REVISITING CONTROVERSY OVER THE PRECISE SCOPE OF WINDING- UP

PROVISIONS

ABHINAV KUMAR, SANAM TRIPATHI & AMIT SINGH 1

ABSTRACT

Under Section 433(e) of the Act, the Tribunal/Company Court may wind up a company if it is

unable to pay its debts. Further, section. 434(1) lists three circumstances where a company is

deemed to be unable to pay its debts. The term ‘debt’ has been construed differently by different

High Courts in India, and controversy has arisen recently over the precise scope of the winding-

up provision. Therefore, there is a need to examine the present position of the law, and the scope

and extent of the powers of the Tribunal/Company Court under Section 433 (read with Section

434) of the Act.

The aim of this paper is to shed clarity upon the exact legal position regarding the interpretation

of ‘debt’ under the Act, the powers of the Tribunal/Company Court under Section 433 of the Act

and the rights of the parties involved in the same. The authors in the article raises three research

question firstly, whether Section 434(1) (a) of the Companies Act 1956 has been interpreted

liberally by Indian Courts? Secondly, whether the Tribunal/Company Court has jurisdiction to

decide complex issues of fact and law arising in a winding up petition? And thirdly whether

solvency is a ground for dismissing a winding up petition filed under Sections 433 and 434(1)(a)

of the Companies Act 1956?

1 Authors are 4th year Student Of National Law University Delhi, and can be reached at abhinav2singh@gmail.com.

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CHAPTER ILITERATURE REVIEW ON BASIS OF RESEARCH QUESTIONS

1.1 Research Question: Whether Section 434(1)(a) of the Companies Act 1956 has been

interpreted liberally by Indian Courts?

1.1.1 Scope of ‘debt’

In Kesoram Industries and Cotton Mills Ltd. v. CWT,2 the Court held that a debt is ‘a sum

of money payable in future by reason of a present obligation debitum in praesenti solvendum in

futuro.’ Newfinds (India) v. Vorion Chemicals & DistilleriesThe term ‘debt’ would refer to a

definite sum and would not include any claim for unliquidated damages or a sum of money that is

capable of being ascertained.3Tripura Admn v. Tripura State Bank Ltd., The term ‘unable to pay

its debt’ is to be taken in its commercial sense of being unable to meet current demands though the

company may be otherwise solvent.4

This principle was re-affirmed in Registrar of Companies v. Kavita Benefit Pvt. Ltd.,5where

the Court opined that a debt must be a determined or definite sum of money payable immediately

or at a future date. Thus, a contingent or conditional liability is not a debt, unless the condition has

already occurred.

The claim of existence of debt cannot be unsubstantiated. If the claimant is unable to show

that the debt does indeed exist, s/he will not be entitled to claim relief. For example, in Kalra Iron

Stores v. Faridabad Fabricators P. Ltd. (No. 2),6 the petition neither averred that the company

was unable to pay its debts nor carried a statement of accounts or acknowledgment of the debt

claimed by the petitioner, the petitioner was held not be entitled to a winding up order.Similarly,

in Naresh Kumar Agarwal v. Davender Kumer Mittal,7 the petitioners made an unsubstantiated

allegation of loan to the company for a hotel project, and were thus barred from seeking the

remedy of winding up.

2 (1966) 59 ITR 767 (SC).3 Newfinds (India) v. Vorion Chemicals & Distilleries, (1976) 46 Com Cases 87 (Mad.), at 89.4 Tripura Admn v. Tripura State Bank Ltd., (1960) 30 Comp Cas 324 (Tri).5 (1978) 48 Com Cases 231 (Guj.)6 (1992) 73 Com Cases 337 (Del.)7 (1996) 3 Comp LJ 326.

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1.1.2 Exercise of discretionary power

In every winding up petition under Section 433(e), the petitioner must show the following 2

things:8

i. Firstly, that there exists a debt

ii. Secondly, that the respondent company is unable to pay the debt.

However, the mere presence of these 2 factors is not in itself sufficient to cause the winding

up petition to be granted. In other words, the Court/tribunal has discretion to grant or not grant the

winding up order, and it is not bound the presence of these 2 factors. An order for winding up

under Section 433(e) is discretionary.

