Madras High Court Orders Winding Up Of SpiceJet Ltd, Official Liquidator To Take Over The Company Assets

Justice R. Subramanian was 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.

In the petition filed under Sections 433(e) and (f) r/w Sections 434 and 439 of the Companies Act, 1956, the single judge bench 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. The court iterated that the three-pronged test enunciated by the apex court involves,

• Ascertaining if the defence of company is bonafide and is of substance,
• If such defence is likely to succeed on point of law, and
• If the company produces prima facie proof of the facts on which the defence rests.

While agreeing with the submissions made by Advocate Rahul Balaji appearing for the stock corporation, Justice R Subramanian recorded on the question of enforceability of debts after referring to Mathusudan and Madras HC judgment in Michael Hart v. M/s. Ninestars Information Technologies Ltd. (2013):

"The three pronged test suggested by the Hon'ble Supreme Court which I have already extracted would show that the Company Court need not render a conclusive finding on the enforceability of the debt, while examining the issuance of notice of winding up or while examining the admission of a winding up petition. The question whether the documents require stamping or the question whether the bills of exchange are payable on demand or otherwise than on demand or questions which, as rightly pointed out by Mr. Rahul Balaji, learned counsel appearing for the petitioner, will have to be examined at the time when the actual enforcement or examination of the claim of the petitioner by the Official Liquidator takes place."

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 the 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 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 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.

Arguments Raised

The petitioner counsel, Advocate Rahul Balaji, argued before the court that a debt exists and a notice was issued under the Companies Act to the Airlines. Once a notice has been issued under Section 434(1) (a) of the Act and the failure of the company which in receipt of the said notice to repay the amount within three weeks or to secure the debt or to compound for it becomes evident, the winding-up procedure inevitably follows. To dispute the admission of winding up, the respondent company should prove a bona fide dispute or unenforceability of debt under Indian law, contended Mr. Balaji.

The counsel argued that the Airlines has not disputed the utilisation of services by SR Technics. This, along with the fact that the invoices were accepted, Bills of Exchange and Certificates of Acceptance were issued by the first party airlines negates their argument that the debt is non-enforceable. The counsel also added that the dissection of debt enforceability is not warranted at the stage of admission of winding up; it is the duty of official liquidator to examiner the same and not the court's responsibility. The dispute on the adequacy of stamping the instruments need not be looked into at this stage, concluded the counsel.

About the lack of a valid license for aircraft maintenance, the counsel would submit that the Debtor Company was aware of the same and still availed the services of Second Party Company. These contentions raised by the Airlines were rejected during the arbitration proceedings in UK as well, added Mr. Balaji.

Along with the arguments that it was a bona fide dispute and the debt was unenforceable, Senior Advocate V. Ramakrishnan would submit that there wasn't a contractual relationship between the Airlines and the Stock Corporation. He also argued that the assignment of rights was contrary to the agreement between SR Technics and SpiceJet. Another argument was raised by the respondent airlines that SR Technics did not have a valid license to carry out Air Craft maintenance services from the Directorate-General of Civil Aviation (DGCA) and therefore the enforcement of the claim would be against public policy.

The counsel would also argue that the Bills of Exchange are not payable on demand since a fixed date of six months from the date of issue has been mentioned, which makes stamping a prerequisite for those instruments. In the absence of stamping, the Bills of Exchange and agreements can't be considered as a valid evidence of existing debt, argued the Senior Counsel. In addition to the arguments about the improper stamping of instruments ranging from original and supplemental agreements, Invoices, Bills of Exchange and Certificates of Acceptance, the counsel also put forward an argument that the arbitral award in UK in favour of corporation cannot be a ground before Madras High Court where the Indian Laws would apply. Finally, he also submitted that the endorsement of Bills of Exchange are not in the form required as per the agreement between the Stock Corporation and SR Technics, which renders the endorsements on the instrument invalid.

Court's Observations And Findings

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 issuance of a winding up notice."

