REVISITING CONTROVERSY OVER THE PRECISE SCOPE OF WINDING- UP

PROVISIONS
ABHINAV KUMAR, SANAM TRIPATHI & AMIT SINGH 1
ABSTRACT
Under Section 433(e) of the Act, the Tribunal/Company Court may wind up a company if it is
unable to pay its debts. Further, section. 434(1) lists three circumstances where a company is
deemed to be unable to pay its debts. The term debt has been construed differently by different
High Courts in India, and controversy has arisen recently over the precise scope of the windingup provision. Therefore, there is a need to examine the present position of the law, and the scope
and extent of the powers of the Tribunal/Company Court under Section 433 (read with Section
434) of the Act.
The aim of this paper is to shed clarity upon the exact legal position regarding the interpretation
of debt under the Act, the powers of the Tribunal/Company Court under Section 433 of the Act
and the rights of the parties involved in the same. The authors in the article raises three research
question firstly, whether Section 434(1) (a) of the Companies Act 1956 has been interpreted
liberally by Indian Courts? Secondly, whether the Tribunal/Company Court has jurisdiction to
decide complex issues of fact and law arising in a winding up petition? And thirdly whether
solvency is a ground for dismissing a winding up petition filed under Sections 433 and 434(1)(a)
of the Companies Act 1956?

1 Authors are 4th year Student Of National Law University Delhi, and can be reached
at abhinav2singh@gmail.com.
1

CHAPTER I
LITERATURE REVIEW ON BASIS OF RESEARCH QUESTIONS
1.1 Research Question: Whether Section 434(1)(a) of the Companies Act 1956 has been
interpreted liberally by Indian Courts?
1.1.1 Scope of debt
In Kesoram Industries and Cotton Mills Ltd. v. CWT,2 the Court held that a debt is a sum of
money payable in future by reason of a present obligation debitum in praesenti solvendum in
futuro. Newfinds (India) v. Vorion Chemicals & DistilleriesThe term debt would refer to a
definite sum and would not include any claim for unliquidated damages or a sum of money that is
3

capable of being ascertained. Tripura Admn v. Tripura State Bank Ltd ., The term unable to pay
its debt is to be taken in its commercial sense of being unable to meet current demands though the
company may be otherwise solvent.4
This principle was re-affirmed in Registrar of Companies v. Kavita Benefit Pvt. Ltd., 5where the
Court opined that a debt must be a determined or definite sum of money payable immediately or at
a future date. Thus, a contingent or conditional liability is not a debt, unless the condition has
already occurred.
The claim of existence of debt cannot be unsubstantiated. If the claimant is unable to show that the
debt does indeed exist, s/he will not be entitled to claim relief. For example, in Kalra Iron Stores
v. Faridabad Fabricators P. Ltd. (No. 2), 6 the petition neither averred that the company was
unable to pay its debts nor carried a statement of accounts or acknowledgment of the debt claimed
by the petitioner, the petitioner was held not be entitled to a winding up order.Similarly, in Naresh
Kumar Agarwal v. Davender Kumer Mittal,7 the petitioners made an unsubstantiated allegation of
loan to the company for a hotel project, and were thus barred from seeking the remedy of winding
up.

2 (1966) 59 ITR 767 (SC).

3 Newfinds (India) v. Vorion Chemicals & Distilleries, (1976) 46 Com Cases 87 (Mad.), at 89.
4 Tripura Admn v. Tripura State Bank Ltd., (1960) 30 Comp Cas 324 (Tri).
5 (1978) 48 Com Cases 231 (Guj.)
6 (1992) 73 Com Cases 337 (Del.)
7 (1996) 3 Comp LJ 326.
2

