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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

J U D G M E N T

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

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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

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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) &

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(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

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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

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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

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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

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(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

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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

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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

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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