Honeywell Automation India Ltd. vs DLF Unviersal Ltd.

Permod Kohli, J.—M/s Honeywell Automation India Limited, Company incorporated under the Companies Act, 1956 filed Company Petition No. 66 of 2006 u/s 433(e) and (f) read with Section 439(1)(b) and 434(1)(a) of the Companies Act seeking winding up of the respondent-Company known as M/s DLF Universal Ltd. on the grounds that the respondent-company Was failed and neglected the payment of the dues against it. It is further alleged that respondent-company is not in a position to make its financial commitment and thus unable to pay the debts. It is also stated that respondent-company appears to be in an insolvent condition and its substratum appears to have been lost. According to the-petitioner, the respondent-company is unable to pay the amount of Rs. 32,56,514/- as the principal amount with interest @ 20% per annum total Rs. 60,24,550/- as on 31.3.2006. A statutory demand u/s 434 was also made and therefore, the present petition has been filed. An ancillary application seeking appointment of Official Liquidator has also been preferred.

A notice to show cause as to why petition be not admitted was issued on 4.5.2006. On being served, the respondent-company has appeared and after seeking certain opportunities for filing the reply, an application u/s 8 of the Arbitration and Conciliation Act for referring the matter to the Arbitrator was filed on 5.4.2007. Simultaneously, reply to the main petition No. 66 of 2007 was also filed on the same date. The petitioner in the main petition filed its reply to the application u/s 8 and rejoinder thereto also stands filed.

Through the medium of this application u/s 8 of the Arbitration and Conciliation Act, 1996, a prayer is made for reference of the parties to the arbitration and for dismissal of the Company Petition No. 66 of 2006. The premises on which the reference to the arbitration is sought is the existence of an arbitration agreement between the parties. It is stated that the petitioner in the main petition approached the DLF Indus tries Ltd. for supplying a product called as AM-NT to its client Mangalore Refinery and Petrochemical Ltd. (MRPL). DLF Industries Ltd. had placed two purchase orders being dated 24.11.1997 and 28.7.1998 for supply of certain additional items for switching over to AM-NT instead of AM of DCS system already supplied by the petitioner. It is alleged that against the aforesaid purchase orders DLF Industries Ltd. and its client MRPL made the payment to the petitioner and nothing remained outstanding and accordingly the allegations made in the petition for winding up have been denied. Copies of these purchase orders are placed on record. It is alleged that the purchase orders contain arbitration Clause being Clause 16 and thus disputes between the parties are required to be referred to the Arbitral Tribunal in accordance with the aforesaid purchase orders (arbitration agreement). Clause 16 of the purchase orders reads as under:

All disputes arising in connection with this agreement which cannot be settled by mutual negotiations shall be finally settled under the rules of Indian Arbitration Act, 1940 and as amended from time to time. The venue of the arbitration shall be New Delhi.

The applicant has further stated that the petitioner in the main petition has relied upon forged and fabricated documents to show alleged admission of liability on the party of the applicant (respondent). The question of validity of these forged documents can only be decided by means of evidence in arbitration proceedings.

The applicant has been resisted by the petitioner-non-applicant. Without disputing the existence of the purchase orders prayer for reference of the parties to the Arbitrator is opposed primarily on two grounds:

(i) that there is no bona fide dispute;

(ii) that there is an admission of liability by the respondent vide its letter dated 7.1.2000.

It is stated that there is no bona fide dispute raised by the respondent and thus the parties cannot be referred to the arbitration in terms of Section 8 and the application amounts to abuse of the process of law and is an attempt to stall the winding up of the company.

In the rejoinder besides reiterating the stand in the application u/s 8 further pleas are raised that the mater involves bona fide controversial triable dispute and thus the matter needs to be adjudicated upon by the Arbitral Tribunal in terms of Clause 16 of the terms and conditions of the purchase orders. Applicant (respondent) has also raised plea of limitation and delay saying that the money said to be due relate to the period October, 1999 to February, 2000 whereas the winding up petition has been filed in the year 2006.

I have heard learned Counsel for the parties Section 8 of the Arbitration and Conciliation Act, 1996 reads as under:

Section 8 - Power to refer parties to arbitration where there is an arbitration agreement.