1.1.2 Exercise of discretionary power

In every winding up petition under Section 433(e), the petitioner must show the following 2
things:8
i. Firstly, that there exists a debt
ii.
Secondly, that the respondent company is unable to pay the debt.
However, the mere presence of these 2 factors is not in itself sufficient to cause the winding
up petition to be granted. In other words, the Court/tribunal has discretion to grant or not grant the
winding up order, and it is not bound the presence of these 2 factors. An order for winding up
under Section 433(e) is discretionary.
1.2 Research Question: Whether the Tribunal/Company Court has jurisdiction
to decide complex issues of fact and law arising in a winding up petition?
A winding up order may only be made once the petitioner established its claim and there is
no bona fide or genuine dispute or defense as to the liability of the company to pay the claim of
the creditor.9It is well-settled law that a winding up petition is not a legitimate means of
enforcement of a debt that is bona fide disputed by the respondent company.10
In Ceramics India v. Haryana Steel and Alloys Ltd., 11 the Punjab and Haryana High Court
held that when the claims and allegations of petitioner-creditors and counter claims by the
respondent-company involve or raise complicated questions of law and facts and require detailed
investigation, the Company Court will refuse to order winding up of the company.
InAmalgamated Commercial Traders (P) Ltd. v. A.C.K. Krishnaswami & Anr.,12
theSupreme Courtheld 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
8 CR DATTA ON COMPANY LAW, 6th edn, 2008, LexisNexis Butterworths Wadhwa Nagpur, p.
5945.
9 CR DATTA ON COMPANY LAW, 6th edn, 2008, LexisNexis Butterworths Wadhwa Nagpur, p.
5938.
10 Harinagar Sugar Mills Co. Ltd. v. Court Receiver, (1966) 36 Comp Cas 426 (SC).
11 (1995) 83 Comp Cas 737 (P&H). The High Courts of Himachal Pradesh and Allahabad
respectively, have given similar decisions in Mazboot Packers and Engineers Co. v. Himachal Pradesh
Horticulture Producing Marketing and Processing Corporation Ltd., (1999) 95 Comp Cas 579 (HP);
and Shadi Lal Enterprises Ltd. v. Co-operaive Co. Ltd., (2001) 103 Comp Cas 863 (All).
12(1965) 35 Company Cases 456 (SC).

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.
It further observed that while bona fide challenge of debt would disentitle recourse under
Sections 433(e) and 434(1)(a), but what is a bona fide disputed debt would have to be decided
subjectively on the facts of each case. If the dispute, upon examination, were found to be bona
fide, then the tribunal/company court would cease to be the appropriate forum for adjudication,
and a civil court would have jurisdiction over the case.13
Similarly, in Madhusudan Gordhandas and Co. v. Madhu Woollen Industries Pvt.
Ltd.,14the same Court upheld this decision. The principles laid down in the above mentioned
judgment were reiterated by the Court in Mediquip Systems (P) Ltd. v. Proxima Medical Systems
(GMBH),15 wherein the Court held that the defense 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 Court in Vijay Industries v. NATL Technologies Ltd.,16 later
also followed the abovementioned judgments.
InM/s IBA Health (I) Pvt. Ltd. v. M/s Info-Drive Systems,17 this very question was raised
before the Court. The facts of the case are as follows. IBA Health Systems Ltd., an Indian
company, had developed a Hospital Information Software (HIS-I). In 2002, it entered into a
Cooperation Agreement with Info-Drive Systems (IDS), a Malaysian company, pursuant to which
IDS introduced IBA to a third company and facilitated the sale of the HIS-I software to that
company. For this service, IBA agreed to pay IDS a commission. Subsequently, disputes arose
between the parties on the payment of commission, and they entered into a Deed of Settlement in
2003.
To further complicate the matter, IBA (it was known as Medicom previously) was to be
taken over, which IDS sought to prevent by filing a civil suit in the jurisdictional court in
Bangalore. In 2006, the parties filed a compromise petition, reiterating that their relationship
would be governed by the terms of the Deed of Settlement. In essence, the Deed of Settlement
provided that IBA would pay IDS a specified percentage of certain types of payments it received
from its customer, and IDS in turn acknowledged that IBA had paid all its dues to date, and
undertook not to make any other claim in respect of the HIS-I transaction.

