Case Report

IBA Health (I) Pvt. Ltd. V. Info-Drive Systems Sdn. Bhd.

Citation: 2010 (9) UJ SC 4729 Brief Facts There was an agreement between the Appellant and Respondent Companies relating to the marketing of the Appellant Companys HIS software applications and for that service, the Appellant Company had agreed to pay certain charges as commission to the Respondent Company. Dispute arose between them regarding payment of commission charges which led the parties to enter into a deed of settlement, as a result of which the Appellant Company agreed to pay commission charges due to Respondent Company in accordance with the terms and conditions set out in the deed of settlement. On failing to fulfill the said terms by Appellant Company, a notice was sent by Respondent Company to the Appellant Company. In reply to this notice, Appellant Company completely denied the liability to pay the amount. Respondent Company filed a petition for winding up of the Appellant Company. Therefore this appeal is from the decision of the Division Bench of the High court which had upheld the order of the Company Court allowing the Respondent Company to proceed further with the Creditors winding up procedure of the Appellant Company. Legal Issues (Companies Act ss. 434 (e) & (f), 434(1), and 439) Winding up of Company 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 case the company court is not expected to hold a full trial of the matter. If the court is satisfied that the grounds are substantial then the law provides for the dismissal of the petition and the creditor will have to first establish his claim in an action. This ensures that a party to a dispute is not allowed to use the threat of winding up petition as a means of forcing the company to pay a bona fide disputed debt. Determination of Commercial Solvency It is another important aspect as it may be a useful aid in deciding whether the refusal to pay is as a result of the bona fide dispute as to liability or whether it reflects an inability to pay. A legal notice before the filing of Company petition can be served on the company only in respect of a debt that is due and the company could be wound up only if it was unable to pay its debts.

In order to exercise the power under ss. 433(e) & 434(1) of the Companies Act, 1956, there should be a neglect to pay. But, the principle is that in case of a bona fide dispute as to the debt, there cannot be a neglect to pay within the meaning of s.433(1)(a) of the Act. If there is no neglect to pay, the winding up on the ground that the company is unable to pay its debts is not substantiated for incurring any liability. Held The Court in this appeal case held that, The Company Court cannot be reduced as debt collecting agency or as means of bringing improper pressure on company to pay bona fide disputed debt. Creditors winding up petition implies insolvency and is likely to damage companys creditworthiness or its financial standing with its creditors or customers and even among public. Publication in Newspaper of filing of winding up petition may also have other economic and social ramifications. Order passed by Company Court ordering publication of advertisement in the newspaper would definitely tarnish the image and reputation of the Appellant Company resulting in serious other civil consequences.

Ratio Decidendi Winding up petition is not a legitimate means of seeking to enforce payment of the debt which is bona fide disputed by the company. Section 433 of the Companies Act, 1956 provides for circumstances in which a company may be wound up by the court and section 434 specifies when a company is deemed to be unable to pay its debts. These provisions are intended to safeguard the interests of creditors, especially when the company becomes commercially insolvent and is unable to pay its debt. This case is important as it stresses on the need for safeguards for both the creditor and the company. It has been stated that the grounds of dispute must not consist of some ingenious mask invented to deprive a creditor of a just and honest entitlement, and/or a creditor 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. Winding up proceedings cannot be used as an alternate forum to examine or as a legitimate means for enforcing the recovery of a bona fide disputed debt which comes under the purview of the Civil Court. Hence this judgment ensures that a winding-up petition is scrutinised more carefully before it is admitted.

- Gokul Nair C.C. .

Roll No. 670, V Semester