(1) A judicial authority before which an action is brought in a matter which is the Subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.

(2) The application referred to in Sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.

(3) Notwithstanding that an application has been made under Sub-section (1) and that the issue is pending before the judicial authority an arbitration may be commenced or continued and an arbitral award made.

Section 8 provides for reference of the parties to the arbitration where the matter is pending before a judicial authority which is the subject matter of arbitration agreement or an application of a party. One of the condition for application of the Section 8 is that if such an application is made not later than submission of first statement on the substance of the dispute. In the present case, the applicant claims existence of an arbitration agreement between the parties relating to the dispute raised before this Court and has applied for referring the parties to the arbitration through the medium of this application. A statement on the substance of the dispute has also been filed simultaneously with making of this application. The other condition for invoking Section 8 is that the application should be accompanied by the original arbitration agreement or a certified copy thereof. The application is accompanied with a zerox copy of the purchase order which bears the seal of notary and is attested by him. This purchase order is said to be an arbitration agreement. In any case, it is neither an original document nor a certified copy thereof. However, the documents having not been denied rather existence admitted by the other side, the non-filing of the original documents or certified copies cannot be a ground for rejecting the application. At the same time, the, company court is a special forum created under the Companies Act to deal with the winding up and other company related matters and is a special law. The question whether the company court having exclusive jurisdiction to deal with the issue of winding up of the company and the matters related thereto are under any legal obligation to refer to the Arbitration for settlement of alleged dispute between the parties needs to be considered in the present application.

While opposing the application Mr. Dhruv Mehta, Advocate appearing on behalf of the petitioner/non-applicant has referred to various judgments to contend that there is no bona fide dispute/defence necessitating adjudication by the Arbitral Tribunal. His further contention is that there is an admission on the part of the respondent-Company and thus the alleged defence of the bona fide dispute is without any substance and is fallacious. Annexure P-5 is a fax message from the respondent-company in response to the fax dated 1.7.1979 of the petitioner wherein the respondent is said to have admitted the claim of Rs. 10,000/- per day for services of the site Engineer. Annexure P-11 is again a fax from die respondent whereby it is communicated that they have advised M/s MRPL, Mangalore to release Rs. 12.47 lacs in favour of the petitioner. It also contains a commitment for payment of Rs. 14.74 lacs on the basis of some discussion. Annexure P-6 is again a document wherein the request is made for reconciliation of the accounts. It also refers to payment of Rs. 12,24,647/- which seems to be referred in letter dated 7.1.2000 (Annexure P-11). Annexure P-7 is the notice issued by the petitioner demanding an amount of Rs. 15,80,825/-. Annexure P-8 is the order whereby merger/amalgamation of M/s DLF Industries Ltd. with M/s DLF Universal Limited as communicated to the Court. Annexure P-9 is statutory notice u/s 433(i)(a) of the Companies Act, 1956.

Mr. A.M. Punchhi, Advocate appearing on behalf of the applicant i.e. the respondent-company has also relied upon various judgments. In Agri Gold Exims Ltd. Vs. Sri Lakshmi Knits and Wovens and Others, , following observations have been made:

The term ''dispute'' must be given its general meaning under the 1996 Act.

In the context of an arbitration the words ''disputes'' and ''differences'' should be given their ordinary meanings. Because one man could be said to be indisputably right and the other indisputably wrong, that did not necessarily mean that there had never been any dispute between them.

Section 8 of the 1996 Act is preemptory in nature. In a case where there exists an arbitration agreement, the court is under obligation to refer the parties to arbitration in terms of arbitration agreement.... No issue, therefore, would remain to be decided in a suit. Existence of arbitration agreement is not disputed. The High Court, therefore, in our opinion, was right in referring the dispute between the parties, to arbitration.

In Rashtriya Ispat Nigam Limited and Another Vs. Verma Transport Company, , following observations have been made:

In the instant case, the existence of a valid agreement stands admitted. There cannot also be any dispute that the matter relating to termination of the contract would be a dispute arising out of a contract and, thus, the arbitration agreement contained in Clause 44 of the contract would be squarely attracted. Once the conditions precedent contained in the said proceedings are satisfied, the judicial authority is statutorily mandated to refer the matter to arbitration. What is necessary to be looked into therefore, inter alia, would be as to whether the subject matter of the dispute is covered by the arbitration agreement or not.