13 Ibid.
14 (1971) 3 SCC 632.
15(2005) 7 SCC 42.
16(2009) 3 SCC 527.
17 (2010) 10 SCC 553.
4

However, a year later, IDS demanded from IBA its share of a payment it alleged IBA had
received from its customer. IBA disputed both the existence of any such receipt and its liability to
IDS. At this point, IDS issued notice under Section 434 of the Companies Act, and filed a
company petition seeking a winding-up order. The Company Court, over IBAs objections,
admitted the petition, found that IDS had established a prima facie case and indicated that it would
pass orders in relation to the customary advertisement to be published. Naturally, this would have
caused IBA substantial detriment, both commercially and more generally, and it challenged the
order of the Company Judge.
The issue that arose was whether a creditor could prefer an application for winding up for
discharge of a substantially disputed liability. The Court held that in such a situation, there is a
clear duty upon 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, would not be expected to
hold a full trial of the matter - it would only have to decide whether the grounds appear to be
substantial.
The Company Court is not required in a winding-up proceeding to examine complex issues
of law and fact, or resolve serious disputes between parties, and relied in support on prior
decisions of the Court.18 As a result, the Supreme Court held that a Company Court cannot proceed
with a winding-up petition if the respondent raises a substantial or bona fide dispute as to the
existence of the debt.
However, the Court cautioned that 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 re-affirmed that 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 would always retain 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.19
Although the Court subsequently used other expressions to indicate the threshold a company
court must use to dismiss a winding-up petition, it seems clear from the above observations and
from the context of the judgment that the standard is one of reasonable or bona fide defense a
18Amalgamated Commercial Traders v. ACK Krishnaswami, 1965 35 CompCas 456 SC; Mediquip
Systems Pvt. Ltd. v. Proxima Medical System GMBH, AIR 2005 SC 4175.
19 Ibid.

standard that appears to be higher than a prima facie case but lower than the standard required to
succeed (or resist) in civil court.
1.3 Research Question: Whether solvency is a ground for dismissing a winding
up petition filed under Sections 433 and 434(1)(a) of the Companies Act 1956?
In order for a Tribunal/Company Court to exercise the discretion conferred upon it under
Section 433(e) read with Section 434(1)(a), it must be satisfied that the company is insolvent,
because the term unable to pay its debt is to be taken in its commercial sense of being unable to
meet current demands though the company may be otherwise solvent.20
The company should be plainly and commercially insolvent; its assets and its existing
liabilities must be such as to make it reasonably certain that the existing and probable assets would
be insufficient to meet the existing liabilities.21 Thus, ordinarily, if there is a bona fide dispute
regarding the debt payable by the respondent company, and the company is sound and solvent, the
winding up petition would be liable to be dismissed.22
However, if the debt is in fact owed and the company indebted, then the defendant company
cannot claim the defense that it is a viable and profit-making company having a sound financial
position.23
In M/s IBA Health (I) Pvt. Ltd. v. M/s Info-Drive Systems,24(facts previously discussed) the
Appellant company argued that the winding-up petition should be dismissed notwithstanding the
courts finding on the extent of the dispute, because the Appellant was commercially solvent and
able to pay its debts. The Court rejected this contention, holding that the solvency of a company
cannot stand in the way of a winding-up petition if the company does indeed owe an unpaid debt
to the creditor. At first sight, this does seem surprising, for Section 433(e) refers to a company that
is unable to pay its debts.
Section 434(1)(a) provides that a company shall be deemed to be unable to pay its debts if it
has neglected to pay a certain sum for three weeks after notice is duly served on it. Section
434(1)(a) refers, therefore, merely to the factum of non-payment. It may be suggested that Section
433(e) is not exhausted by the circumstances enumerated in Section 434(1)(a), and that a company
can demonstrate its ability to satisfy debts.
20 Tripura Admn v. Tripura State Bank Ltd., (1960) 30 Comp Cas 324 (Tri).
21 Ibid.
22 Pradeshiya Industrial and Investment Corporation of UP v. North India Petro Chemicals Ltd.,
(1994) 79 Comp Cas 835 (SC).
23 Mahesh Nathani v. Sir Edward Dunlop Hospitals (India) Ltd., (2006) 129 Comp Cas 678 (Del).
24 (2010) 10 SCC 553.