1.2 Research Question: Whether the Tribunal/Company Court has jurisdiction

to decide complex issues of fact and law arising in a winding up petition?

A winding up order may only be made once the petitioner established its claim and there is

no bona fide or genuine dispute or defense as to the liability of the company to pay the claim of

the creditor.9It is well-settled law that a winding up petition is not a legitimate means of

enforcement of a debt that is bona fide disputed by the respondent company.10

In Ceramics India v. Haryana Steel and Alloys Ltd.,11 the Punjab and Haryana High Court

held that when the claims and allegations of petitioner-creditors and counter claims by the

respondent-company involve or raise complicated questions of law and facts and require detailed

investigation, the Company Court will refuse to order winding up of the company.

InAmalgamated Commercial Traders (P) Ltd. v. A.C.K. Krishnaswami & Anr.,12

theSupreme Courtheld that a winding up petition is not a legitimate means of seeking to enforce

payment of the debt which is bona fide disputed by the company; a petition presented ostensibly

8 “CR DATTA ON COMPANY LAW,” 6th edn, 2008, LexisNexis Butterworths Wadhwa Nagpur, p. 5945.9 “CR DATTA ON COMPANY LAW,” 6th edn, 2008, LexisNexis Butterworths Wadhwa Nagpur, p. 5938.10 Harinagar Sugar Mills Co. Ltd. v. Court Receiver, (1966) 36 Comp Cas 426 (SC).11 (1995) 83 Comp Cas 737 (P&H). The High Courts of Himachal Pradesh and Allahabad respectively, have given similar decisions in Mazboot Packers and Engineers Co. v. Himachal Pradesh Horticulture Producing Marketing and Processing Corporation Ltd., (1999) 95 Comp Cas 579 (HP); and Shadi Lal Enterprises Ltd. v. Co-operaive Co. Ltd., (2001) 103 Comp Cas 863 (All).12(1965) 35 Company Cases 456 (SC).

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for a winding up order but really to exercise pressure will be dismissed, and under circumstances

may be stigmatized as a scandalous abuse of the process of the court.

It further observed that while bona fide challenge of debt would disentitle recourse under

Sections 433(e) and 434(1)(a), but what is a bona fide disputed debt would have to be decided

subjectively on the facts of each case. If the dispute, upon examination, were found to be bona

fide, then the tribunal/company court would cease to be the appropriate forum for adjudication,

and a civil court would have jurisdiction over the case.13

Similarly, in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries Pvt.

Ltd.,14the same Court upheld this decision. The principles laid down in the above mentioned

judgment were reiterated by the Court in Mediquip Systems (P) Ltd. v. Proxima Medical Systems

(GMBH),15 wherein the Court held that the defense raised by the appellant-company was a

substantial one and not mere moonshine and had to be finally adjudicated upon on the merits

before the appropriate forum. The Court in Vijay Industries v. NATL Technologies Ltd.,16 later

also followed the abovementioned judgments.

InM/s IBA Health (I) Pvt. Ltd. v. M/s Info-Drive Systems,17 this very question was raised

before the Court. The facts of the case are as follows. IBA Health Systems Ltd., an Indian

company, had developed a Hospital Information Software (‘HIS-I’). In 2002, it entered into a

Cooperation Agreement with Info-Drive Systems (IDS), a Malaysian company, pursuant to which

IDS introduced IBA to a third company and facilitated the sale of the HIS-I software to that

company. For this service, IBA agreed to pay IDS a commission. Subsequently, disputes arose

between the parties on the payment of commission, and they entered into a ‘Deed of Settlement’ in

2003.

To further complicate the matter, IBA (it was known as Medicom previously) was to be

taken over, which IDS sought to prevent by filing a civil suit in the jurisdictional court in

Bangalore. In 2006, the parties filed a compromise petition, reiterating that their relationship

would be governed by the terms of the Deed of Settlement. In essence, the Deed of Settlement

provided that IBA would pay IDS a specified percentage of certain types of payments it received

from its customer, and IDS in turn acknowledged that IBA had paid all its dues to date, and

undertook not to make any other claim in respect of the HIS-I transaction.

