Remedy Of Winding-Up Petition Can’t Be Relied Upon For Bona Fide Payment Disputes: Karnataka HC [Read Judgment]

The Karnataka High Court, in the case of M/s Uttam Industrial Engineering Ltd vs M/s Shree Basaveshwar Sugars Ltd, has held that a winding-up petition has serious ramifications on the financial standing of a company and cannot be used in cases where there is a bona fide dispute regarding the amount owed by one party to the other and in such cases the company court should relegate the matter either to the civil court or arbitral tribunal.

In this case, Uttam Industrial Ltd entered into a contract with Basaveshwar Sugars Ltd to provide machinery and equipment for a sugar plant.

The petitioner fulfilled part of its obligation and demanded payment for the same. There was a dispute regarding the amount to be paid by the respondent company to the petitioner company. However, though the respondent company had initially agreed to pay a specified amount upon reconciliation of their accounts, they subsequently refused to pay the same. Therefore, a winding-up petition was filed before the high court. The contract between the parties was governed by an arbitration clause and proceedings before an arbitral tribunal were pending.

The court noted that in case payment of a debt is bona fide disputed by the company, a winding-up proceeding is not the legitimate way to enforce payment.

“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.

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. 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,” it said.

The Court noted that since a bona fide dispute with respect to the amount paid by the respondent to the petitioner existed and since the proceedings were already pending before the arbitral tribunal, the tribunal would be the appropriate forum for the adjudication of this dispute. A winding-up proceeding is a summary proceeding and the court is not expected to hold a mini trial for the same. Therefore, it is not the right remedy for adjudication of a dispute regarding default of payment.

Read the Judgment here.