1981 (12) TMI 132 - HC - Companies Law

Issues Involved:
1. Validity of counter-claim as a defense in a winding-up petition.
2. Bona fide dispute regarding the debt.
3. Interpretation of "neglects to pay" under Section 434(1)(a) of the Companies Act, 1956.
4. Relevance of prior judgments and awards in the context of winding-up petitions.

Detailed Analysis:

1. Validity of Counter-Claim as a Defense in a Winding-Up Petition:
The petitioner argued that a counter-claim by the company cannot be considered a valid defense unless it has been fructified into a decree. The petitioner's counsel, Shri Subramaniyam, emphasized that a substantive right to a cross-claim must arise out of a contract or a provision of law, such as Section 59 of the Sale of Goods Act. He further contended that there is no provision in the Arbitration Act for a cross-claim and that the winding-up proceedings should follow principles analogous to res judicata.

The court, however, found that the company had a bona fide counter-claim based on an award of Rs. 55,000, which was in excess of the petitioner's claim. The court held that the existence of a genuine cross-claim could constitute a reasonable cause for non-payment, thereby providing a valid defense to the winding-up petition.

2. Bona Fide Dispute Regarding the Debt:
The court examined whether the company's defense, based on an award against the petitioners, constituted a bona fide dispute. The court noted that both awards (one in favor of the company and one in favor of the petitioners) were passed on the same day by the same arbitrators. The company's award was for a larger amount, and this fact was not disputed by the petitioners.

The court concluded that the company's defense was bona fide and that the existence of a genuine cross-claim rendered the petitioner's claim a disputed one. A disputed claim cannot be a good subject-matter for a winding-up petition.

3. Interpretation of "Neglects to Pay" under Section 434(1)(a) of the Companies Act, 1956:
Section 434(1)(a) of the Companies Act, 1956, states that a company is deemed unable to pay its debts if it neglects to pay a sum exceeding five hundred rupees after a demand notice has been served. The term "neglected" has been interpreted by judicial pronouncements to mean a refusal to pay without reasonable cause.

The court cited several precedents, including the Calcutta High Court's decisions in Bangasri Ice and Cold Storage Ltd. v. Kali Charan Banerjee and In re Bharat Vegetable Products, which held that a bona fide dispute or a valid counter-claim constitutes a reasonable cause for non-payment. The court also referenced Lord Denning's observations in In re L.H.F. Wools Ltd., emphasizing that a genuine cross-claim should be tried out in a different forum, and if found substantial, the winding-up petition must be rejected.

In this case, the court found that the company's refusal to pay the petitioner's claim was based on a bona fide dispute arising from an award in its favor. Therefore, the company had not "neglected" to pay within the meaning of Section 434(1)(a).

4. Relevance of Prior Judgments and Awards:
The court considered the decision in Crompton Greaves Ltd., In re, where it was held that a cross-claim must arise out of the same contract to constitute a bona fide dispute. However, the court noted that this was not a general proposition and must be read in the context of the specific facts of that case.

In the present case, the court observed that the awards were based on different contracts but were passed on the same day by the same arbitrators. The court concluded that the company's defense was bona fide and that the existence of a larger award in favor of the company provided a reasonable cause for non-payment.

Conclusion:
The court dismissed the winding-up petition with costs, holding that the company's defense based on a bona fide cross-claim was valid. The court emphasized that a genuine dispute regarding the debt, supported by an award in favor of the company, constituted a reasonable cause for non-payment, thereby negating the claim of "neglect" under Section 434(1)(a) of the Companies Act, 1956.

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