Companies Act Case Law M/s IBA Health (I) P Ltd Appellant Vs M/s Info-Drive Systems Sdn Bhd Respondent

 

 

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8230 OF 2010
[Arising out of SLP (C) No. 886 of 2010]
M/s IBA Health (I) P. Ltd. .. Appellant

Versus

M/s Info-Drive Systems Sdn. Bhd. .. Respondent

JUDGMENT

K. S. Radhakrishnan, J.

1. Leave granted.

2. A Company Petition No. 41 of 2009 was filed by the

respondent herein under Sections 433(e) & (f), 434 and 439 of the

Companies Act, 1956 before the High Court of Karnataka at Bangalore

(hereinafter referred to as the Company Court) praying for winding up

of the appellant company on the ground that it had failed to pay a sum

of US$ 1,065,714.00 in terms of the Deed of Settlement entered into

by the parties on 19.12.2003 towards the fees for the marketing

services undertaken by the respondent for the appellant.

3. Prior to the filing of the company petition, a legal notice dated

16.8.2008 was served on the appellant under Section 434(1)(a) of the

Companies Act, 1956, calling upon the company to pay the amount

within twenty one days from the date of the receipt of that notice, failing

which the appellant was informed that appropriate legal proceedings
2

would be initiated. Specific reference was also made to the deed of

settlement dated 19.12.2003 and the terms of the Compromise entered

into by the parties on 18.3.2006 in O.S. No. 9655 of 2005 before the

City Civil Court at Bangalore.

4. The appellant replied to the said notice vide its letter dated

28.8.2008 stating that it had not violated any of the terms and

conditions of the said deed of settlement or the compromise entered

into by the parties and that whatever amount received by the appellant

prior to 31.12.2006 from M/s Solutions Protocol Sdn. Bhd., a company

incorporated in Malaysia, was paid to the respondent. The appellant

also denied the liability to pay the amount demanded. The respondent

was advised not to indulge in any frivolous litigation against the

appellant which would be at their risk and costs.

5. The Company Judge, however, admitted the company

petition vide its order dated 17.9.2009 holding that the respondent

company has established a prima facie case and ordered that the

matter be re-listed for orders regarding advertisement to be published

in the newspaper. The Company Judge also referred to certain

clauses in the deed of settlement and the compromise petition and

concluded prima facie that the appellant had undertaken to make

future payments to the respondent. The Company Judge also directed

the parties to appear before the Mediation Centre at Bangalore for

amicably settling the dispute. Aggrieved by the above mentioned
3

order, the appellant company filed OSA No. 36 of 2009 before the

Division Bench of the High Court of Karnataka which was dismissed

vide its judgment dated 21.10.2009 and hence, the present appeal

before this Court.

6. Mr. R. F. Nariman, learned senior counsel appearing for the

appellant company submitted that no grounds have been made out

even prima facie warranting interference by the Company Court and to

proceed further calling for an advertisement in the newspaper or

directing the parties to appear before the Mediation Centre for

amicably settling the dispute. Learned senior counsel submitted that

the Company Judge as well as the Division Bench have completely

misunderstood the terms and conditions of the deed of settlement

dated 19.12.2003 and the compromise entered into by the parties on

18.3.2006. The learned senior counsel also submitted that if at all the

respondent is aggrieved, the remedy open to the respondent is to

approach in the Civil Court and not by way of a winding up petition,

especially when there is substantial dispute between the parties.

Learned counsel also submitted that the company is commercially

solvent and capable of discharging its debts, if legally due.

7. Mr. R. S. Hegde, learned counsel appearing for the

respondent company submitted that the Company Court as well as the

Division Bench of the High Court have correctly came to the conclusion

that prima facie grounds have been made out under Section 433(e) &
4

(f) read with Section 434 of the Companies Act. The learned counsel

submitted that the appellant company has failed to comply with the

terms and conditions of the deed of settlement dated 19.12.2003 and

the compromise entered into by the parties dated 18.3.2006. Learned

counsel submitted that the appellant company is not in a position to

pay off its debts and it is just and equitable that the appellant company

be wound up.

