'Claim Not Legally Enforceable, Admission Of Winding Up Laden With Procedural Infirmities': SpiceJet Files Appeal Before Madras High Court

On 6^th December, Madras High Court had ordered the admission of winding up SpiceJet Ltd. while adjudicating a company petition filed by Credit Suisse AG, a Switzerland based Stock Corporation and a creditor, who alleged inability on the part of respondent Airlines to pay the debts owed to the former. The company petition was filed by the Swiss Corporation under Sections 433(e) and (f) r/w Sections 434 and 439 of the Companies Act, 1956, before the single judge bench.

Background

SpiceJet Limited (First Party) had availed the services of SR Technics (Second Party) in Switzerland for Air Craft maintenance and repair, among other related services, via an agreement that has a lifetime of 10 years, back in 2011. In 2021, a supplemental agreement was signed between the two parties that enabled the airlines to pay back the monies raised by SR Technics at various occasions through a deferred payment scheme.

Before the High Court, the contentious matter was the seven invoices raised by SR Technics, the seven corresponding Bills of Exchange for the amount due under invoices, and the acknowledgement of debts through the issuance of certificates of acceptance by the Airlines. In 2012, the stock corporation Credit Suisse AG (Third Party) was assigned all the rights to receive payments due to SR Technics through a financial agreement. The assignment also entitled the third party to receive payments from SpiceJet under the seven invoices issued by SR Technics.

Even after repeated requests, SpiceJet allegedly shrugged off its responsibility to pay the monies due under the invoices, that too after a statutory notice under Sections 433 and 434 of the Companies Act, 1956. Therefore, the third party preferred a company petition for winding up under Section 433 (e), citing the inability on the part of the first party airlines to repay the debts.

Court Room Exchange

For SpiceJet

The appellant counsel, at the outset, submitted that the primary contract was between SR Technics and SpiceJet Limited for aircraft maintenance services. The other agreement between SR Technics and Credit Suisse AG, i.e, the banker, was entirely a financing agreement to which the appellant passenger carrier was not a party.

"In all other branches of law, an order of admission is inconsequential, no one can even appeal against admission. In Corporate matters, however, admission including admission of winding up is a step into the 'gallows'," the senior advocate for SpiceJet remarked at the outset.

He also added that the Supreme Court has set out the standards for admission via three requirements. These three requirements are i) The existence of a bona fide dispute, ii) Debt payable should be bona fide, and iii) If the company produces prima facie evidence of such bona fide debt. He added that a company court does not give a finding as to whether a debt is due or not; the only question would be if it's bona fide or not.

On the general question of the reason behind SpiceJet's refusal to pay 24 Million US Dollars to Credit Suisse, the counsel argued that the third-largest passenger carrier became aware of the lack of license for SR Technics to carry out aircraft maintenance only halfway. Since SR Technics did not have a valid license from Directorate General of Civil Aviation (DGCA) between the period of 2009-2015 during the period of issued invoices, there was no requirement to pay the amount claimed towards such maintenance.

SpiceJet contended that the single judge bench erred in ordering the admission of winding up. The single judge had taken a stand that if there is a breach of contract had taken place, then the appellant should have terminated the contract. Secondly, the single judge bench remarked that there was a finding in the Arbitration proceedings that took place in United Kingdom to the detriment of SpiceJet. The finding, according to Justice R. Subramanian, was that the appellant was aware of the DGCA's non-approval of services rendered by SR Technics.

On the first issue, the counsel said that he disagrees with the observation of the single bench judge that the remedy for a breach of contract is its termination. When the issue is laden with illegalities that affect the safety of passengers it goes beyond the appellant's hands. Citing the legal maxim, 'Ex Dolo Malo Non Oritur Actio' ( A right of action cannot arise out of fraud), the counsel submitted that he had referred to Sections 23 and 24 of the Indian Contract Act. However, it was not relied on by the appellant since the contract was governed by English law. He added that the above proposition was approved by English courts as well as Indian courts. It was contended by Mr. Ramakrishnan that termination of an agreement upon breach is not mandatory and it is an entitlement of the party who is at the receiving end of such breach. It was again iterated that SpiceJet was unaware for a long time that SR Technics rendered services without a valid license.