13 Ibid.14 (1971) 3 SCC 632.15(2005) 7 SCC 42.16(2009) 3 SCC 527.17 (2010) 10 SCC 553.

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However, a year later, IDS demanded from IBA its share of a payment it alleged IBA had

received from its customer. IBA disputed both the existence of any such receipt and its liability to

IDS. At this point, IDS issued notice under Section 434 of the Companies Act, and filed a

company petition seeking a winding-up order. The Company Court, over IBA’s objections,

admitted the petition, found that IDS had established a prima facie case and indicated that it would

pass orders in relation to the customary advertisement to be published. Naturally, this would have

caused IBA substantial detriment, both commercially and more generally, and it challenged the

order of the Company Judge.

The issue that arose was whether a creditor could prefer an application for winding up for

discharge of a substantially disputed liability. The Court held that in such a situation, there is a

clear duty upon the Company Court to examine whether the company has a genuine dispute to the

claimed debt. A dispute would be substantial and genuine if it is bona fide and not spurious,

speculative, illusory or misconceived. The Company Court, at that stage, would not be expected to

hold a full trial of the matter - it would only have to decide whether the grounds appear to be

substantial.

The Company Court is not required in a winding-up proceeding to examine complex issues

of law and fact, or resolve serious disputes between parties, and relied in support on prior

decisions of the Court.18 As a result, the Supreme Court held that a Company Court cannot

proceed with a winding-up petition if the respondent raises a ‘substantial’ or ‘bona fide’ dispute as

to the existence of the debt.

However, the Court cautioned that the grounds of dispute, of course, must not consist of

some ingenious mask invented to deprive a creditor of a just and honest entitlement and must not

be a mere wrangle. It re-affirmed that is settled law that if the creditor's debt is bona fide disputed

on substantial grounds, the Court should dismiss the petition and leave the creditor first to

establish his claim in an action, lest there is danger of abuse of winding up procedure. The

Company Court would always retain the discretion, but a party to a dispute should not be allowed

to use the threat of winding up petition as a means of forcing the company to pay a bona fide

disputed debt.19 

Although the Court subsequently used other expressions to indicate the threshold a company

court must use to dismiss a winding-up petition, it seems clear from the above observations and

from the context of the judgment that the standard is one of ‘reasonable’ or ‘bona fide’ defense – a

18Amalgamated Commercial Traders v. ACK Krishnaswami, 1965 35 CompCas 456 SC; Mediquip Systems Pvt. Ltd. v. Proxima Medical System GMBH, AIR 2005 SC 4175.19 Ibid.

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standard that appears to be higher than a prima facie case but lower than the standard required to

succeed (or resist) in civil court.

1.3 Research Question: Whether solvency is a ground for dismissing a winding

up petition filed under Sections 433 and 434(1)(a) of the Companies Act 1956?

In order for a Tribunal/Company Court to exercise the discretion conferred upon it under

Section 433(e) read with Section 434(1)(a), it must be satisfied that the company is insolvent,

because the term ‘unable to pay its debt’ is to be taken in its commercial sense of being unable to

meet current demands though the company may be otherwise solvent.20

The company should be plainly and commercially insolvent; its assets and its existing

liabilities must be such as to make it reasonably certain that the existing and probable assets would

be insufficient to meet the existing liabilities.21 Thus, ordinarily, if there is a bona fide dispute

regarding the debt payable by the respondent company, and the company is sound and solvent, the

winding up petition would be liable to be dismissed.22

However, if the debt is in fact owed and the company indebted, then the defendant company

cannot claim the defense that it is a viable and profit-making company having a sound financial

position.23

In M/s IBA Health (I) Pvt. Ltd. v. M/s Info-Drive Systems,24(facts previously discussed) the

Appellant company argued that the winding-up petition should be dismissed notwithstanding the

court’s finding on the extent of the dispute, because the Appellant was ‘commercially solvent’ and

‘able to pay its debts’. The Court rejected this contention, holding that the solvency of a company

cannot stand in the way of a winding-up petition if the company does indeed owe an unpaid debt

to the creditor. At first sight, this does seem surprising, for Section 433(e) refers to a company that

is unable to pay its debts.

Section 434(1)(a) provides that a company shall be deemed to be unable to pay its debts if it

has ‘neglected to pay’ a certain sum for three weeks after notice is duly served on it. Section

434(1)(a) refers, therefore, merely to the factum of non-payment. It may be suggested that Section

433(e) is not exhausted by the circumstances enumerated in Section 434(1)(a), and that a company

can demonstrate its ability to satisfy debts.