FACTS IN BRIEF

8. The appellant [M/s IBA Health (India) Private Limited] was

originally incorporated as Medicom Solutions Private Limited. The

name of the appellant company was changed to M/s IBA Health (India)

Private Limited in December 2005 following its acquisition by IBA

Health (Asia) Holding Pte. Limited and IBA Health (Singapore) Pte.

Limited, both of which are entities incorporated in Singapore. The

paid up capital of the appellant company was in excess of Rs.10.06

crores at the end of 31.3.2009 and its fixed assets and investments

were in excess of Rs.23.83 crores. At the end of 31.3.2009, it had

made a profit of over Rs.15 crores and there were over 300 employees

working in the appellant company. The respondent is a company

incorporated in Malaysia which was originally incorporated as Bhari

Information Technology Systems Sdn. Bhd. and subsequently changed

its name to Info-Drive Systems Sdn. Bhd.

9. Pursuant to a Cooperation Agreement dated 18.2.2002
5

entered into by the appellant and the respondent, the respondent

introduced the appellant to one M/s. Solutions Protocol Sdn. Bhd. for

the sale and supply of the appellant’s Hospital Information Systems

(HIS) Software applications and for that service, the appellant

company agreed to pay the respondent company certain commission

charges as set out in the said agreement. The dispute arose between

the parties regarding the payment of the commission charges which

led the parties entering into a deed of settlement dated 19.12.2003,

pursuant to which the terms of the cooperation agreement were

superseded by the deed of settlement and the appellant agreed to pay

the commission charges due to the respondent in accordance with the

terms and conditions set out in the deed of settlement.

10. Alleging breach of the terms of the deed of settlement, the

respondent filed a civil suit being O.S. No. 9655 of 2005 before the City

Civil Court, Bangalore for restraining the acquisition of the appellant by

IBA Health (Asia) Holding Pte. Limited and IBA Health (Singapore) Pte.

Limited. The parties entered into a compromise on 18.3.2006,

pursuant to which both the parties agreed to adhere to the terms and

conditions of the deed of settlement dated 19.12.2003.

11. After the compromise petition was filed, the respondent

received an amount of RM1,069,583.29 on 20.3.2006 from the

appellant. Alleging that, despite receiving periodical payments from

M/s Solutions Protocol Sdn. Bhd., the appellant company had failed to
6

honour its commitments as per the deed of settlement and the

compromise entered into by the parties, the respondent issued an

invoice dated 2.2.2007 to the appellant claiming an amount of US$

1,065,714.00 allegedly due towards fees for the marketing services.

Since the appellant declined to pay the amount demanded, the

respondent issued a legal notice dated 4.7.2007 calling upon the

appellant to pay the above mentioned amount within fifteen days from

the receipt of the notice, failing which the appellant was informed that

the legal proceedings would be initiated against it. Reference was also

made to various terms and conditions incorporated in the deed of

settlement.

12. Appellant replied to the said notice on 19.7.2007 stating that it

had not violated any of the terms and conditions of the deed of

settlement dated 19.12.2003 and pointed out that whatever amounts

received by the appellant from M/s Solutions Protocol Sdn. Bhd. were

paid over to the respondent. It was stated that the appellant company

had received no other payments till 31.12.2006 after they made

payment to the respondent on 20.3.2006. Further, it was pointed out

that the invoice dated 2.2.2007 had no basis as it has been issued to

M/s IBA Health Limited, a company incorporated in Australia and was

not a party to the Corporation agreement or the deed of settlement.

The respondent company was advised not to indulge in any frivolous

proceedings against the appellant, which it was stated would be at
7

their risk and costs. The respondent company then issued a legal

notice dated 16.8.2008 under Section 434 of the Companies Act

calling upon the appellant to pay the amount demanded within twenty

one days from the date of receipt of notice, failing which the appellant

was informed that appropriate legal proceedings would be initiated.

The notice was replied by the appellant company vide letter dated

28.8.2008 denying its liability. Further, it was also pointed out that any

attempt to initiate proceedings under Section 433(e) of the Companies

Act, 1956 has to fail as there is no debt payable by the appellant.

