Goetze India Ltd. vs Pure Drinks (New Delhi) Ltd. (No. 2).

Ashok Bhan, J.—This order shall dispose of Company Application No. 48 of 1991. Goetze India Ltd. filed a petition under sections 433, 434 and 439 of the Companies Act, 1956 (for short "the Act"), against Pure Drinks (New Delhi) Ltd., inter alia, on the following grounds :

That, vide lease agreement dated June 20, 1986, the petitioner-company and the respondent-company, entered into an agreement whereby the petitioner agreed to give on lease and the respondent-company agreed to take on lease, diverse machinery for a period of five years commencing from June 17, 1986, and ending on May 17, 1991. In terms of lease summary schedule, annexed to the said lease agreement dated June 20, 1986, the respondent-company was to pay a sum of Rs. 54,87,540 to the petitioner being the total sum of rentals for the said equipment for the period of five years commencing from June 17, 1986, and ending on May 16, 1991, in equal monthly instalments of Rs. 91,459. Each monthly instalment towards the monthly rent was to be paid by the 17th day of each month as specified in the lease summary schedule annexed to the agreement dated June 20, 1986 ; it was also agreed that the respondent shall pay on demand as late charge an amount equal to 2 per cent, per month of each instalment of lease rent or part thereof that remain unpaid. In terms of Clause 16 of the agreement dated June 20, 1986, an event of default shall occur if the respondent fails to pay any of the lease rentals or part thereof or other payments liable to be paid as per the agreement when due and such failure continues for a period of 14 days after a written notice is sent to the respondent ; it has further been alleged in the petition that since the year 1987, the respondent-company had been committing intermittent defaults in the payment of lease rentals to the petitioner ; that despite the petitioners'' oral and written requests to pay the outstanding amounts, the respondent-company failed and or neglected to pay the outstanding amount of lease rentals ; that the petitioner issued a legal notice dated February 6, 1989, to the respondent company, calling upon it to pay a sum of Rs. 14,02,607 inclusive of over due interest within 14 days from the date of receipt of the notice. However, pursuant to the above notice dated February 6, 1989, the respondent-company made payment of Rs. 91,459 only being the monthly instalment of the lease rentals for the month of January, 1988. Similarly, thereafter the petitioner-company caused another legal notice dated March 17, 1989, whereby the respondent-company was again called upon to pay a sum of Rs. 14,02,607. In pursuant to the above notice the respondent-company sent a sum of Rs. 1,82,918 being the instalments for the months of February and March, 1988. The respondent-company after the receipt of the said notice paid only one instalment of Rs. 91,450 on July 18, 1989, being the monthly instalment of April, 1988. Again a legal notice dated July 31, 1989, was issued u/s 434 of the Act to the respondent-company to pay a sum of Rs. 17,34,290 being the outstanding amount of rentals and interest in terms of the agreement which was due and payable by the respondent to the petitioner''as on July 20, 1989.

In reply to this notice, the respondent-company sent a letter, annexure P-6, in the following terms :

"This is with reference to your letter dated July 31, 1989, in connection with Goetze India Ltd. sent to our Patiala Office and subsequently received by our office on August 14, 1989.

In this connection, we wish to state that we have paid lease instalments of Rs. 91,459 each in the month of July and August, 1989. Last year''s instalments were irregular because of unprecedented rains and floods in Delhi and North India.

Further payment will follow and we request you to please bear with us and not resort to any unpleasant move.

Thanking you."

After adjusting of the amount paid to the petitioner, a sum of Rs. 28,58,486.73 still remained outstanding due and payable to the petitioner-company by the respondent which is inclusive of over due interest at the rate of 2 per cent, per month in terms of Clause 3 of the agreement dated June 20, 1986. The petitioner claimed that the respondent-company is indebted to the petitioner in a sum of Rs. 28,58,486.73 of which the respondent-company was bound and obliged to make the payment to the petitioner ; that the respondent-company is unable to pay its debt and, therefore, liable to be wound up u/s 433(e) of the Act. Section 434 of the Act, defines as to when a company would be deemed to unable to pay its debt and the same reads as under :

"434. Company when deemed unable to pay its debts.- (1) A company shall be deemed to be unable to pay its debts-

(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor. ; . . ."

