TMI Blog1991 (12) TMI 248X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings as well as from the petition for winding up. Goetze India Ltd., the petitioner, filed a petition for winding up the respondent company, Pure Drinks (New Delhi) Ltd., inter alia , on the grounds that the company is not in a position to meet its day-to-day statutory and other liabilities as and when these fall due and the company is commercially insolvent, it would, therefore, be just, equitable and convenient for this hon'ble court to wind up the company. The petitioner served a notice under section 434 of the Companies Act on the respondent. The sum demanded by the petitioner from the respondent is more than Rs. 500. The respondent has neither paid the sum due nor secured or compounded it to the satisfaction of the petitioner for more than three weeks after service of notice. In answer to the motion taken by the petitioner, the respondent filed an application under section 34 of the Indian Arbitration Act. It is prayed that further proceedings in the winding up petition be stayed and the matter be referred to arbitration. The relevant gist of the defence disclosed and put forth in the application under section 34 of the Arbitration Act is : The respondent entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the parties and/or their respective representatives touching these presents or any clause or thing herein contained or otherwise in any way relating to or arising from these presents shall be referred to the arbitration of two arbitrators, one to be appointed by each party to the dispute, and such arbitration shall be in accordance with and subject to the provisions of the Arbitration Act, 1940, or any statutory modification or re-enactment thereof for the time being in force. Such arbitration proceedings will be held at New Delhi". Before precisely referring the question for determination, my brother, Majithia J., noticed that in the judgment reported as Tirlok Chand Jain v. Swastika Strips ( P. ) Ltd. [1990] 2 PLR 655 ; [1991] 70 Comp. Cas. 197 (P H), my learned brother, the late Tiwana J ., while answering the question, "can an application under section 34 of the Indian Arbitration Act, be moved for stay of the proceedings in a petition under sections 433, 434 and 439 of the Companies Act ?", relied upon a Division Bench judgment in Maruti Ltd. v. B.G. Shirke and Co. P. Ltd. [1981] PLR 732 ; [1981] 51 Comp. Cas. 11 (P H), wherein the question answered is " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r has to be in the negative. It may be observed at the outset that the contention of learned counsel for the, parties is based on foundation, which is non-existent. What is pre-supposed by learned counsel for the parties is that mere existence of an arbitration clause in the agreement would take away the jurisdiction of the court to entertain the present proceedings but this approach is not legally tenable". Finally, the Division Bench answered the question in the following terms (at page 17 of 51 Comp. Cas.) : "We hold that a clause existing in an agreement for making a reference to the arbitrator, continues to bind a company subsequent to the order of winding up as it did before, that such a clause does not impinge upon or take away the jurisdiction of the court and that it would be for the court to decide whether to try the dispute which has been brought before it or to stay the action where the other party applies in time and otherwise complies with the conditions of section 34 of the Indian Arbitration Act, 1940". The Hon'ble Single Bench in Tirlok Chand Jain v. Swastika Strips P. Ltd. [1990] 2 PLR 655 ; [1991] 70 Comp. Cas. 197 (P H), after noticing the arbitration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the juristic entity of the company. Winding up is to bring the activity consortium to an end. Winding up is adopted with the object of dissolution of company. It can be done when prima facie it appears that it cannot any more survive or its members want to close down the business. The winding up of a company is governed by specific and precise legislation provided by the Companies Act which in itself is a self-contained complete code. On a brief reference to the skeletal provisions for winding up provided by Part VII of the Act which is prefatory a necessity (sic), the basic design appears, that the company can be wound up, either by the court or voluntarily or subject to the supervision of the court. Reference may be made to section 425 of the Act. The Act specifically provides for the liabilities of the contributories, the obligations of directors and managers whose liability is unlimited, the nature of liability of contributories, the consequences on the death of a contributory, the insolvency of a member and so on and so forth. Chapter II of Part VII of the Act provides the methodology, mechanism and procedural aspect for winding up a company by the court. In fact the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory, may ( a )where any suit or proceeding against the company is pending in the Supreme Court or in any High Court, apply to the court in which the suit or proceeding is pending for a stay of proceedings therein; and ( b )any suit or proceeding is pending against the company in any other court, apply to the court having jurisdiction to wind up the company, to restrain further proceedings in the suit or proceeding; and the court to which application is so made may stay or restrain the proceedings accordingly, on such terms as it thinks fit". Again the court has been conferred with a power which it can exercise on hearing the winding up petition. It has been specifically and expressly provided by the Legislature by section 443 of the Act which runs as under: "443. Powers of court on hearing petition. (1) On hearing a winding up petition the court may- ( a )dismiss it with or without costs ; or ( b )adjourn the hearing conditionally or unconditionally ; or ( c )make any interim order that it thinks fit ; or ( d )make an order for winding up the company with or without costs, or any other order that it thinks fit : Provided that the court shall not refuse