13. We are, in this case, primarily concerned with the terms and

conditions of the deed of settlement followed by the terms of the

compromise entered into by the parties on 18.3.2006 in O.S. No. 9655

of 2005. In order to examine the rival contentions raised by the

parties, it is useful to refer to the terms and conditions incorporated in

the above mentioned documents. The relevant terms and conditions

of the deed of settlement dated 19.12.2003 are as follows:

“1. MEDICOM has agreed to pay and BITECH has agreed to accept
up to the maximum amount of Ringgit Malaysia Eight Million Six
Hundred Thousand (RM 8,600,000) only as full and final settlement
subject to terms and conditions hereinafter contained (hereinafter
referred to as the “Settlement Sum”).

2. The Parties hereto agreed that the Settlement Sum is formulated
based on the following proportions of the total amounts of
MIDICOM produce license fee and/or all other payments received
by MEDICOM from SP and/or SP/JV by virtue of the HICT
Package I Contract:

i. Eleven (11%) percent of the MEDICOM HIS software
applications produce license fee, subject to a maximum
of Ringgit Malaysia Six Million Two Hundred Thousand
8

(RM 6,200,000) only;

ii. Subject to a maximum of Ringgit Malaysia Two Million
Four Hundred Thousand (RM 2,400,000) only:
a. Twelve (12%) percent for implementation and
business process re-engineering fees only, for
payments received by MEDICOM on or before
31st December, 2003;

b. Five (5%) percent for implementation and
business process re-engineering fees only, for
payments received by MEDICOM after 31st
December, 2003;

iii. The Settlement Sum as indicated in sub-paragraphs (i)
and (ii) above is only towards the amount received from
SP and/or SP/JV for any of the 13 named hospitals along
with scope of modules/deliverables agreed as part of
HICT Package I Contract. BITECH shall not be entitled
to any amount in respect of any new hospitals added to
HICT Package I Contract or replacement hospitals to
HICT Package I contract or change in methodology and
scope of supply;

iv. BITECH shall have no claims either now or anytime in
future on payments received by MEDICOM from SP
and/or SP/JV on any other items of deliverables not
specified in Clause 2(i) or Clause 2(ii) above, howsoever
designated, including Software Maintenance, Annual
Maintenance Charges (AMC), customization, per diem
charges, local expenses, airfare & travel expenses,
accommodation expenses and the like.
3. The Settlement Sum shall be valid for payments received by
MEDICOM from SP and/or SP/JV under the HICT Package I
Contract and/or the HIS software applications modules contracted
for the HICT Package I Contract with SP/JV only and it is
conclusively agreed to that BITECH shall not in any circumstances
whatsoever be entitled in law or otherwise for any payment for any
other contracts including contracts involving MEDICOM and
Solutions Protocol from the Government of Malaysia or otherwise,
whether in Malaysia or any other country.

4. The Parties hereto hereby acknowledge that the obligation of
MEDICOM to pay BITECH the Settlement Sum shall always be
subject to MEDICOM (or its representatives or nominees) having
9

received payments of sufficient value from SP and/or SP/JV to
enable the payment of up to the maximum amount of the
Settlement Sum to be made on or before 31st December, 2006
(hereinafter referred to as the “Cut-Off Date”) and in the event that
such payments are not received on or before the Cut-off Date, the
Parties agree that BITECH shall receive a proportion of the total
value of payments received by MEDICOM (or its representatives or
nominees) to be calculated in accordance with Clause 2(i) and (ii)
above.

5. BITECH may designate a nominee to receive payments from
MEDICOM constituting the Settlement Sum, the identity and
address of which shall be communicated MEDICOM and Solutions
Protocol in writing upon the execution of this Deed of Settlement.
xxx xxx xxx
xxx xxx xxx

7. The Settlement sum shall be initiated for the process of payment
by MEDICOM to BITECH in the following manner:

i. For all or any amounts received by MEDICOM up to 31
December 2003, MEDICOM shall issue and establish an
irrevocable Letter of Credit (LC) to BITECH in the
proportions set out in Clause 2(i) and (iia) within 10 working
days from 31st December, 2003; and

ii. For any amounts received by MEDICOM from SP/JV after
31 December 2003 onwards, MEDICOM shall issue and
establish an irrevocable Letter of Credit (LC) to BITECH in
the proportions set out in Clause 2(i) and (iib) within 21
working days from the date the payment is received by
MEDICOM.