20 Tripura Admn v. Tripura State Bank Ltd., (1960) 30 Comp Cas 324 (Tri).21 Ibid.22 Pradeshiya Industrial and Investment Corporation of UP v. North India Petro Chemicals Ltd., (1994) 79 Comp Cas 835 (SC). 23 Mahesh Nathani v. Sir Edward Dunlop Hospitals (India) Ltd., (2006) 129 Comp Cas 678 (Del).24 (2010) 10 SCC 553.

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The Court, however, addresses this point by noting that the company will have an

opportunity on the liquidation application to rebut that presumption. In addition, commercial

solvency is also relevant to determine whether there is a serious dispute between the parties over

the existence of liability.

The Court held that a determination of examination of the company’s insolvency may be a

useful aid in deciding whether the refusal to pay is a result of the bona fide dispute as to liability or

whether it reflects an inability to pay; in such a situation, solvency is relevant not as a separate

ground.

It further observed that if there is no dispute as to the company's liability, the solvency of the

company might not constitute a stand alone ground for setting aside a notice under Section 434 (1)

(a), meaning thereby, if a debt is undisputedly owing, then it has to be paid. If the company refuses

to pay on no genuine and substantial grounds, it should not be able to avoid the statutory demand.

The law should be allowed to proceed and if demand is not met and an application for liquidation

is filed under Section 439 in reliance of the presumption under Section 434(1)(a) that the company

is unable to pay it debts, the law should take its own course and the company of course will have

an opportunity on the liquidation application to rebut that presumption.25 

The Court felt that an examination of the company's solvency may be a useful aid in

determining whether the refusal to pay debt is a result of a bona fide dispute as to the liability or

whether it reflects an inability to pay. Of course, if there is no dispute as to the company's liability,

it is difficult to hold that the company should be able to pay the debt merely by proving that it is

able to pay the debts. If the debt is an undisputedly owing, then it should be paid. If the company

refuses to pay, without good reason, it should not be able to avoid the statutory demand by

proving, at the statutory demand stage, that it is solvent. In other words, commercial solvency can

be seen as relevant as to whether there was a dispute as to the debt, not as a ground in itself, that

means it cannot be characterized as a standalone ground.26

The Court concluded by pointing out that the Company Court cannot be maliciously used as

a debt collecting agency, and that an action may lie in appropriate Court in respect of the injury to

reputation caused by maliciously and unreasonably commencing liquidation proceedings against a

company and later dismissed when a proper defense is made out on substantial grounds. This

judgment may ensure that a winding-up petition is scrutinised more carefully before it is admitted.

25 Ibid.26 Ibid.

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CHAPTER II

ANALYSIS

2.1 General Analysis

It is well known that one of the grounds for winding up a company under Indian company

law is its inability to pay ‘debts’. Section 433(e) of the Companies Act explicitly provides that the

Tribunal/Company Court may wind up a company if it is ‘unable to pay its debts’ and Section

434(1)(a) lists three circumstances where a company is deemed to be unable to pay its debts.

‘Debt’ has been construed widely in Indian law, and controversy has arisen recently over the

precise scope of the winding-up provision. Recently, while the Supreme Court addressed part of

this in Vijay Industries v. NATL Technologies,27 it has had occasion to consider the law in more

detail in IBA Health v. Info-Drive Systems.28

The Supreme Court has held that a debt is ‘a sum of money payable in future by reason of a

present obligation debitum in praesenti solvendum in futuro.’29 The term ‘debt’ refers to a definite

sum and does not include any claim for unliquidated damages or a sum of money that is capable of

being ascertained.30 The term ‘unable to pay its debt’ is to be taken in its commercial sense of

being unable to meet current demands though the company may be otherwise solvent.31

Therefore, it is clear that a ‘debt’ under Section 433(e) is a fixed and certain sum of money

that is owed by the respondent company to the petitioner creditor, and the respondent company has

been unable to repay the debt in the appropriate time. This understanding poses 2 possibilities of

non-payment – the respondent company could have failed to pay because it is actually

commercially unable to do so; or the respondent company could be commercially solvent and may

have refused to repay for some other non-commercial reason.

