TMI Blog2009 (10) TMI 526X X X X Extracts X X X X X X X X Extracts X X X X ..... n is to wind up the respondent-company and for a consequential direction that the properties of the company be directed to be vested with the official liquidator. 2. The respondent-company is a limited liability company involved in textile business since 2006. The authorised share capital of the respondent-company, according to the petitioner, is Rs. 11 crores of 1,10,00,000 equity shares of Rs. 10 each and the issued, subscribed and paid-up share capital is Rs. 3 crores, consisting of 30,00,000 equity shares of Rs. 10 each. The main objects of the respondent-company is to carry on the business of manufacture, processors, imports, exports, buy, sell and deal with all kinds of yarn like cotton yarn, polyester cotton yarn, synthetic yarn and polyester yarn in all range of counts and hosiery goods, readymade garments manufactured from cotton, wool, silk, jute, etc. 3. The respondent-company with an intention to develop its existing set of patterns and building and functioning had called for quotations from various individuals and construction companies. The petitioner submitted its quotation for carrying out the building construction and for its operations. The respondent appo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was posted for admission, notice was ordered and in C. A. No. 671 of 2009 filed by the petitioner seeking interim injunction restraining the respondent, its men, agents, officers or anyone claiming through it from alienating, disposing of or otherwise encumbering all machinery, stock in trade and raw materials at the factory site at M/s. Muthukumarasamy Textiles Ltd., Ponnivadi Village, Yeragampatti Pirivu, Dharapuram to Oddanchatram Main Road, Dhara-puram-638 656, Erode District, this court granted interim injunction by order dated May 20, 2009. 6. The respondent filed counter affidavit for both injunction application and in the company petition contending that the company petition is not maintainable as there is no debt payable by the respondent to the petitioner. The legal notice issued by the petitioner to the respondent on December 1, 2008 ; the reply notice issued by the respondent to the petitioner on December 13, 2008 ; and filing of O. P. No. 229 of 2009 before this court under section 11 of the Arbitration and Conciliation Act, 1996, seeking appointment of an arbitrator are suppressed in the company petition. It is stated in the counter affidavit that the construc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onest intention knowing fully well that no amount is payable by the respondent to the petitioner or to anyone. 7. Learned counsel for the petitioner submitted that the second bill raised by the petitioner was verified by the architect in accordance with the terms of the agreement and therefore there is no dispute with regard to the liability on the part of the respondent in paying the said amount. Learned counsel also relied on clause 13 of the agreement in support of his contention. Clause 26 of the agreement provides for settlement of all disputes and differences of any kind arise between the parties, pursuant to which the petitioner had filed an application under section 11 of the Arbitration and Conciliation Act, 1996, for appointment of an arbitrator and the said filing of the petition will not be an embargo to maintain this petition seeking winding up. Learned counsel relied upon the judgment of this court reported in [1971] 41 Comp. Cas. 548 ( Hind Mercantile Corporation (P.) Ltd. v. J . H. Rayner and Co. Ltd. ) , for the proposition that mere filing of an application for appointment of arbitration will not abate the company petition. He has also cited the judgment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed application seeking appointment of an arbitrator under section 11 of the Arbitration and Conciliation Act, 1996, for determining the very same claim ? 11. The case of the petitioner is that after paying the first bill raised, the petitioner raised the second and final bill dated February 22, 2008, for the said sum, which according to the petitioner is payable for putting up additional construction. The case of the respondent is that there was no agreement for making the said alleged additional construction and all constructions made by the petitioner is covered by the agreement executed and the entire amount has been paid. The same is disputed by issuing a notice on December 1, 2008, by stating that a sole arbitrator can be appointed in terms of the construction agreement to adjudicate upon the claim made in the bill dated February 22, 2008, by a named arbitrator. The respondent through its counsel sent reply dated December 13, 2008 and stated that the entire amount payable as claimed in the first bill for a sum of Rs. 4,84,49,674 has already been paid and the second bill dated February 22, 2008, claiming the disputed sum has no basis and there is no prior agreement for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Section 21 of the 1996 Act, as noticed hereinbefore, provides as to when the arbitral proceedings would be deemed to have commenced. Section 21 although may be construed to be laying down a provision for the purpose of the said Act but the same must be given its full effect having regard to the fact that the repeal and saving clause is also contained therein. Section 21 of the Act must, therefore, be construed having regard to section 85(2)( a ) of the 1996 Act. Once it is so construed, indisputably the service of notice and/or issuance of request for appointment of an arbitrator in terms of the arbitration agreement must be held to be determinative of the commencement of the arbitral proceeding . . . Keeping in view the fact that in all the decisions, referred to hereinbefore, this court has applied the meaning given to the expression 'commencement of the arbitral proceeding 7 as contained in sectional of the 1996 Act for the purpose of applicability of the 1940 Act having regard to section 85 (2) ( a ) thereof, we have no hesitation in holding that in this case also, service of a notice for appointment of an arbitrator would be the relevant date for the purpose of commence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontemplated within the meaning of sections 433 and 434 of the Act. Respondent No. 1 is not a creditor." 