xxx xxx xxx
xxx xxx xxx

19. This Deed of Settlement shall be governed by and construed in
accordance with the law of India and the parties hereto submit to the
exclusive jurisdiction of the courts of Bangalore, India.”
14. Following the above deed of settlement, we have already

indicated that the parties had entered into a Compromise on 18.3.2006

in O.S. No. 9655 of 2005. Reference may also be made to clauses 2
10

to 6 of the said Compromise deed, which are extracted hereunder:

” xxx xxx xxx
xxx xxx xxx

2. The Defendant has agreed that it will provide report once in two
months to plaintiff, of defendant’s invoices raised on M/s Solution
Protocol Sdn. BHD, Malaysia and reports once in two months, of
payment effected by M/s. Solutions Protocol Sdn. BHD, Malaysia
in favour of the defendant pertaining to the transactions under
HICT Package I Contract as referred in Clause 2(i)(ii) & (iii) of the
Deed of Settlement. Plaintiff assures that it will make reasonable
efforts to persuade M/s. Solutions Protocol to settle the invoices of
the defendant at the earliest.

3. The Defendant agreed to make future payments to the plaintiff as
per Plaintiff’s entitlement and as per the defendant’s obligation
under the Deed of Settlement.

4. The Defendant, based on transactions pertaining to the Deed of
Settlement has paid the amount having become due and payable
to the Plaintiff as on date. The Plaintiff accepts that it has received
all payments due to it as on date from the defendant as per the
terms of the deed of settlement.

5. The Defendant has already disclosed the right of the Plaintiff in
respect of Deed of Settlement mentioned in the suit, to M/s IBA
Health Limited, Australia in the understanding entered with them.

6. This compromise shall be binding on the parties and shall not be
construed as creating an executable decree.
xxx xxx xxx
xxx xxx xxx”

 

15. The respondent company in company petition alleged that the

appellant had failed to comply with the terms and conditions of the

deed of settlement and since no payment was forthcoming from the

appellant company and, it was under such circumstances, that a legal

notice legal notice dated 16.8.2008 was issued on the appellant

reminding of its obligations under the deed of settlement. Further, it is
11

also stated that the respondent had reliably learnt that substantial

payment had been received by the appellant from M/s Solutions

Protocol Sdn. Bhd. and, in spite of that, the appellant company had

failed to honour its commitments under the deed of settlement.

Reference was also made to clause (4) of the deed of settlement.

16. Appellant company in its statement of objections stated that it

had paid the amount of RM 1,069,583.89 to the respondent company

in due compliance with the terms of the deed of settlement. Further it

was pointed out that the appellant company had not received any

amount from M/s Solutions Protocol Sdn. Bhd. since its payment in

March 2006. Further, it is also pointed out that the appellant company

had no subsisting commercial dealings with M/s. Solutions Protocol

Sdn. Bhd. and that the respondent company should be put to strict

proof with regard to the transactions completed before 31.12.2006 and

also the payments effected by M/s Solutions Protocol Sdn. Bhd. to the

appellant company. Further, it was pointed out that the documents

Annexure J1 to J9 did not pertain to the appellant company and it had

not received any payment thereunder. Further, it was pointed out that

the allegations raised by the respondent company are totally frivolous

which would require detailed investigation, recording of evidence and

adjudication of the rights and obligations of third-party entities and

would fall beyond the scope of enquiry to be conducted by the

Company Court under Sections 433, 434 and 439 of the Companies
12

Act, 1956 and if, at all, the respondent is aggrieved, the remedy open

is to approach the Civil Court for adjudication of its claims.

SUBSTANTIAL DISPUTE – AS TO LIABILITY

17. The question that arises for consideration is that when there

is a substantial dispute as to liability, can a creditor prefer an

application for winding up for discharge of that liability? In such a

situation, is there not a duty on 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, is not expected to hold a full trial of the matter. It must

decide whether the grounds appear to be substantial. 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 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

always retains 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.