On the second issue of arbitral award and findings included therein, the counsel pointed out that even Credit Suisse had said in their pleadings that arbitral proceedings under English law were not relevant to the proceedings before High Court. It was further claimed that the arbitral award in the proceedings intitiated by SR Technics was granted on different invoices and there was no factual finding about SpiceJet's awareness regarding non approval of SR Technics by DGCA.

On a lighter note, the counsel remarked that "If Munnabhai MBBS was to file a claim before the court for doctor's fees, no court would allow it" referring to SR Technics.

The English law has clearly laid down that the court cannot assist illegality in order to enforce a claim, which is in consonance with the principles laid down in Indian law as well, the counsel added.

"Therefore, my first submission would be that there are prima facie illegalities that goes to the root of the matter, termination of agreement is not necessary. On the second issue, we haven't shut our eyes and pretended that the rest of world has gone dark. None of the invoices in the company petition were subject matter in the arbitration proceedings," he clarified.

Senior Advocate also pointed out that the single judge bench had revised the order dated 6th December twice on 15th December and 23rd December, quite contrary to the principle that there cannot be substantive amendments to the judgements pronounced unless reviewed under Order 47 Rule 1 of CPC. The counsel also pointed out that the single judge bench has not distinguished between winding up and admission of winding up in the judgment. It was also argued that the Official Liquidator, High Court, Madras was appointed as Provisional Liquidator when there were no pleadings to that effect. The liquidator was directed to take charge of the assets of the respondent company, even though such a proceeding was deterred by the extension of stay for another week. In the latest modification to the judgment, the first two sentences of para 23 of the original judgment were deleted since it ran contrary to the directions given in the modified order dated 15th December regarding winding up. 

The counsel also added to the above contentions that none of the agreements were sufficiently stamped under the Indian Stamp Act so as to be admitted by the court to establish a debt. The apex court has clearly laid down that the requirement of stamping must be met in the first opportunity itself, he added.

For Credit Suisse AG

Advocate Rahul Balaji, counsel appearing for the Swiss Corporation, submitted that there are seven invoices, seven certificates of acceptance and corresponding Bills of Exchange which forms the crux of the matter. The appellant has bound himself to the payment of the monies mentioned in the invoices. As the Banker, Credit Suisse is entitled to claim those monies that they have parted with from SpiceJet, he added.

"SpiceJet thought that their arguments will improve with the passage of time and age like fine wine. Their counter says that they discovered much later about the non-approval from DGCA  about the services provided by SR Technics.If our rejoinder is referred to, it could be seen that we are concerned solely about the liabalities arising from invoices, certificates of acceptance and bills of exchange that are not disputed."

Previous Order Passed By Single Judge Bench Admitting Winding Up Proceedings

The single-judge bench of Justice R. Subramanian had previously evoked the three-pronged test framed by the apex court in Mathusudan Gordhandas & Co. v. Madhu Woollen Industries (P) Ltd., (1971) 3 SCC 632 to determine the admission of winding up when the existence of debt is proved against SpiceJet Limited.

Placing reliance on Section 434(1)(a) and Section 433 of the Companies Act, the court observed:

"Once a notice is issued under Section 434 of the Companies Act, a deeming fiction is created regarding the inability to pay the debt, therefore it becomes the obligation on the part of the respondent/debtor Company to show that the debt itself is illegal or that there is no debt at all, if it has to escape the consequence of the issuance of a winding up notice."

On the bona fides of the defence set out by the Airlines, the court observed that the respondent Company had obtained an advantage of a deferred payment by execution of documents. Having obtained an advantage under the supplementary agreement and having executed the documents as required, the respondent was not right in attempting to evade the liability by raising technical objections relating to the insufficiency in stamping of the instrument.

The court had also granted a stay on the operation of order for a period of three weeks to allow SpiceJet enough time to prefer an appeal, provided that SpiceJet Limited deposits an amount equivalent to five million dollars to the credit of Company Petition No.363/2015 within a period of two weeks.

Case Title: SpiceJet Limited v. Credit Suisse AG

Case No: OSA/1/2022 & Connected Matters