In Food Corporation of India Vs. Indian Council of Arbitration and Others etc. etc., , following observations have been made:

...The legislative intent underlying the 1996 Act is to minimize the supervisory roles of courts in the arbitral process and nominate/appoint the arbitrator without wasting time, leaving all contentious issues to be urged and agitated before the Arbitral Tribunal itself....

Hindustan Petroleum Corpn. Ltd. Vs. Pinkcity Midway Petroleums, , following observations have been made:

It is clear from the language of the section, as interpreted by the Constitution Bench Judgment in Konkan Rly that if there is any objection as to the applicability of the arbitration Clause to the facts of the case, the same will have to be raised before the Arbitral Tribunal concerned. Therefore, in our opinion, in this case the courts below ought not to have proceeded to examine the applicability of the arbitration Clause to the acts of the case in hand but ought to have left that issue to be determined by the Arbitral Tribunal as contemplated in Clause 40 of the Dealership Agreement arid as required under Sections 8 and 16 of the Act.

...We have come to the conclusion that the civil court had no jurisdiction to entertain a suit after an application u/s 8 of the Act is made for arbitration. Therefore, we are of the opinion that the trial Court erred when it rejected the application of the appellant filed under Sections 8 and 5 of the Act. In such a situation, refusal to refer the dispute to arbitration would amount to failure of justice as also causing irreparable injury to the applicant....

In P. Anand Gajapathi Raju and Others Vs. P.V.G. Raju (Died) and Others, , following observations have been made:

...The language of Section 8 is pre-emptory. It is, therefore, obligatory for the Court to refer the parties to arbitration in terms of their arbitration agreement....

Based upon observations of the Hon''ble Apex Court in the above mentioned judgments, wherein the purpose and object of Section 8 of Arbitration and Conciliation Act has been noticed by the Hon''ble Supreme Court, it is contended by Mr. Punchhi appearing on behalf of the applicant that perhaps the court has little option in the matter of referring the parties to the arbitration as the law itself mandates that the dispute between the parties be allowed to be adjudicated upon by the special Forum created by the parties with their agreement which should not and cannot be allowed to the diluted. He has further argued that the jurisdiction of the Company Court u/s 433(e) of the Companies Act is a summary jurisdiction and it has no power to receive and assess the evidence. In support of this, he has relied upon Haryana Telecom Ltd. v. Himachal Futuristic Communication Ltd. (2006)133 Comp. Cas. 351 which reads as under:

...It is well settled that a winding up petition cannot be used to seek enforcement for the realization of debt where there exists a bona fide dispute. The company court is required to judge whether the defence put up by the company is bona fide and is in good faith. It has further to be kept in view that the defence is one of substance and the defence taken is prima facie likely to succeed.

The company Court, while hearing a petition u/s 433(e) of the Companies Act, 1956 has a summary jurisdiction. It has no power to assess evidence....

To the contrary, Mr. Dhruv Mehta, learned Counsel appearing for the petitioner has also referred to and relied upon a number of judgments. In Goetze India Ltd. v. Pure Drinks (New Delhi) Ltd. (1994)80 Comp. Case. 340, following observations have been made:

...It would be reasonable to infer from the observations made above that mere existence of an arbitration Clause in an agreement by itself would not debar or oust the jurisdiction of the company court in proceedings for winding up nor would make it incumbent upon the company court to stay the proceedings till the decision of the arbitrator. It has been observed by me in the earlier part of the judgment that the company court has much wider jurisdiction. It can go behind the award. The winding up order not only enures for the petitioner but also for other creditors. Other creditors cannot be bound by the agreement between the petitioner-creditor and the company particularly when the winding up petition by a creditor would be deemed to be a representative petition....