If it is the latter situation (i.e.: the respondent company has failed to pay because it is

actually commercially unable to do so), then the Tribunal/Company Court may comfortably

exercise its powers under Section 433(e) read with Section 434(1)(a) and allow the petition for

winding up of the company so that the petitioner creditor may reclaim money owed.

However, if it is the former case, then further complications arise. If the company is

commercially solvent, but does not currently possess the capital to repay the debt or is otherwise

27 AIR 2008 SC 1661.28 (2010) 10 SCC 553.29Kesoram Industries and Cotton Mills Ltd. v. CWT, (1966) 59 ITR 767 (SC), supra note 1.30 Newfinds (India) v. Vorion Chemicals & Distilleries, (1976) 46 Com Cases 87 (Mad.), at 89, supra note 2.31 Tripura Admn v. Tripura State Bank Ltd., (1960) 30 Comp Cas 324 (Tri), supra note 3.

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stalling payment, then the petition for winding up may still be allowed. But if the company has not

repaid the debt because it is contesting the existence or genuineness of the debt, then there is a

complex question of whether to allow the petition or not. This is because it would then become a

substantial dispute of law and fact over whether there actually exists a debt owed to the petitioner

by the respondent.

Various High Courts across the country have taken the firm stand that when there is a

substantial question of fact and law raised in a petition for winding up under Section 433, then the

Tribunal/Company Court cannot proceed with the winding up petition; the petition must be

dismissed, and a civil suit must be instituted in a Court of appropriate jurisdiction.32

InAmalgamated Commercial Traders (P) Ltd. v. A.C.K. Krishnaswami & Anr.,33

theSupreme Court held that a winding up petition is not a legitimate means of seeking to enforce

payment of the debt which is bona fide disputed 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 stigmatized as a scandalous abuse of the process of the court.

It further observed that while bona fide challenge of debt would disentitle recourse under

Sections 433(e) and 434(1)(a), but what is a bona fide disputed debt would have to be decided

subjectively on the facts of each case. If the dispute, upon examination, were found to be bona

fide, then the tribunal/company court would cease to be the appropriate forum for adjudication,

and a civil court would have jurisdiction over the case.34

2.2 Case Analysis: M/s IBA Health (I) Pvt. Ltd. v. M/s Info-Drive Systems,(2010) 10 SCC 553.

2.2.1 Facts of the Case

IBA Health Systems Ltd., an Indian company, had developed a Hospital Information

Software (‘HIS-I’). In 2002, it entered into a Cooperation Agreement with Info-Drive Systems

(IDS), a Malaysian company, pursuant to which IDS introduced IBA to a third company and

facilitated the sale of the HIS-I software to that company. For this service, IBA agreed to pay IDS

a commission. Subsequently, disputes arose between the parties on the payment of commission,

and they entered into a ‘Deed of Settlement’ in 2003.

32SeeCeramics India v. Haryana Steel and Alloys Ltd., (1995) 83 Comp Cas 737 (P&H);Amalgamated Commercial Traders (P) Ltd. v. A.C.K. Krishnaswami & Anr., (1965) 35 Company Cases 456 (SC); Mazboot Packers and Engineers Co. v. Himachal Pradesh Horticulture Producing Marketing and Processing Corporation Ltd., (1999) 95 Comp Cas 579 (HP); Shadi Lal Enterprises Ltd. v. Co-operaive Co. Ltd., (2001) 103 Comp Cas 863 (All); supra notes 9-11.33(1965) 35 Company Cases 456 (SC).34 Ibid.

9

To further complicate the matter, IBA (it was known as Medicom previously) was to be

taken over, which IDS sought to prevent by filing a civil suit in the jurisdictional court in

Bangalore. In 2006, the parties filed a compromise petition, reiterating that their relationship

would be governed by the terms of the Deed of Settlement. In essence, the Deed of Settlement

provided that IBA would pay IDS a specified percentage of certain types of payments it received

from its customer, and IDS in turn acknowledged that IBA had paid all its dues to date, and

undertook not to make any other claim in respect of the HIS-I transaction.