18. In this connection, reference may be made to the judgment of

this Court in Amalgamated Commercial Traders (P) Ltd. v. A.C.K.
13

Krishnaswami and another (1965) 35 Company Cases 456 (SC), in

which this Court held that “It is well-settled 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.”

19. The above mentioned decision was later followed by this

Court in Madhusudan Gordhandas and Co. v. Madhu Woollen

Industries Pvt. Ltd. 1971) 3 SCC 632. The principles laid down in the

above mentioned judgment have again been reiterated by this Court in

Mediquip Systems (P) Ltd. v. Proxima Medical Systems (GMBH)

(2005) 7 SCC 42, wherein this Court held that the defence 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 above mentioned judgments were later

followed by this Court in Vijay Industries v. NATL Technologies Ltd.

(2009) 3 SCC 527.

20. The principles laid down in the above mentioned cases

indicate that if the debt is bona fide disputed, there cannot be “neglect

to pay” within the meaning of Section 433(1)(a) of the Companies Act,

1956. If there is no neglect, the deeming provision does not come into

play and the winding up on the ground that the company is unable to
14

pay its debts is not substantiated and non-payment of the amount of

such a bona fide disputed debt cannot be termed as “neglect to pay”

so as to incur the liability under Section 433(e) read with Section

434(1)(a) of the Companies Act, 1956.

COMMERCIALLY SOLVENT

21. Appellant company raised a contention that it is commercially

solvent and, in such a situation, the question may arise that the factum

of commercial solvency, as such, would be sufficient to reject the

petition for winding up, unless substantial grounds for its rejection are

made out. 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. 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
15

opportunity on the liquidation application to rebut that presumption.

22. 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 stand alone ground.
23. We have gone through various terms and conditions of the

deed of settlement as also the compromise agreement and the

allegations raised in the company petition and the objections filed by

the appellant company. Both the parties are in agreement that they

are bound by the terms and conditions of the deed of settlement. The

respondent maintained the stand that substantial payments have been

released by M/s Solutions Protocol Sdn. Bhd. in respect of various

invoices raised by the appellant on or before 31.12.2006, this is the cut

off date mentioned in the deed of settlement. The appellant company

categorically denied that it had received payments on or before
16

31.12.2006, except the amount already received from M/s Solutions

Protocol Sdn. Bhd. had been paid over to the respondent. Clause (2)

of the deed of settlement states that the parties had agreed that the

settlement sum was formulated based on the following proportions of

the total amounts of MEDICOM produce license fee and/or all other

payments received by MEDICOM from SP and/or SP/JV by virtue of

the HICT Package I Contract. Further, it is stated therein that the

settlement sum shall be valid for payments received by MEDICOM

from SP and/or SP/JV under the HICT Package I Contract and/or the

HIS Software applications modules contracted for the HICT Package I

Contract with SP/JV only and it was conclusively agreed to that

BITECH shall not in any circumstances whatsoever be entitled in law

or otherwise for any payment for any other contracts including

contracts involving MEDICOM and Solutions Protocol from the

Government of Malaysia or otherwise, whether in Malaysia or any

other country. Further, Clause (4) also stipulated that the parties have

acknowledged that the obligation of MEDICOM to pay BITECH the

settlement sum shall always be subject to MEDICOM (or its

representatives or nominees) having received payments of sufficient

value from SP and/or SP/JV to enable the payment of upto the

maximum amount of the settlement sum to be made on or before

31.12.2006, which is the Cut-off date. Further, it is seen that one of

the terms of the compromise was that the respondent would make
17

reasonable efforts to persuade M/s. Solutions Protocol to settle the

invoices of the appellant at the earliest.