A Division Bench of this Court in Som Nath Jain Vs. Oswal Agro Mills Limited and Another, while considering the jurisdiction of the company u/s 433(e), 434 and 439 of the Companies Act and the scope of Section 34 of Arbitration Act, 1940 observed as under:

In the facts and circumstances of this case, I am clearly of the opinion that respondent No. 1 has defaulted in the payment of the amount claimed by the petitioner along with interest. At no stage prior to the filing of the written statement did the company dispute its liability to pay the amount. Even in the written statement, liability to pay the amount is admitted but the only defence, as already noticed, is that it is liable to pay after the lapse often years and that too, without interest, which plea has not been accepted being not supported by any material at all... The defence raised by the company cannot, therefore, be said to be bona fide and for these reasons I hold that the respondent-company is unable to pay its admitted debts. The amount advanced by the petitioner has not been disputed.... In the situation it is held that the company is unable to pay the admitted debts.

In Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. Hon''ble Apex Court made following observations:

...The claim in a petition for winding up is not for money. The petition filed under the Companies Act would be to the effect, in a matter like this, that the company has become commercially insolvent and, therefore, should be wound up. The power to order winding up of a company is contained under the Companies Act and is conferred on the Court. An arbitrator, notwithstanding any agreement between the parties would have no jurisdiction to order winding up of a company. The matter which is pending before the High Court in which the application was filed by the petitioner herein was relating to winding up of the company, that could obviously not be referred to the arbitration and, therefore, the High Court in our opinion was right in rejecting the application....

In Haryana Telecom Limited Vs. Sterlite Industries (India) Ltd., following observations have been made:

...therefore, it must be treated as a settled proposition of law that the arbitration Clause does not ipso facto oust the jurisdiction of the company court to entertain a winding up petition and the party invoking the arbitration Clause for making a request to the company court to refer the matter to arbitration must satisfy the said court that there is a bona fide dispute between the parties to the agreement which requires reference to the arbitrator and it is not sufficient for the applicant to say that the court should refer the matter to the arbitration because there is a Clause in the agreement for making reference to the arbitrator....

From the various judgment referred to above and noticed by me, the proposition of law that emerge are:

(i) where there is an arbitration agreement between the parties and their inter se dispute is required to be adjudicated upon by the domestic Forum like Arbitral Tribunal so created by the parties the ordinary Civil Court should not continue to decide the dispute as and when an application is made for the discontinuation of the proceedings before the judicial authority/Civil Court where the parties are governed by an arbitration agreement.

(ii) Even though the dispute inter se parties is to be adjudicated upon by the Arbitral Tribunal, it does not prevent the company court from continuing winding up proceedings where the court is of the opinion that it is in public interest to wind up a company as it is not only the interest of the petitioner who has made a motion for winding up but also the interest of other creditors which is of prime importance.

(iii) The winding up proceedings per se are not the mode for recovery of a claim of an individual or a person where the claim can be very well settled through the Civil Court or other ordinary and appropriate Forum without causing the death of the company.

It is in this context, that the present application is required to be considered to formulate an opinion as to which of the above modes will meet the ends of justice. The basis of the claim and the allegations made in the petition for winding up are required to be scanned to find out as to whether the motion for winding up is confined to mere recovery of the debt or does it also involve the larger public interest inviting the ultimate order for winding up of the company. The allegations made in the petition are contained in paras 9(XIV), (XV) and (XVI) which reads as under:

(XIV) That the petitioner states that the respondent-company has failed and neglected to make the payment of the dues till date. The principal outstanding against the respondent are Rs. 32,56,514/-. The petitioner is also entitled to an interest @ 20% per annum on the principal amount w.e.f. 21.12.2001. Therefore, the total amount outstanding against the respondent is approximately Rs. 60,24,550/- (Rupees sixty lacs twenty four thousand five hundred and fifty only) as on 31.3.2006. The aforesaid said liability of the respondent company to make such payment to the petitioner is absolute and unconditional.

(XV) That the statutory demand u/s 434 of the Companies Act, 1956 has been made on the respondent-company and it has failed and neglected to make the payment due to the petitioner.

(XVI) That it is evident that the respondent-company is not in a position to meet its financial commitments and is unable to pay its debts. The respondent company appears to be in an insolvent condition and its substratum appears to have been lost. The petitioner submits that the company is therefore even otherwise unable to pay its debts.

In response to the aforesaid averments, the liability of payment of Rs. 32,56,514/- and interest @ 20% per annum is denied. It is also denied that the company is unable to pay its debts and is in insolvent condition and lost its substratum. It is stated that respondent-company is a profitable concern having made profits in the last three years and the company has also been able to satisfy its debts in the normal and ordinary course of business. The respondent, however, denied and disputed the claim of the petitioner. It is further stated that there were delay in execution and completion of the work on the part of the petitioner. Petitioner''s engineers remained at site solely for completing the work and not for providing support service to the respondent-company.

