Comp Cas 835 : [1994] 3 SCC 348.

(B) There is absolutely no conflict. In that case, the Supreme Court found that the debt itself was yet to be established and that merely because the promoter's agreement had been signed it did not follow that the appellant was liable as a debtor. In paragraph 22 of the judgment, the Supreme Court noted Clause 31 of the agreement and observed that since the agreement had been cancelled the appellant, i.e., the company therein, was not liable to discharge any of its obligations thereunder. In paragraph 23 the Supreme Court held that there was a substantial dispute.

(C) The doubt in this regard is set at rest as, in fact, the Supreme Court referred to the judgment in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries P. Ltd. MANU/SC/0033/1971 : [1971] 3 SCC 632 : [1972] 42 Comp Cas 125 : 131 and at SCC page 638 and cited with approval paragraphs 20 and 21, I have quoted above.

(D) Paragraph 25 of the judgment strongly relied upon by Mr. Seervai, reads as under (page 842 of 79 Comp Cas):

25. The defence of the appellant in relation to non-payment is a bona fide defence. Whatever it may be, the liability of the appellant is yet to be determined. It is in this factual background that we will deal with legal aspect of the matter. Section 433 of the Act says:

A company may be wound up by the court,-. . .

(e) if the company is unable to pay its debts ; . ..,'

From the above it follows:

(1) There must be a debt ; and

(2) the company must be unable to pay the same. An order under Clause (e) is discretionary.

26. A debt under this section must be a determined or a definite sum of money payable immediately or at a future date.

(E) The decision of the Supreme Court was as stated in paragraph 25 in the factual background, which included the finding that the claim was bona fide disputed.

Mr. Seervai relied upon the fact that the Supreme Court in the latter part of paragraph 25 held that there must be a debt and a company must be unable to pay the same. He submitted that the use of the term "and" indicated that even if the debt is undisputed if the company can show that it is financially capable of paying it, the petition must be dismissed.

(F) This is not a correct reading of the judgment. The judgments are not to be read as statutes. The judgment, read as a whole contains no such ratio. Indeed, in paragraph 28, the Supreme Court quoted paragraph 21 of the judgment in Madhusudan Gordhandas's case (supra) wherein it was held that where the debt is undisputed the court will not act upon a defence that the company has the ability to pay the debt but the company chooses not to pay that particular debt.

(G) There is nothing in the judgment in Pradeshiya's case (supra) which even remotely suggests that this observation was even dissented from, leave alone, impliedly overruled.

Further, both the judgments were delivered by two learned judges. I cannot therefore imply an intention on the part of the learned judges in Pradeshiya's case (supra) to overrule the judgment of the Supreme Court in Madhusudan Gordhandas's case (supra).

43. In the circumstances, the company petition is disposed of by the following order:

(i) If the company deposits in this Court a sum of Rs. 3,50,00,000 on or before March 31, 2009, the same shall be invested in a nationalised bank initially for a period of one year and thereafter for like periods of one year each.

(ii) In the event of the amount being so deposited and in the event of the petitioner filing a suit within twelve weeks from the date of the petitioner's advocate being informed of the same in writing, the amount shall stand transferred to the credit of that suit.

(iii) In the event of the suit not being filed as aforesaid, the petition shall stand dismissed and the amount with interest thereon shall be refunded to the respondent-company.

(iv) If the company fails to deposit the amount as aforesaid, the petition shall stand admitted and shall be advertised in the Free Press Journal, Maharashtra Times and Maharashtra Government Gazette. The petitioner to deposit an amount of Rs. 10,000 with prothonotary and senior master of this Court within four weeks from the date of default.




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