17. For the said contention, the Supreme Court gave finding in paragraphs 23 to 30 which reads thus (page 842 of 79 Comp Cas) : "The second respondent, Dalmia Industries Ltd., has resorted to arbitration proceedings and has claimed this money. Hence, there is a substantial dispute inasmuch as the second respondent claims the said payment of Rs. 72.50 lakhs on the ground that they should be reimbursed. The appellant is a financial corporation which is fully owned by the State of Uttar Pradesh. It cannot be denied that it is a profit-making organisation and is not incurring losses. It is paying dividends on its annual profits. Therefore, there is no relationship of debtor and creditor. The defence of the appellant in relation to non-payment is a bona fide defence. Whatever it may be, the liability of the appellant is yet to be determined. It is in this factual background that we will deal with the legal aspect of the matter. Section 433 of the Act says : 'A company may be wound up by the court, . . . ( e ) if the company is unable to pay its debts ; . . .' From th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... editor to quantify the debt precisely (see Tweeds Garages Ltd., In re [1962] 32 Comp. Cas. 795 (Ch. D) ; [1962] Ch. 406). The principles on which the court acts are first that the defence of the company is in good faith and one of substance, secondly, the defence is likely to succeed in point of law, and, thirdly, the company adduces prima facie proof of the facts on which the defence depends.' Another rule which the court follows is that if there is opposition to the making of the winding up order by the creditors the court will consider their wishes and may decline to make the winding up order. Under section 557 of the Companies Act, 1956, in all matters relating to the winding up of the company the court may ascertain the wishes of the creditors. The wishes of the shareholders are also considered, though, perhaps, the court may attach greater weight to the views of the creditors. The law on this point is stated in Palmer's Company Law, 21st edition, page 742, as follows : 'This right to a winding up order is, however, qualified by another rule, viz. , that the court will regard the wishes of the majority in value of the creditors, and if, for some good reason, they ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent is not a creditor. The appellant is not a debtor because it is a financial institution for an amount which is agreed to be subscribed. Neither the learned single judge nor the Division Bench has decided this important question whether there is a debt and the company has either neglected or is unable to pay. The same claim is the subject-matter of arbitration which is pending adjudication. Therefore, there is no definiteness about it. In view of all these, there is no prima facie dispute as to the debt. The defence raised is a substantial one and not mere moonshine. We find it difficult to appreciate the reasoning of the learned single judge when he holds that there are arguable issues and, therefore, the winding up petition has to be admitted. On this aspect the courts below failed to note that the admission of the winding up petition is fraught with serious consequences as far as the appellant is concerned." 18. A Division Bench of this court in O. S. A. No. 319 of 2003 ( Rediffusion-Dentsu, Young and Rubicam (P.) Ltd. v. Solidaire India Ltd. (dated September 4, 2008) [2008] 145 Comp. Cas. 693, considered similar issue with regard to the pendency of the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istence of a dispute with regard to payment of interest cannot at all be construed as existence of a bona fide dispute relegating the parties to decide such a dispute before the civil court and in such an eventuality, the company court itself is competent to decide such a dispute in the winding up proceedings ; and ( iii )If there is no bona fide dispute with regard to the sum payable towards the principal, it is open to the creditor to resort to both the remedies of filing a civil suit as well as filing a petition for winding up of the company.' The rules as regards the disposal of winding up petition based on disputed claims are thus stated by this court in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries (P.) Ltd., AIR 1971 SC 2600 ; [1972] 42 Comp. Cas. 125. This court has held that if the debt is bona fide disputed and the defence is a substantial one, the court will not wind up the company. The principles on which the court acts are :' ( i )that the defence of the company is in good faith and one of substance ; ( ii )the defence is likely to succeed in point of law ; and ( iii )the company adduces, prima facie proof of the facts on which the def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sputed by the company. A petition presented ostensibly for a winding up order but really to exercise pressure will be dismissed, and under circumstances may be stigmatised as a scandalous abuse of the process of the court. At one time petitions founded on disputed debt were directed to stand over till the debt was established by action. If, however, there was no reason to believe that the debt, if established, would not be paid, the petition was dismissed. The modern practice has been to dismiss such petitions. But, of course, if the debt is not disputed on some substantial ground, the court may decide it on the petition and make the order.' (Vide Buckley on the Companies Acts, 13th edition, page 451). We are satisfied that the debt in respect of which notice was given under section 434 was bona fide disputed by the appellant-company. The appellant-company had received legal advice and it had acted on it. On the facts it seems to us clear that the appellant-company did not dispute the debt in order to hide its inability to pay debts. Further we are satisfied that the question whether the declaration of dividend dated December 30, 1959, is valid or not raises a substantial que ..... X X X X Extracts X X X X X X X X Extracts X X X X
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