24. On a detailed analysis of the various terms and conditions

incorporated in the deed of settlement as well as the compromise deed

and the averments made by the parties, we are of the considered view

that there is a bona fide dispute with regard to the amount of claim

made by the respondent company in the company petition which is

substantial in nature. The Company Court while exercising its powers

under Sections 433 and 434 of the Companies Act, 1956 would not be

in a position to decide who was at fault in not complying with the terms

and conditions of the deed of settlement and the compromise deed

which calls for detailed investigation of facts and examination of

evidence and calls for interpretation of the various terms and

conditions of the deed of settlement and the compromise entered into

between the parties. A company petition cannot be pursued in respect

of contingent debt unless the contingency has happened and it has

become actually due. In the absence of any evidence, it is not

possible to conclude that M/s. Solutions Protocol Sdn. Bhd. had in fact

paid any amount to the appellant company towards commission

charges due to the respondent company before the cut off date. A

legal notice prior to the institution of the company petition could be

served on the company only in respect of a debt (then due) and a

company could be wound up only if it was unable to pay its debts. In
18

this case, there is a bona fide dispute as to whether the amount

claimed is presently due and if, at all, it is due, whether the appellant

company is liable to pay the sum unless they have received the same

from M/s. Solutions Protocol Sdn. Bhd. Where the company has a

bona fide dispute, the petitioner cannot be regarded as a creditor of the

company for the purposes of winding up. “Bona fide dispute” implies

the existence of a substantial ground for the dispute raised. Where the

Company Court is satisfied that a debt upon which a petition is

founded is a hotly contested debt and also doubtful, the Company

Court should not entertain such a petition. The Company Court is

expected to go into the causes of refusal by the company to pay before

coming to that conclusion. The Company Court is expected to

ascertain that the company’s refusal is supported by a reasonable

cause or a bona fide dispute in which the dispute can only be

adjudicated by a trial in a civil court. In the instant case, the Company

Court was very casual in its approach and did not make any endeavour

to ascertain as to whether the company sought to be wound up for

non-payment of debt has a defence which is substantial in nature and

if not adjudicated in a proper forum, would cause serious prejudice to

the company.

MALICIOUS PROCEEDINGS FOR WINDING UP

25. We may notice, so far as this case is concerned, there has

been an attempt by the respondent company to force the payment of a
19

debt which the respondent company knows to be in substantial

dispute. A party to the dispute should not be allowed to use the threat

of winding up petition as a means of enforcing the company to pay a

bona fide disputed debt. A Company Court cannot be reduced as a

debt collecting agency or as a means of bringing improper pressure on

the company to pay a bona fide disputed debt. Of late, we have seen

several instances, where the jurisdiction of the Company Court is being

abused by filing winding up petitions to pressurize the companies to

pay the debts which are substantially disputed and the Courts are very

casual in issuing notices and ordering publication in the newspapers

which may attract adverse publicity. Remember, 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 defence is

made out on substantial grounds. A creditor’s winding up petition

implies insolvency and is likely to damage the company’s

creditworthiness or its financial standing with its creditors or customers

and even among the public.

PUBLIC POLICY CONSIDERATIONS

26. 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
20

financial standing of the company and which may also have other

economic and social ramifications. Competitors will 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. The Company Court, at times, has not

only to look into the interest of the creditors, but also the interests of

public at large.

27. We have referred to the above aspects at some length to

impress upon the Company Courts to be more vigilant so that its

medium would not be misused. A Company Court, therefore, should

act with circumspection, care and caution and examine as to whether

an attempt is made to pressurize the company to pay a debt which 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.

28. In the above mentioned facts and circumstances of the case,

we are of the view that the order passed by the Company Court

ordering publication of advertisement in the newspaper would definitely

tarnish the image and reputation of the appellant company resulting in

serious civil consequences and, hence, we are inclined to allow this
21

appeal and set aside the order passed by the Company Court dated

17.9.2009 in Company Petition 41 of 2009 and the judgment of the

Division Bench of the High Court of Karnataka dated 21.10.2009

passed in OSA No. 36 of 2009, and we order accordingly. However,

we make it clear that the observations and findings rendered by this

Court in this proceeding will not prejudice the parties in approaching

the appropriate forum for redressal of their grievances and, in the

event of which, that forum will decide the case in accordance with law.

……………………………CJI
(S. H. KAPADIA)

………………………………J.

(K. S. RADHAKRISHNAN)

New Delhi,
September 23, 2010

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