However, a year later, IDS demanded from IBA its share of a payment it alleged IBA had

received from its customer. IBA disputed both the existence of any such receipt and its liability to

IDS. At this point, IDS issued notice under Section 434 of the Companies Act, and filed a

company petition seeking a winding-up order. The Company Court, over IBA’s objections,

admitted the petition, found that IDS had established a prima facie case and indicated that it would

pass orders in relation to the customary advertisement to be published. Naturally, this would have

caused IBA substantial detriment, both commercially and more generally, and it challenged the

order of the Company Judge.

2.2.2 Issue 1: Whether a creditor can prefer an application for winding up for discharge of a

substantially disputed liability?

The Court held that in such a situation, there is a clear duty upon the Company Court to

examine whether the company has a genuine dispute to the claimed debt. A dispute would be

substantial and genuine if it is bona fide and not spurious, speculative, illusory or misconceived.

The Company Court, at that stage, would not be expected to hold a full trial of the matter - it

would only have to decide whether the grounds appear to be substantial.

The Company Court is not required in a winding-up proceeding to examine complex issues

of law and fact, or resolve serious disputes between parties, and relied in support on prior

decisions of the Court.35 As a result, the Supreme Court held that a Company Court cannot

proceed with a winding-up petition if the respondent raises a ‘substantial’ or ‘bona fide’ dispute as

to the existence of the debt.

However, the Court cautioned that the grounds of dispute, of course, must not consist of

some ingenious mask invented to deprive a creditor of a just and honest entitlement and must not

be a mere wrangle. It re-affirmed thatit is settled law that if the creditor's debt is bona fide disputed

on substantial grounds, the Court should dismiss the petition and leave the creditor first to

35Amalgamated Commercial Traders v. ACK Krishnaswami, 1965 35 CompCas 456 SC; Mediquip Systems Pvt. Ltd. v. Proxima Medical System GMBH, AIR 2005 SC 4175.

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establish his claim in an action, lest there is danger of abuse of winding up procedure. The

Company Court would always retain the discretion, but a party to a dispute should not be allowed

to use the threat of winding up petition as a means of forcing the company to pay a bona fide

disputed debt.36 

Although the Court subsequently used other expressions to indicate the threshold a company

court must use to dismiss a winding-up petition, it seems clear from the above observations and

from the context of the judgment that the standard is one of ‘reasonable’ or ‘bona fide’ defense – a

standard that appears to be higher than a prima facie case but lower than the standard required to

succeed (or resist) in civil court.

2.2.3 Issue 2: Whether solvency is a valid ground for dismissing a winding up petition filed

under Sections 433(e) and 434(1)(a) of the Companies Act 1956?

The Appellant Company argued that the winding-up petition should be dismissed

notwithstanding the court’s finding on the extent of the dispute, because the Appellant was

‘commercially solvent’ and ‘able to pay its debts’. The Court rejected this contention, holding that

the solvency of a company cannot stand in the way of a winding-up petition if the company does

indeed owe an unpaid debt to the creditor. At first sight, this does seem surprising, for Section

433(e) refers to a company that is unable to pay its debts.

Section 434(1)(a) provides that a company shall be deemed to be unable to pay its debts if it

has ‘neglected to pay’ a certain sum for three weeks after notice is duly served on it. Section

434(1)(a) refers, therefore, merely to the factum of non-payment. It may be suggested that Section

433(e) is not exhausted by the circumstances enumerated in Section 434(1)(a), and that a company

can demonstrate its ability to satisfy debts. The Court, however, addressed this point by noting that

the company will have an opportunity on the liquidation application to rebut that presumption. In

addition, commercial solvency is also relevant to determine whether there is a serious dispute

between the parties over the existence of liability.

The Court held that a determination of examination of the company’s insolvency may be a

useful aid in deciding whether the refusal to pay is a result of the bona fide dispute as to liability or

whether it reflects an inability to pay; in such a situation, solvency is relevant not as a separate

ground.

It further observed that if there is no dispute as to the company's liability, the solvency of the

company might not constitute a standalone ground for setting aside a notice under Section 434 (1)

(a), meaning thereby, if a debt is undisputedly owing, then it has to be paid. If the company refuses 36 Ibid.

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to pay on no genuine and substantial grounds, it should not be able to avoid the statutory demand.