The petitioner claimed that a notice was caused to be delivered to the respondent-company and in response to the said notice, the respondent-company has failed to pay the sum due to the petitioner and, therefore, neglected to pay the sum and as such it be deemed that the respondent-company is unable to pay its debt.

Pure Drinks (New Delhi) Ltd. (hereinafter referred to as "the applicant") moved the present application u/s 34 of the Arbitration Act, 1940, for staying further proceedings in the company petition. It is stated in the application that the parties entered into a lease agreement dated June 20, 1986. and the said agreement had an arbitration Clause 19, which reads thus :

"19. Arbitration.--All disputes, differences, claims and questions whatsoever arising from this agreement between the parties and/or their respective representatives touching these presents or any clause or thing herein contained or otherwise in any way relating to or arising from these presents shall be referred to the arbitration of two arbitrators, one to be appointed by each party to the dispute, and such arbitration shall be in accordance with and subject to the provisions of the Arbitration Act, 1940, or any statutory modification or re-enactment thereof for the time being in force. Such arbitration proceedings will be held at New Delhi."

Notice of this application was issued to the petitioner. Vide order dated June 7, 1991, G.R Majithia J. referred the following question to a larger Bench for decision :

"Whether an arbitration agreement between the parties to a company petition under sections 433, 434 and 439 of the Companies Act binds the parties/and the party against whom the company petition is filed can raise the objection that in view of the arbitration clause further proceedings in the company petition be stayed ?"

The question referred was answered by the Division Bench, vide its order dated December 20, 1991 (see Goetze India Ltd. v. Pure Drinks (New Delhi) Ltd. [1994] 80 Comp Cas 340, 361), in the following terms :

"In my considered view, no omnibus answer can be given that merely because of an arbitration clause in the agreement being there, the respondent-company is as a matter of right entitled to get the winding up proceedings stayed mechanically till the controversy raised by it in its defence is decided by the arbitrator. By adopting the ritualistic formula of Section 34, the respondents cannot be permitted to stultify the proceedings. Otherwise too, as observed above, the relief claimed under sections 433, 434 and 439 of the Companies Act cannot be diverted to the. arbitrator by the company court or by the parties by their mutual agreement nor can the arbitrator order the winding up.

In view of the discussion made above, it emerges that the arbitration agreement between the parties to the company petition under sections 433, 434 and 439 continues to bind the parties and the party against whom the company petition is filed can raise the objection that in view of the arbitration clause further proceedings in the company petition be stayed. But the right to raise an objection would not mechanically result in stay of the winding-up proceedings because of the arbitration clause.

It is for the court, keeping in view the peculiar facts and circumstances of the case in any dispute, the questions raised, the bona fides of the parties, the expediency of the case, the conduct of the parties, the bona fide defence raised, the problem which necessitates reference, the language of the arbitration clause, the purpose sought to be served by referring the matter to the arbitrator, the advantage and disadvantage of the reference to the other persons interested in the company, etc., to determine what order should be passed in terms of Section 443 of the Companies Act, i.e., dismissal of the winding up petition, adjourning the same conditionally or unconditionally ; make any interim order or pass any other order which it thinks fit or make or refuse to make the order of winding up if it comes to the conclusion that though remedy is available to the petitioners, they are acting unreasonably and seeking the company to be wound up instead of adhering to the other remedy for the recovery of their amount. Thus, in my considered view, I may venture to answer the questions in the following terms :

(a) That the arbitration agreement between the company and the party to the agreement would bind the company as well as the party to the arbitration agreement before as well as after an order of winding up has been passed.

(b) That a bona fide objection to the winding up including the prayer for the stay of the winding up proceedings in view of the arbitration clause can be raised and it will be examined by the company court whether it is bona fide and likely to succeed on point of law, yet no absolute right vests in a party to the arbitration agreement to use the arbitration clause by itself as a shield to winding up. It is for the party invoking the arbitration clause for stay of the proceedings to satisfy the court that there is an arbitration clause and there is a bona fide dispute between the parties to the agreement and also there is a prima facie bona fide defence available to the applicant which requires determination by the arbitrator before passing of the order for winding up of the company on the grounds envisaged by Section 433 of the Act. It is the court''s discretion to pass a suitable order as demanded, in the facts and circumstances of each case, as observed in the earlier part of the judgment.

