Dena Bank vs K. Motiram Vakil and others

G.H. Guttal, J.—In this summons for judgment, the defendants seek leave to defend. The question is whether the amount agreed to be underwritten under an underwriting contract represents a liquidated demand of money within the meaning of sub-rule (1) of rule 2 of Order 37 of the Code of Civil Procedure. The facts out of which this summons for judgment arises are in paragraphs 2 and 3 below.

Starvox Electronics Ltd. a joint stock company, decided to bring out a public issue of 6,50,000 equity shares, each of Rs.10, aggregating to Rs.65,00,000. The plaintiff, a nationalised bank, agreed to underwrite 50,000 equity shares of the company. On June 8, 1987, the plaintiffs entered into a subsidiary underwriting agreement with the defendants. The defendants are the plaintiffs'' sub-underwriters and the plaintiffs are the underwriters of the company. The defendants agreed to "sub- under writer 20,000 equity shares of the face value of Rs.2,00,000" out of the public issue agreed to be underwritten by the plaintiffs. The defendants were to be discharged of their obligations under the agreement if the issue of equity shares was fully subscribed. If the issue is not fully subscribed by the public on the closing date and the application money payable in respect thereof is not received by the company before that date, the underwriters shall, after the receipt of the subscription position from the company, inform the sub-underwriters, the defendants herein, "of the number of equity shares for which the underwriters is to be subscribe in pursuance of "the agreement. The agreement goes on to record that. "the sub-underwriters shall, within eight days after receipt of such intimation, apply for and subscribe such unsubscribe amount of the equity shares and pay or procure to subscribe to the extend mentioned." The sub-underwriter, the defendants, shall sub-scribe fro a number of equity shares representing the difference between the public issue and the subscription from the public. However, this obligation to subscribe to the equity shares or pay the amount of the value of unsubscribed shares is "subject to a ceiling of Rs. 2,00,000."

On September 15, 1987, the plaintiffs informed the defendants that the issue "did not evoke a good response with the result that there has been devolvement on the underwriters". The plaintiffs then advised the defendants to subscribe to the shares of the above company "to the extent of Rs. 2,00,000 in fulfillment of "their sub-underwriting commitment.

Rule 2(1) of Order 37 of the CPC provides, interalia, that all suits in which the plaintiff seeks ''only to recover ,(i) a debt, or (ii) liquidated demand in money payable by the defendant with or without interest, arising on a written contract..." be instituted in the manner provided therein. The question is whether the sum of Rs. 2,00,000 claimed by the plaintiffs in this suit under the sub-underwriting contract is a "liquidated demand".

What is the nature of an underwriting contract ? What is the liability of the underwriter to the company and of the sub-underwriter to the underwriter ? Does the contract on which this suit is based stipulate the payment of a liquidated sum / The answers to these questions will determine whether the amount claimed in the suit is a liquidated sum. Underwriting in its simplest form consists of an undertaking by some person or persons, that if the public fails to take up the issue, he or they will do so. In return for this undertaking, the company agrees to pay the underwriters a commission on all shares or debentures, whether taken by the public or by the underwriters. The underwriters themselves will usually choose to spread their risk by using sub-underwriters who agree to take a certain number of the shares for which they accept responsibility and for which they receive a commission. In the result, if an issue to the public is a success, the underwriters receives their commission without having to take up any of the shares or debentures, but if it is a failure, the underwriters and sub-underwriters have to take up a large proportion of it."

Underwriting is in the nature of an insurance against the possibility of inadequate subscription. The necessity for an underwriting contract arises because a public, unless the amount specified in the prospectus as the minimum subscription ,is raised by the issue of shares.

From the nature of the underwriting contract ,it is clear that, if the public issue is not fully subscribed, the defendants as the sub- underwriters are under an obligation to take the shares to the extent stipulated by the contract.

In the context of debts, "to liquidate" means to ascertain and/apportion, and "liquidated" mens ascertained and/or apportioned. Generally,the amount clearly shown to be payable is referred to as a liquidated amount. For example, the principle sum and the interest stipulated in a contract constitute the liquidated sum. Where the parties agreed that a sum stated shall be paid, such sum also is a liquidated sum. The contract on the basis of which the suit is instituted must create a liability in the defendants to pay an ascertainable amount. Under the contract in this suit, the liability of the defendants is to subscribe "such unsubscribed amount" of the equity shares. Therefore, this amount has to be ascertained. Until then, the defendants are liable to pay an uncertain amount. How is the amount of subscription by the defendants ascertained ? The contract answers this question. The defendants shall subscribe to a certain number of equity shares, and the number shall be the difference between the public issue and the subscription from the public. Now, how are the defendants told that their liability is to subscribe, say Rs. X ? The contract does not state the amount. This step in the process of ascertainment of the extend of the defendants'' liability is left to be taken after receipt of the subscription position from the company. Therefore, the parties to the contract do not know until the closing date as to what the defendants are liable to pay. That is why the plaintiff have to inform the defendants "of the number of equity shares for which the sub- underwriter is to subscribe in pursuance of "the agreement. Therefore, in the first place, the value of the subscription from the public will have to be ascertained and deducted from the value of the public issue. This represents the total liability not of the sub-under writer but of the underwriter. The contract then goes on to state that the liability of the sub-underwriter ascertained by subtracting the subscription value from the public issue, shall be "subject to a ceiling of Rs. 2,00,000".

Significantly the language of the agreement makes the defendants ''liability to subscribe "subject to a ceiling of Rs.2,00,000." Therefore, the sum of Rs.2,00,000 claimed in this suit is not what the defendants ae, under the contract, liable to pay. The sum of Rs.2,00,000 represents the ceiling or the upper limit of such liability. The amount due from the defendants is, therefore, not Rs.2,00,000 but may be a lesser amount representing the difference stated above.

The liability of the sub-underwriter is thus contingent upon (a) the number of shares subscribed by the public, and (b) the intimation by the underwriter to the sub-underwriter that the latter shall subscribe or procure subscription. Having regard to the nature of the agreement which stipulates the ceiling on the liability of the defendants, it cannot be said that Rs.2,00,000 is the liability of the defendants. It is inherent in a contract of this nature that the amount is not ascertainable on the date on which the contract is made. The amount claimed in this suit is, therefore, not a liquidated amount which the defendants are liable to pay. It may be reduced to a liquidated sum after ascertainment of the amount according to the mode prescribed by the contract. It is not the case of the plaintiffs that Rs.2,00,000 have been so ascertained.

It has been urged that commission is due to the defendants from the plaintiffs and, therefore , what is due is not Rs.2,00,000, but the sum found after deducting the commission. In view of my conclusion that the amount claimed in this suit is not a liquidated demand, it is unnecessary to decide this question.

The defendants also urged that the plantiff''s claim of interest at 17.5 per cent. is not based on any contract. It is, no doubt,true that there is no agreement to pay interest. The plaintiffs have based their claim for interest on the Interest Act from the date of notice of demand. The defendants contention is, therefore, unsound.

For all these reasons, I grant unconditional leave to defend. Suit shall be tried as commercial cause. Written statement within six weeks, affidavits of documents within two weeks thereafter. Parties shall complete inspection of documents within two weeks after the expiry of the time prescribed for filing affidavits of documents.