1999 (10) TMI 649 - HC - Companies Law

Issues Involved:
1. Applicability of Section 34 of the Arbitration Act, 1940 in staying winding-up proceedings under Sections 433, 434, and 439 of the Companies Act, 1956.
2. Jurisdiction of the High Court in winding-up proceedings versus arbitration proceedings.
3. Bona fide disputes and their impact on winding-up petitions.

Detailed Analysis:

1. Applicability of Section 34 of the Arbitration Act, 1940:
The primary issue revolves around whether a winding-up application under Sections 433, 434, and 439 of the Companies Act, 1956, can be stayed based on an arbitration agreement between the petitioning creditor and the respondent company. The learned Single Judge had stayed the winding-up proceedings, allowing arbitration to proceed. However, the appellant contended that the jurisdiction to wind up a company is a special jurisdiction conferred on the High Courts under the Companies Act, which cannot be overridden by an arbitration agreement. The Supreme Court in Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. held that an arbitrator has no jurisdiction to order the winding-up of a company, as this power is conferred exclusively on the court under the Companies Act.

2. Jurisdiction of the High Court in Winding-Up Proceedings:
The judgment emphasizes that winding-up proceedings are distinct from arbitration disputes. The winding-up jurisdiction is a special jurisdiction conferred on the High Court to address the insolvency of a company, which is a matter of public interest and involves the collective interests of all creditors, shareholders, and contributories. The court's order in winding-up proceedings is an order in rem, affecting the company's status and its ability to continue operations. The Division Bench in Pure Drinks (New Delhi) Ltd. v. Goetze India Ltd. emphasized that the existence of an arbitration clause does not automatically stay winding-up proceedings, as the company court has the jurisdiction to consider the overall interests of all stakeholders.

3. Bona Fide Disputes and Their Impact on Winding-Up Petitions:
The existence of a bona fide dispute between the petitioning creditor and the respondent company is crucial in deciding whether to stay winding-up proceedings in favor of arbitration. The court must be satisfied that a genuine dispute exists and that it falls within the scope of the arbitration agreement. The Division Bench in Pure Drinks (New Delhi) Ltd. v. Goetze India Ltd. and S.N. Enterprises (P.) Ltd., In re, held that the winding-up proceedings cannot be stayed merely because an arbitration agreement exists. The court must examine whether the dispute is bona fide and whether it justifies staying the winding-up proceedings.

Conclusion:
The High Court held that the learned Single Judge erred in staying the winding-up proceedings solely based on the existence of an arbitration agreement. The court emphasized that the jurisdiction to wind up a company is a special jurisdiction that cannot be overridden by an arbitration agreement. The court must consider whether a bona fide dispute exists and whether it justifies staying the winding-up proceedings. The appeal was allowed, and the order under appeal was set aside, reviving the winding-up application to its original position. The Company Judge was directed to examine the existence of an arbitration agreement and the bona fide nature of the dispute before deciding whether to stay the winding-up proceedings.

Judgment:
The appeal is allowed, the order under appeal is set aside, and the winding-up application is revived to its original position. The Company Judge is to examine the existence of an arbitration agreement and the bona fide nature of the dispute before deciding on the stay of winding-up proceedings. No order as to costs.

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