The Court, however, addresses this point by noting that the company will have an
opportunity on the liquidation application to rebut that presumption. In addition, commercial
solvency is also relevant to determine whether there is a serious dispute between the parties over
the existence of liability.
The Court held that a determination of examination of the companys 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.
It further observed that 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 opportunity on the liquidation application to rebut that presumption.25
The Court felt that 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 standalone ground.26
The Court concluded by pointing out that the Company Court cannot be maliciously used as
a debt collecting agency, and that 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 defense is made out on substantial grounds. This
judgment may ensure that a winding-up petition is scrutinised more carefully before it is admitted.

25 Ibid.
26 Ibid.
7

CHAPTER II
ANALYSIS
2.1 General Analysis
It is well known that one of the grounds for winding up a company under Indian company
law is its inability to pay debts. Section 433(e) of the Companies Act explicitly provides that the
Tribunal/Company Court may wind up a company if it is unable to pay its debts and Section
434(1)(a) lists three circumstances where a company is deemed to be unable to pay its debts.
Debt has been construed widely in Indian law, and controversy has arisen recently over the
precise scope of the winding-up provision. Recently, while the Supreme Court addressed part of
this in Vijay Industries v. NATL Technologies,27 it has had occasion to consider the law in more
detail in IBA Health v. Info-Drive Systems.28
The Supreme Court has held that a debt is a sum of money payable in future by reason of a
present obligation debitum in praesenti solvendum in futuro.29 The term debt refers to a definite
sum and does not include any claim for unliquidated damages or a sum of money that is capable of
being ascertained.30 The term unable to pay its debt is to be taken in its commercial sense of
being unable to meet current demands though the company may be otherwise solvent.31
Therefore, it is clear that a debt under Section 433(e) is a fixed and certain sum of money
that is owed by the respondent company to the petitioner creditor, and the respondent company has
been unable to repay the debt in the appropriate time. This understanding poses 2 possibilities of
non-payment the respondent company could have failed to pay because it is actually
commercially unable to do so; or the respondent company could be commercially solvent and may
have refused to repay for some other non-commercial reason.
If it is the latter situation (i.e.: the respondent company has failed to pay because it is
actually commercially unable to do so), then the Tribunal/Company Court may comfortably
exercise its powers under Section 433(e) read with Section 434(1)(a) and allow the petition for
winding up of the company so that the petitioner creditor may reclaim money owed.

27 AIR 2008 SC 1661.

28 (2010) 10 SCC 553.
29Kesoram Industries and Cotton Mills Ltd. v. CWT, (1966) 59 ITR 767 (SC), supra note 1.
30 Newfinds (India) v. Vorion Chemicals & Distilleries, (1976) 46 Com Cases 87 (Mad.), at 89, supra
note 2.
31 Tripura Admn v. Tripura State Bank Ltd., (1960) 30 Comp Cas 324 (Tri), supra note 3.