It is also relevant to notice that legal notice u/s 434(i) was also replied to by the respondents denying its liability which fact is also evident from the legal notice dated 9.1.2006 (Annexure P-10). In the reply, it is stated that the respondents paid an amount of Rs. 12,47,647/- against the petitioner''s invoice dated 31.3.1999 vide cheque No. 713021 dated 28.01.2000 and no other amount is payable to the respondent.

It is settled proposition of law that winding up is not a substitute for recovery. In Mediquip Systems Pvt. Ltd. Vs. Proxima Medical System GMBH, . Hon''ble Supreme Court has relied upon Madhusudan Gordhandas and Co. Vs. Madhu Wollen Industries Pvt. Ltd., wherein following principal were laid down:

(i) that the defence of the company is in good faith and one of substance;

(ii) the defence is likely to succeed in point of law; and

(iii) the company adduces, prima facie proof of the facts on which the defence depends.

It is further held that if the debt is bona fide disputed and the defence is a substantial one, there is no justification for admitting the winding up petition.

In the present case also, the dispute raised by the petitioner is deployment of its engineers at site. The factum of deployment at the instance of respondent is denied. Whether the engineers were deployed for providing services or on account of delay in execution is a question of fact. It needs to be established by evidence. The existence of the arbitration agreement and also that the inter se dispute falls within the scope and ambit of the arbitration Clause is not a dispute. The disputed question of fact needs to be adjudicated upon by the competent Forum i.e. Civil Court or Arbitral Tribunal. Almost 50% of the claim of the petitioner contains the component for interest @ 20%. There is a serious question of existence of contractual Clause which entitles the petitioner to claim interest or at least the interest @ 20%. How much is the component of interest in the demand raised and whether such interest is legally payable? One of the invoice was for Rs. 20,00,000/- against which Rs. 12.47 lacs already stands paid. The defence seems to be substantial in nature. In any case, there is no material on record to show that the respondent-company is insolvent or it has lost its substratum.

In the reply filed, the respondent-company has specifically pleaded that the company has been earning profits in last three years which fact is not disputed. In Pradeshiya Industrial and Investment Corporation of U.P. Vs. North India Petrochemical Ltd. and Another, . Hon''ble Supreme Court while considering the scope of winding up u/s 433(e) made following observations:

A debt under this Section must be a determined or a definite sum of money payable immediately or at a future date.

What then is inability when the Section says ''unable to pay its dues''? That should be taken in the commercial sense. In that, it is unable to meet current demands. As stated by William James, V.C. it is plainly and commercially insolvent-that is to say, that its assets are such and its existing liabilities are such, as to make it reasonably certain-as to make the court feel satisfied that the existing and probable assets would be insufficient to meet the existing liabilities....

...It is beyond dispute that the machinery for winding up will not be allowed to be utilized merely as a means for realizing its debts due from a company. In Amalgamated Commercial Traders (P.) Ltd. Vs. A.C.K. Krishnaswami and Another, , this Court quoted with approval the following passage from Buckley on the companies Act....

It is well settled that a winding up petition is not legitimate means of seeking to enforce payment of a 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.

In view of the dictum of the abovesaid judgment, I am of the considered opinion that there is no overwhelming public interest to continue the winding up proceedings and deny the opportunity to the parties to settle their dispute through arbitration. The claim of petitioner can be conveniently and effectively adjudicated upon and settled through arbitration. Under the facts and circumstances, the parties in the present case are required to be referred to arbitration in view of Clause 16 of the arbitration agreement between the parties.

It is not a case where the winding up is the only option and no circumstances exists to cause the death of the company merely on account of alleged claim of the petitioner which itself is required to be established before the competent Court/Forum. This application is accordingly allowed. Parties are referred to the arbitration. Parties may take appropriate steps for appointment of Arbitral Tribunal and reference of dispute in accordance with law. As a consequence of allowing this application, C.P. No. 66 of 2006 stands dismissed.

No order as to costs.