It may be made clear that so far as the relief or question of winding up of company is concerned, it cannot be referred to arbitration in spite of any agreement being there. The winding up can be determined by the court alone under the Act.

So far the question whether there is a bona fide defence which has been raised by the applicant or whether the matter requires reference to the arbitrator in view of the peculiar facts and circumstances of the case, is concerned, the same will be determined by the Hon''ble single Bench."

In view of the order passed by the Division Bench, the question which falls for consideration before me is as to whether there is a bona fide defence which has been raised by the applicant or whether the matter can be referred to the arbitrator in view of the facts and circumstances of the case. What emerges from the order of the Division Bench is that the relief claimed under sections 433, 434 and 439 of the Act, cannot be diverted to the arbitrator by the company court or by the parties by their mutual agreement nor can the arbitrator order winding up but a bona fide objection to the winding up including a prayer for stay of winding up proceedings can be raised and if the court is satisfied that there is a valid agreement and in that agreement there is an arbitration clause regarding the settlement of disputes by arbitration and a prima facie/bona fide defence is available to the applicant which requires consideration by the arbitrator then and only then the company judge may, in his discretion, pass a suitable order staying the proceedings for winding up and referring the matter to be settled in the arbitration proceedings or dismiss the application u/s 34 of the Arbitration Act keeping in view the peculiar facts and circumstances of each case, (emphasis* supplied).

Mr. Vajinder Jain, senior advocate, has argued that,

(i) the claim upon which the winding up has been founded can also be referred to the arbitrator, as agreed to between the parties under Clause 19 of the said agreement ;

(ii) this court should stay the winding up proceedings and relegate the parties to the arbitrator for settlement of the dispute in accordance with Clause 19 of the said agreement by which the parties had agreed to settle all disputes, claims, etc., before two arbitrators ;

(iii) the proceedings for winding up are nothing but a sheer abuse of the process of court and in the nature of recovery of the amount due and, therefore, it is a fit case in which proceedings should be stayed by referring the matter to the arbitrator ; and

(iv) that only after the award by the arbitrator, the court shall be in a position to assess as to whether the winding up petition is maintainable or not.

I have heard learned counsel for the parties at length and I do not find any substance in the submissions made by counsel for the applicant.

No doubt, there is a valid agreement executed between the parties and there is an arbitration clause as well but I am not satisfied that there is a prima facie bona fide defence available to the applicant which requires determination by the arbitrator because the petitioner-company had caused to be issued several legal notices creating demand running into lakhs of rupees from time to time but in reply thereto, the respondent-company raised no meaningful defence. The only explanation which is available on the record is the letter, annexure P-6, written by the respondent-company to counsel for the petitioner-company, which is in the following terms :

"In this connection, we wish to state that we have paid lease instalments of Rs. 91,459 each in the month of July and August, 1989. Last year''s instalments were irregular because of unprecedented rains and floods in Delhi and North India.

Further payment will follow and we request you to please bear with us and not resort to any unpleasant move."

and which clearly goes to show that in fact there is no worthwhile defence with the respondent-company except that it wants the petitioner-company to bear with it and not resort to any litigation. The petitioner-company had issued a number of notices to the respondent-company requiring the respondent-company to pay the sum so due but the respondent-company neglected to pay the same and, therefore, prima facie the company is deemed unable to pay its debts in terms of Section 434 of the Act. The Division Bench has clearly held that the relief claimed under sections 433, 434 and 439 of the Act cannot be diverted to the arbitrator by the company court or by the parties by their mutual agreement. It would not be either just or equitable to do so in the circumstances of the present case. Thus, I am satisfied that no case is made out for stay of the proceedings in this court under sections 433, 434 and 439 of the Act for winding up of the respondent-company.

Accordingly, the application u/s 34 of the Arbitration Act, is dismissed. Costs of this application shall be costs in the proceedings. The respondent-company through Shri Vajinder Jain, advocate, is directed to file its written statement to the main petition on or before April 3, 1992, to which date the case stands adjourned.

Nothing herein discussed shall be construed as an expression of opinion on the merits of the case.