However, if it is the former case, then further complications arise. If the company is
commercially solvent, but does not currently possess the capital to repay the debt or is otherwise
stalling payment, then the petition for winding up may still be allowed. But if the company has not
repaid the debt because it is contesting the existence or genuineness of the debt, then there is a
complex question of whether to allow the petition or not. This is because it would then become a
substantial dispute of law and fact over whether there actually exists a debt owed to the petitioner
by the respondent.
Various High Courts across the country have taken the firm stand that when there is a
substantial question of fact and law raised in a petition for winding up under Section 433, then the
Tribunal/Company Court cannot proceed with the winding up petition; the petition must be
dismissed, and a civil suit must be instituted in a Court of appropriate jurisdiction.32
InAmalgamated Commercial Traders (P) Ltd. v. A.C.K. Krishnaswami & Anr.,33
theSupreme Court held 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.
It further observed that while bona fide challenge of debt would disentitle recourse under
Sections 433(e) and 434(1)(a), but what is a bona fide disputed debt would have to be decided
subjectively on the facts of each case. If the dispute, upon examination, were found to be bona
fide, then the tribunal/company court would cease to be the appropriate forum for adjudication,
and a civil court would have jurisdiction over the case.34
2.2 Case Analysis: M/s IBA Health (I) Pvt. Ltd. v. M/s Info-Drive Systems,(2010) 10 SCC 553.
2.2.1 Facts of the Case
IBA Health Systems Ltd., an Indian company, had developed a Hospital Information
Software (HIS-I). In 2002, it entered into a Cooperation Agreement with Info-Drive Systems
(IDS), a Malaysian company, pursuant to which IDS introduced IBA to a third company and
facilitated the sale of the HIS-I software to that company. For this service, IBA agreed to pay IDS
a commission. Subsequently, disputes arose between the parties on the payment of commission,
32SeeCeramics India v. Haryana Steel and Alloys Ltd., (1995) 83 Comp Cas 737
(P&H);Amalgamated Commercial Traders (P) Ltd. v. A.C.K. Krishnaswami & Anr., (1965) 35
Company Cases 456 (SC); Mazboot Packers and Engineers Co. v. Himachal Pradesh Horticulture
Producing Marketing and Processing Corporation Ltd., (1999) 95 Comp Cas 579 (HP); Shadi Lal
Enterprises Ltd. v. Co-operaive Co. Ltd., (2001) 103 Comp Cas 863 (All); supra notes 9-11.
33(1965) 35 Company Cases 456 (SC).
34 Ibid.

and they entered into a Deed of Settlement in 2003.

To further complicate the matter, IBA (it was known as Medicom previously) was to be
taken over, which IDS sought to prevent by filing a civil suit in the jurisdictional court in
Bangalore. In 2006, the parties filed a compromise petition, reiterating that their relationship
would be governed by the terms of the Deed of Settlement. In essence, the Deed of Settlement
provided that IBA would pay IDS a specified percentage of certain types of payments it received
from its customer, and IDS in turn acknowledged that IBA had paid all its dues to date, and
undertook not to make any other claim in respect of the HIS-I transaction.
However, a year later, IDS demanded from IBA its share of a payment it alleged IBA had
received from its customer. IBA disputed both the existence of any such receipt and its liability to
IDS. At this point, IDS issued notice under Section 434 of the Companies Act, and filed a
company petition seeking a winding-up order. The Company Court, over IBAs objections,
admitted the petition, found that IDS had established a prima facie case and indicated that it would
pass orders in relation to the customary advertisement to be published. Naturally, this would have
caused IBA substantial detriment, both commercially and more generally, and it challenged the
order of the Company Judge.
2.2.2 Issue 1: Whether a creditor can prefer an application for winding up for discharge of a
substantially disputed liability?
The Court held that in such a situation, there is a clear duty upon 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, would not be expected to hold a full trial of the matter - it
would only have to decide whether the grounds appear to be substantial.
The Company Court is not required in a winding-up proceeding to examine complex issues
of law and fact, or resolve serious disputes between parties, and relied in support on prior
decisions of the Court.35 As a result, the Supreme Court held that a Company Court cannot proceed
with a winding-up petition if the respondent raises a substantial or bona fide dispute as to the
existence of the debt.
However, the Court cautioned that 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 re-affirmed thatit is settled law that if the creditor's debt is bona fide disputed
35Amalgamated Commercial Traders v. ACK Krishnaswami, 1965 35 CompCas 456 SC; Mediquip
Systems Pvt. Ltd. v. Proxima Medical System GMBH, AIR 2005 SC 4175.