to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g up of the company, or before or after the commencement of the Companies (Amendment) Act, 1960 (65 of 1960). (3) Any suit or proceeding by or against the company which is pending in any court other than that in which the winding up of the company is proceeding may, notwithstanding anything contained in any other law for the time being in force, be transferred to and disposed of by that court. (4) Nothing in sub-section (1) or sub-section (3) shall apply to any proceeding pending in appeal before the Supreme Court or a High Court". Finally, the consequences of the winding up have been provided by section 447 of the Act, which runs as under : "447. Effect of winding up order. An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on the joint petition of a creditor and of a contributory". From the skeletal scheme of the Act, summarised and referred to in brevity above and what has been expressly provided, the brief design from short exordium appears to be that winding up of a company is provided by specific and precise legislation. It is a case of insolvency of a corporate existen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his debts before the official liquidator after the passing of the winding up order as any creditor would have been able to do so. The winding up proceedings cannot be treated as an alternative remedy of a suit for recovery nor as an execution proceedings. It may be a legitimate means for seeking enforcement of payment of a debt but it cannot be used as a lever to exercise pressure on the company to pay off the debts to a creditor. It cannot be allowed to become an illegitimate pressure in spite of the fact that the creditor cannot be compelled to avail of his ordinary remedy for the recovery of his debts. An order passed in a winding up petition is an order in rem. As a necessary and natural consequence of the same, the court attains the custody and control of the assets of the company which are released and distributed in the manner provided by the Act. The court is bound to keep in view the public interest. Primarily, the court is concerned not only with the interest of the petitioner or the creditors but it has to keep in view the interest of the company's shareholders, contributories, etc., also. It is said that winding up is only a process of expediting the resultant effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermine whether the disputes sought to be raised are bona fide or not. Even where unconditional permission to defend has been granted by the civil court, courts cannot refuse the winding up solely on the ground that either a suit is maintainable for recovery or a decree or award is executable or the same cannot be executed for some reasons. It has the power to insist upon proof of debt. It is well-settled that bona fides or disputes which a company court is required to find out with respect to the averments of the petitioner, depends upon the facts and circumstances sought to be raised. Putting off liabilities or creating a defence would be considered and decided by the court. The court would take into consideration the nature of the disputes, all other facts and circumstances including the conduct of the parties. The winding up court while determining the necessity for winding up of a company will keep in view as the most important ingredients and material consideration, the company's inability to pay the debt, the basis of the creditor's due and denial of the payment. It is not the creditor's claim which is of prime importance for a winding-up order but it is the liability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 of the Companies Act that no proceedings will either continue or commence after the winding up order is passed without permission of the company court. Of course, the company court has residuary powers to pass a specific interim order during pendency of the winding up proceedings in view of the peculiar facts and circumstances of each case. It is further clear it cannot be disputed that in case of passing of an order of winding up of a company, all disputes, claims, liabilities, etc., would be decided by the official liquidator or by the forum agreed upon by the parties or court, provided it is permitted by the company court in terms of section 446. At this stage, a reference to section 9 of the Companies Act as well as section 34 of the Indian Arbitration Act is necessary to find out the composite picture to answer the question posed. Section 9 renders by its operation all memorandum or articles of a company, agreements, resolutions, etc., whether registered prior to the commencement of the Act or after the commencement of the Act, as void to the extent they are repugnant to the provisions of this Act. The Indian Arbitration Act with an object to cut short the delays and tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company court. Lastly, it was argued that any provisions in an agreement ousting the jurisdiction of the company court would be void in view of the provisions of section 34 of the Indian Arbitration Act. In order to support his submission, learned counsel for the petitioner, relied upon Tirlok Chand jain v. Swastika Strips ( P. ) Ltd. [1990] 2 PLR 655 ; [1991] 70 Comp. Cas. 197 (P H), Hind Mercantile Corporation Pvt. Ltd. v. J . H. Rayner and Co. Ltd. [1971] 41 Comp. Cas. 548 (Mad) and O. P. Gupta v. Shiv General Finance ( P. ) Ltd. [1977] 47 Comp. Cas. 279 (Delhi), Company Application No. 8 of 1979, in C. P. No. 147 of 1978, decided on July 12, 1979. In reply to the arguments addressed, learned counsel for the respondents refuted the submissions made though he admitted the company court's jurisdiction for winding up. It was argued that though section 34 of the Arbitration Act does not oust the jurisdiction of the company court for winding up, proceedings can be stayed and parties can be asked to get their disputes settled from an arbitrator. In support of his contention, he relied upon Star Trading Corporation v. Rajratna Naranbhai Mills Co. Ltd. [1971] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of the company would continue to flow under the said