The court noted that the existence of the debt has been proved in the case at hand due to the deeming fiction created by Section 434 of the Act. The primary question before the court would be then to test the bona fides of defences put forward by the debtor company against the standards of three-pronged test formulated by the apex court.

"I therefore do not propose to go into the requirements as to stamping. I must point out, even ignoring the agreements and the bills of exchange, the certificates of acceptance that had been issued by the respondent would show that there is a categorical admission of liability. Each of the bills of exchange is supported by a certificate of acceptance. The respondent has not denied the execution of the certificates of acceptance", the court observed in the order.

In addition to the apex court judgment and the Madras High Court DB judgment in Michael Hart, the court also referred to the Bombay High Court Judgment in Classic Diamonds (India) Ltd., v. ICICI Bank Limited (2016) to opine that the question relating to stamping or sufficiency of stamping is really foreign to the scope of the proceedings, i.e., admission of winding up.

"When a Division Bench of this Court had categorically laid down that even production of the document is unnecessary as the execution of the document is not denied, I do not think it will be proper for me to dwell into the aspect of stamping or the character of the document whether it is a bill of exchange payable on demand or it is a bill of exchange payable otherwise on demand etc. in these proceedings", the court made one of its final observations on the aspect of deciding the enforceability of debts at this stage.

On the SpiceJet's submission that endorsements made are not in the proper form as stipulated by the agreement, the court opines that the Airlines was aware of the ability of SR Technics to endorse the Bills of Exchange in favour of Credit Suisse AG since the 2012 supplemental agreement between SpiceJet and SR Technics had a clause to that effect. It was only in pursuance of the agreement that certificates of acceptance in support of such Bills of Exchange were issued by the respondent company.

The court also places on record that by virtue of the said supplemental agreement, the respondent company could avail a six months deferred payment scheme.

"Therefore, it is clear that the respondent Company had obtained an advantage of a deferred payment by execution of these documents and the denial there of, in my considered opinion, cannot be said to be bona fide. Having obtained an advantage under the supplementary agreement and having executed the documents as required, the respondent cannot now seek to evade liability raising technical objections relating to stamping of the instrument", the court made its observations on the bona fides of defence set out by the Airlines.

On the respondent counsel's arguments pertaining to the lack of SR Technic's License to carry out Air Craft Maintenance as per DGCA, the court gave its attention to a particular clause(Clause 14.3) in the agreement between SpiceJet and SR Technics, which would have allowed the former to terminate the agreement by a written notice in case any certification required by SR Technics was revoked or suspended by the concerned authorities:

"It is not in dispute that the respondent Company had not invoked Clause 14.3 and terminated the agreement. It chooses to avail of the services of SR Technics despite being aware of the fact that SR Technics did not possess a valid authorisation by DGCA."

Further, Clause 14.4 of the agreement requires both parties to fulfil all obligations prior to the termination of agreement under Clause 14.3. It was also open to the parties to make claims for breach of obligations under the agreement even post termination of the agreement. The court interpreted this clause to hold as follows:

"…while it was open to SpiceJet Limited to terminate the contract for the reason that SR Technics did not have a valid authorisation the termination by itself would not relive SpiceJet Limited of the obligations that arose under the contract prior to such termination becoming effective."

Accordingly, the court held that the respondent company has 'failed miserably' to satisfy the three-pronged test of the apex court on the bona fides of defences set out, and that the company should be wound up for its inability to pay the debt owed under Section 433 (e) of the Companies Act 1956.

Finally, on the operation of the said order, the senior counsel for respondents requested two weeks' stay to allow themselves time for filing an appeal. The court has acceded to the same by granting a stay on the operation of order for a period of three weeks, 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 from the date of the order.

Case Title: Credit Suisse AG v. SpiceJet Limited

Case Nos: Company Petition No.363 of 2015 and C.A. Nos.887 & 888 of 2015 and 55 of 2020