The law should be allowed to proceed and if demand is not met and an application for liquidation

is filed under Section 439 in reliance of the presumption under Section 434(1)(a) that the company

is unable to pay it debts, the law should take its own course and the company of course will have

an opportunity on the liquidation application to rebut that presumption.37 

The Court felt that an examination of the company's solvency could be a useful aid in

determining whether the refusal to pay debt is a result of a bona fide dispute as to the liability or

whether it reflects an inability to pay. Of course, if there is no dispute as to the company's liability,

it is difficult to hold that the company should be able to pay the debt merely by proving that it is

able to pay the debts. If the debt is an undisputedly owing, then it should be paid. If the company

refuses to pay, without good reason, it should not be able to avoid the statutory demand by

proving, at the statutory demand stage, that it is solvent. In other words, commercial solvency can

be seen as relevant as to whether there was a dispute as to the debt, not as a ground in itself, that

means it cannot be characterized as a stand alone ground.38

The Court concluded by pointing out that the Company Court cannot be maliciously used as

a debt collecting agency, and that an action may lie in appropriate Court in respect of the injury to

reputation caused by maliciously and unreasonably commencing liquidation proceedings against a

company and later dismissed when a proper defense is made out on substantial grounds. This

judgment may ensure that a winding-up petition is scrutinised more carefully before it is admitted.

2.2.4 Public Policy Considerations

The Court thought it proper to additionally examine considerations of public policy while

determining whether to allow a winding up petition or not. It observed that a creditor's winding up

petition, in certain situations, implies insolvency or financial position with other creditors, banking

institutions, customers and so on. Publication in the Newspaper of the filing of winding up petition

may damage the creditworthiness or financial standing of the company and which may also have

other economic and social ramifications. Competitors would be all the more happy and the sale of

its products may go down in the market and it may also trigger a series of cross-defaults, and may

further push the company into a state of acute insolvency much more than what it was when the

petition was filed. Thus, it held, that the Company Courthas not only to look into the interest of the

creditors, but also the interests of public at large.

37 Ibid.38 Ibid.

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The Court sought to impress upon Company Courts to be more vigilant so that their process

would not be misused. A Company Court should thus act with circumspection, care and caution

and examine as to whether an attempt is made to pressurize the company to pay a debt that is

substantially disputed. A Company Court, therefore, should be guarded from such vexatious abuse

of the process and cannot function as a Debt Collecting Agency and should not permit a party to

unreasonably set the law in motion, especially when the aggrieved party has a remedy elsewhere.

2.2.5 Decision

In light of the facts and the discussion by the Court, the appeal to the judgment of the

Company Court was allowed, and leave was granted to the parties to approach an appropriate

forum for their dispute that would decide their dispute in accordance with law.

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CHAPTER III

CONCLUSION

3.1 Research Question: Whether the term ‘unable to pay its debts’ under Section 433(e) of

the Companies Act 1956 has been interpreted liberally by Indian Courts?

Conclusion: While earlier the term ‘unable to pay its debts’ was interpreted narrowly, it

has been interpreted more broadly in recent times, and the discretion given to the Court to pass an

order for winding up under Section 433(e) has consequently been increased. Thus, if it is proved

that there exists an undisputed debt, and that the debt has not been paid, then the Court may

comfortably exercise its powers to grant the winding up order, even if the Company may be

otherwise commercially solvent.

3.2 Research Question: Whether the Tribunal/Company Court has jurisdiction to decide

complex issues of fact and law arising in a winding up petition?

Conclusion: The Supreme Court has made it very clear in its judgment of IBA Health v.

Info-Drive Systems that in all cases where complex issues of fact and law as to existence of debt

have been raised, the Tribunal/Company Court does not have jurisdiction to proceed with a

winding up petition.

3.3 Research Question: Whether solvency is a ground for dismissing a winding up petition

filed under Sections 433(e) and 434(1)(a) of the Companies Act 1956?

Conclusion: The Supreme Court has observed that solvency itself is not a sufficient

ground to dispose off a winding-up petition, if the company does indeed owe an unpaid debt to the

creditor. Section 434(1)(a) of the Companies Act provides that a company shall be deemed to be

unable to pay its debts if it has ‘neglected to pay’ a certain sum for three weeks after notice is duly

served on it. Section 434(1)(a) refers, therefore, merely to the factum of non-payment. Thus,

solvency in itself will not cause a winding up petition to be prima facie dismissed.

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