agreement as the juristic identity of the company continues till the company is finally dissolved. There cannot be any gainsaying that in spite of the agreement including the arbitration agreement, binding between the company and the parties to the agreement, in view of the statutory and specific provisions of section 446 of the Act, it would be within the jurisdiction of the company court, either to permit to continue the proceedings before the arbitrator or refer the dispute between the parties to the agreed arbitrator for its determination or determine the same itself keeping in view the facts and circumstances of each case. Otherwise also, section 34 of the Indian Arbitration Act confers discretionary jurisdiction on the court to stay the proceedings brought before it and refer the matter to arbitration but it does not oust the jurisdiction of the court. The only way to read the provisions of section 34 are that it confers a special jurisdiction on a forum agreed to by the parties. Though it may be loosely termed as concurrent jurisdiction yet the court retains the jurisdiction. Section 34 does not oust the jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt to protect the interest of the creditors, etc., though a reference has been made that there have to be strong circumstances to stay the proceedings and refer them to the arbitrator. It is essentially for the court to decide or adjudicate in each case under what circumstances the court should stay the proceedings. In Star Trading Corporation v. Rajratna Naranbhai Mills Co. Ltd. ( in liquidation ) [1971] 41 Comp. Cas. 1023 (Guj.), the company went into liquidation and the official liquidator sought permission to sue in a suit for recovery wherein the question was raised that in view of the arbitration agreement between the parties the civil court was excluded from the jurisdiction, in view of section 446(2) of the Act. The hon'ble court found that since on the winding up of a company, it does not cease to exist as a company as no transformation takes place in so far as its legal or juristic entity is concerned, the rights also continue to exist and only the board of directors are changed and the management of the company goes to the official liquidator. Thus, the court can grant permission to sue in suitable circumstances or otherwise proceed himself. In Company Applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. It can go behind the award. The winding up order not only enures for the petitioner but also for other creditors. Other creditors cannot be bound by the agreement between the petitioner-creditor and the company particularly when the winding-up petition by a creditor would be deemed to be a representative petition. At the same time, I may venture to state that merely because a winding-up petition has been filed, it would not automatically render the arbitration agreement between the parties nugatory, since it is for the company court to determine whether the debt is due, or the creditors have locus standi to file a petition for winding up, being, in fact a creditor, particularly in view of the dispute with respect to his being a creditor having been raised by the company is bona fide, and the company petition not having been shown to be akin to a suit or proceedings for the recovery of the amount. It would be for the court which is to see only a prima facie case, to determine whether the dispute requires to be gone into in an elaborate proceeding before determining the need for winding up. It is for the company court to decide while striking a balance between the public inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect to staying the winding-up proceedings or to continue them, in spite of the arbitration agreement. Courts would not be bound to deal slavishly to the arbitration clause and stay the proceedings. It is in the peculiar facts and circumstances of a case that the company court may relegate the parties to another procedure available, otherwise it would not slavishly accept the arbitration clause and stay the proceedings. The arbitration clause cannot be permitted to be deployed as a ploy with an intention to delay the winding up proceedings. It may cover the dispute between the parties to the agreement, or relating to it but to see whether the debt is due to the petitioner, the question is to be examined, by the company court, and while considering the petition and questions on the merits, divorced from the provisions of the Arbitration Act and while determining the question, as observed above, no order under section 34 of the Indian Arbitration Act may be possible. A reading of the provisions of the Companies Act and the Arbitration Act as referred to above in the background of the Statement of Objects and Reasons for enactment of the Companies Act makes it clear that the Legi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of right entitled to get the winding-up proceedings stayed mechanically till the controversy raised by it in its defence is decided by the arbitrator. By adopting the ritualistic formula of section 34, the respondents cannot be permitted to stultify the proceedings. Otherwise too as observed above, the relief claimed under sections 433, 434 and 439 of the Companies Act cannot be diverted to the arbitrator by the company court or by the parties by their mutual agreement nor can the arbitrator order the winding up. In view of the discussion made above, it emerges that an arbitration agreement between the parties to the company petition under sections 433, 434 and 439 continues to bind the parties and the party against whom the company petition is filed can raise the objection that in view of the arbitration clause further proceedings in the company petition be stayed. But the right to raise an objection would not mechanically result in stay of the winding-up proceedings because of the arbitration clause. It is for the court, keeping in view the peculiar facts and circumstances of the case in any dispute, the questions raised, the bona fides of the parties, the expediency of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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