2002 (12) TMI 499 - HC - Companies Law

Issues Involved:
1. Bona fide dispute and substantial defense.
2. Impact of pending civil suit on winding up petition.
3. Existence of an arbitration clause.
4. Failure to respond to statutory notice.
5. Erosion of the substratum of the company.
6. Admissibility of the winding up petition based on the company's financial health and disputed claims.

Detailed Analysis:

1. Bona fide dispute and substantial defense:
The judgment highlights that if there is a bona fide dispute and the defense is substantial, the court will not wind up the company. The respondent argued that defective material supplied by the petitioner led to rejection, supported by debit notes and letters indicating discrepancies and demands for credit notes. The court noted that the respondent's complaints about defective supplies were contemporaneous with the petitioner's demand for money, indicating that the defense was not an afterthought or a mere moonshine.

2. Impact of pending civil suit on winding up petition:
The respondent contended that a pending civil suit for recovery of money under Order XXXVII of the Code of Civil Procedure should preclude the winding up petition. The court, however, found this argument unappealing, stating that the admission of a winding up petition does not necessarily result in the recovery of the amount due, and that both proceedings can coexist. The court emphasized that the filing of a civil suit does not mandate the dismissal of the winding up petition.

3. Existence of an arbitration clause:
The respondent briefly argued that an arbitration clause existed between the parties. The court maintained that there is no conflict between the statutory relief of winding up and the contractual right to arbitration. If a bona fide defense exists, arbitration is the proper remedy. However, if the defense is mala fide and moonshine, the company judge has unfettered powers to pass appropriate orders. The court reiterated that the existence of an arbitration clause does not preclude the court's jurisdiction in winding up petitions.

4. Failure to respond to statutory notice:
The court discussed the consequences of the respondent's failure to send a reply to the statutory notice. While failure to respond can lead to the admission of the winding up petition, it does not automatically result in winding up orders. The court must consider whether a bona fide defense has been put forward. In this case, the respondent did send a reply, raising issues of defective supplies and disputed amounts, which the court found to be substantial enough to warrant further consideration.

5. Erosion of the substratum of the company:
The respondent argued that the petition should be dismissed because there was no averment that the substratum of the company had been eroded. The court noted that while the erosion of the substratum is a significant consideration, it is not the sole factor. The court must also consider the company's overall financial health and the equitable considerations in winding up proceedings. The court found that the respondent's financial health and ongoing business activities indicated that the substratum had not been eroded.

6. Admissibility of the winding up petition based on the company's financial health and disputed claims:
The court considered the respondent's financial health and the disputed claims. The respondent had deposited a sum of Rs. 20,00,000 as directed by the court, indicating its willingness to comply with court orders. The court directed the respondent to deposit a further sum of Rs. 20,00,000, which would stand to the credit of the civil suit. If the deposit was made, the winding up petition would be deemed concluded and disposed of. If not, the petition would be admitted, and citation published for further proceedings.

Conclusion:
The court balanced the petitioner's claims and the respondent's defenses, considering the bona fide nature of disputes and the financial health of the respondent. The judgment emphasized that winding up petitions should not be used merely as a means of debt recovery and must be tempered by equitable considerations. The court provided a pathway for resolution by directing deposits to be made, ensuring that the winding up petition would only proceed if the respondent failed to comply.

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