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2022 Supreme(Kar) 1042
IN THE HIGH COURT OF KARNATAKA
Krishna S. Dixit, J.
Ordyn Technologies Pvt Ltd. & Ors. - Appellants
Versus
Assistant General Manager & Ors. - Respondents
Writ Petition No. 8432 of 2018(GM-FE)
Decided On : 11-08-2022
Smt. Jayna Kothari, Senior Counsel A/W, Sri. Rohan Kothari, Adv, for the Petitioners; Sri. R V S Naik, Senior Counsel A/W, for the Respondents; Miss. Adithi Shetty, Adv, for the Respondents No. 1 & 2; Sri. Madhukar Deshpande, Adv, for the Respondents No. 3
The main legal point established in the judgment is that a company in winding up cannot maintain a petition on its own, and a compounding order becomes non est if the fine is not paid. Additionally, the judgment emphasizes the importance of complying with foreign exchange regulations, particularly regarding the issuance of corporate guarantees.
Headnote:
Companies Act - Foreign Exchange Management - 2004 Regulations - The court declined to entertain the petition due to the company being in winding up and the compounding order being non est. The court also found that the company had contravened the regulations by issuing a corporate guarantee beyond the prescribed limit.
Fact of the Case:
The petitioners, a company and its Managing Director, sought to challenge notices and orders issued by the Reserve Bank of India and the Directorate of Enforcement regarding contravention of foreign exchange regulations. The company was engaged in manufacturing telecommunication equipment and had a wholly owned subsidiary in Malaysia, which had borrowed a significant amount from a financial institution in Malaysia. The RBI raised objections regarding the corporate guarantee issued by the company for the subsidiary and offered to compound the contravention. The company sought extension for moving the compounding application, but eventually chose not to pay the fine imposed by the compounding order, leading to the involvement of the Directorate of Enforcement.
Finding of the Court:
The court declined to entertain the petition due to the company being in winding up and the compounding order being non est. The court also found that the company had contravened the regulations by issuing a corporate guarantee beyond the prescribed limit.
Issues: The issues involved the maintainability of the petition by a company in winding up, the validity of the compounding order, and the contravention of foreign exchange regulations by the company.
Ratio Decidendi: The court held that a company in winding up cannot maintain a petition on its own and that the compounding order becomes non est if the fine is not paid. The court also found that the company had contravened the regulations by issuing a corporate guarantee beyond the prescribed limit.
Final Decision: The court dismissed the writ petition, granting the petitioners a period of four weeks to respond to the impugned notices.
JUDGMENT
1. First petitioner, a company incorporated under the provisions of the erstwhile Companies Act, 1956 and the second petitioner its Managing Director, are knocking at the doors of Writ Court for assailing the notices dated 26.09.2013 & 9.12.2013 issued by the first respondent - Reserve Bank of India, at Annexures-C & D. They also seek quashment of the compounding order dated 22.08.2014 issued by the said Bank at Annexure-K. They also seek to set aside all proceedings initiated by the third respondent Directorate of Enforcement, pursuant to notice dated 9.2.2018 at Annexure- S.
2. After service of notice, the respondent-RBI has entered appearance through its Panel Counsel who has filed the Statement of Objections; the third respondent-ED is represented by the learned CGC who too has filed the Statement of Objections opposing the Writ Petition. Learned Sr. Advocate appearing for the respondent-RBI and learned Addl. Solicitor General of India appearing for the third respondent have resisted the Writ Petition, making submission in justification of the impugned notices & orders, drawing attention of the court to the provisions of law and to the Rulings.
3. BRIEF FACTS OF THE CASE:
(a) As already mentioned above, first petitioner is a company incorporated on 28.07.1995 and second petitioner happens to be its Managing Director. The Company was engaged in the manufacturing of telecommunication equipments. "The company also had a wholly owned subsidiary in Malaysia..." The subsidiary had borrowed approximately Rs.20 plus crore from a financial institution based in Malaysia way back in November 2008. The petitioner company happen to be a corporate guarantor.
(b) The first respondent vide notice dated 26.09.2013 had raised some objections as to the corporate guarantee alleging violation of contravention of regulation 6(2)(i) read with regulation 2(o) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004 [hereafter 2004 Regulations']. The RBI had also offered to have compounding of the said contravention by moving an application, if so desired by the petitioners. This notice having remained unanswered, the RBI shooted another notice on 9.12.2013 substantially reiterating the version of the earlier one.
(c) The first petitioner company sent a letter dated 24.12.2013 seeking extension of time for moving compounding application pleading some difficulty. Extension arguably having been granted, the application dated 9.1.2014 was also accepted by the RBI. The second respondent official of the RBI passed the compounding order dated 22.08.2014 and imposed a fine of Rs.50,90,000/- (Rupees Fifty Lakh Ninety Thousand) only. However, petitioners chose not to pay the fine and eventually, the matter landed with the third respondent - ED who has shooted the impugned notices/summons.
(d) Petitioners' representation dated 9.12.2017 requesting the second respondent to recall the compounding order on the grounds pleaded therein remained unconsidered. It is the case of petitioners that there is no contravention of any law whatsoever and therefore, the impugned proceedings need to be set at naught. Per contra, the respondent-RBI and respondent-ED controvert the version of petitioners and seek to justify the impugned proceedings.
4. Having heard the learned counsel for the parties and having perused the Petition Papers, this Court declines indulgence in the matter for the following reasons:
(a) The first petitioner admittedly being a company in winding up, cannot maintain a petition on its own, as rightly contended by learned Sr. Adv. Mr.Naik. The Apex Court in SIRMUR Chemical And General Industries Limited vs. Union Of India, CIVIL APPEAL NO.12/1960 decided on 3rd March, 1962 observed "...We do not think that Section 457 of the Companies Act, 1956, or the corresponding provision in the 1913 Act contemplates that on an order of winding up by the court any person other than the liquidator shall have the power t