10

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 would always retain 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.36
Although the Court subsequently used other expressions to indicate the threshold a company
court must use to dismiss a winding-up petition, it seems clear from the above observations and
from the context of the judgment that the standard is one of reasonable or bona fide defense a
standard that appears to be higher than a prima facie case but lower than the standard required to
succeed (or resist) in civil court.
2.2.3 Issue 2: Whether solvency is a valid ground for dismissing a winding up petition filed
under Sections 433(e) and 434(1)(a) of the Companies Act 1956?
The Appellant Company argued that the winding-up petition should be dismissed
notwithstanding the courts finding on the extent of the dispute, because the Appellant was
commercially solvent and able to pay its debts. The Court rejected this contention, holding that
the solvency of a company cannot stand in the way of a winding-up petition if the company does
indeed owe an unpaid debt to the creditor. At first sight, this does seem surprising, for Section
433(e) refers to a company that is unable to pay its debts.
Section 434(1)(a) provides that a company shall be deemed to be unable to pay its debts if it
has neglected to pay a certain sum for three weeks after notice is duly served on it. Section
434(1)(a) refers, therefore, merely to the factum of non-payment. It may be suggested that Section
433(e) is not exhausted by the circumstances enumerated in Section 434(1)(a), and that a company
can demonstrate its ability to satisfy debts. The Court, however, addressed this point by noting that
the company will have an opportunity on the liquidation application to rebut that presumption. In
addition, commercial solvency is also relevant to determine whether there is a serious dispute
between the parties over the existence of liability.
The Court held that a determination of examination of the companys 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.
It further observed that if there is no dispute as to the company's liability, the solvency of the
company might not constitute a standalone ground for setting aside a notice under Section 434 (1)
36 Ibid.
11

(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 opportunity on the liquidation application to rebut that presumption.37
The Court felt that an examination of the company's solvency could 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.38
The Court concluded by pointing out that the Company Court cannot be maliciously used as
a debt collecting agency, and that 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 defense is made out on substantial grounds. This
judgment may ensure that a winding-up petition is scrutinised more carefully before it is admitted.
2.2.4 Public Policy Considerations
The Court thought it proper to additionally examine considerations of public policy while
determining whether to allow a winding up petition or not. It observed that 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 financial standing of the company and which may also have
other economic and social ramifications. Competitors would 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. Thus, it held, that the Company Courthas not only to look into the interest of the
creditors, but also the interests of public at large.
37 Ibid.
38 Ibid.
12

The Court sought to impress upon Company Courts to be more vigilant so that their process
would not be misused. A Company Court should thus act with circumspection, care and caution
and examine as to whether an attempt is made to pressurize the company to pay a debt that 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.
2.2.5 Decision
In light of the facts and the discussion by the Court, the appeal to the judgment of the Company
Court was allowed, and leave was granted to the parties to approach an appropriate forum for their
dispute that would decide their dispute in accordance with law.

13

CHAPTER III
CONCLUSION
3.1 Research Question: Whether the term unable to pay its debts under Section 433(e) of
the Companies Act 1956 has been interpreted liberally by Indian Courts?
Conclusion: While earlier the term unable to pay its debts was interpreted narrowly, it
has been interpreted more broadly in recent times, and the discretion given to the Court to pass an
order for winding up under Section 433(e) has consequently been increased. Thus, if it is proved
that there exists an undisputed debt, and that the debt has not been paid, then the Court may
comfortably exercise its powers to grant the winding up order, even if the Company may be
otherwise commercially solvent.
3.2 Research Question: Whether the Tribunal/Company Court has jurisdiction to decide
complex issues of fact and law arising in a winding up petition?
Conclusion: The Supreme Court has made it very clear in its judgment of IBA Health v.
Info-Drive Systems that in all cases where complex issues of fact and law as to existence of debt
have been raised, the Tribunal/Company Court does not have jurisdiction to proceed with a
winding up petition.
3.3 Research Question: Whether solvency is a ground for dismissing a winding up petition
filed under Sections 433(e) and 434(1)(a) of the Companies Act 1956?
Conclusion: The Supreme Court has observed that solvency itself is not a sufficient
ground to dispose off a winding-up petition, if the company does indeed owe an unpaid debt to the
creditor. Section 434(1)(a) of the Companies Act provides that a company shall be deemed to be
unable to pay its debts if it has neglected to pay a certain sum for three weeks after notice is duly
served on it. Section 434(1)(a) refers, therefore, merely to the factum of non-payment. Thus,
solvency in itself will not cause a winding up petition to be prima facie dismissed.

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