M.S. Liberhan, J.
1. The moot question referred is '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 ?'
2. I may appositely advert to the factual matrix on which succinctly the significant question has been formulated and posed in the reference order.
3. The facts in brief are taken, from the application under Section 34 of the Indian Arbitration Act, filed by the respondent, for the stay of winding-up proceedings as well as from the petition for winding up. Goetze India Ltd., the petitioner, filed a petition for winding up the respondent company, Pure Drinks (New Delhi) Ltd., inter alia, on the grounds that the company is not in a position to meet its day-to-day statutory and other liabilities as and when these fall due and the company is commercially insolvent, it would, therefore, be just, equitable and convenient for this hon'ble court to wind up the company. The petitioner served a notice under Section 434 of the Companies Act on the respondent. The sum demanded by the petitioner from the respondent is more than Rs. 500. The respondent has neither paid the sum due nor secured or compounded it to the satisfaction of the petitioner for more than three weeks after service of notice.
4. In answer to the motion taken by the petitioner, the respondent filed an application under Section 34 of the Indian Arbitration Act. It is prayed that further proceedings in the winding up petition be stayed and the matter be referred to arbitration. The relevant gist of the defence disclosed and put forth in the application under Section 34 of the Arbitration Act is : The respondent entered into an agreement with the petitioner for taking machinery and equipment on lease basis, vide agreement dated June 20, 1986. There is no admitted amount due. The alleged debt claimed is based on and arises out of the arbitration agreement. There cannot be any admitted debts in the absence of the arbitration proceedings. It is claimed that the petitioner committed breach of the agreement and is liable for damages, which is the respondent's counter-claim, the subject-matter of the present petition, as well as the amount due is the very basis of winding-up petition. The rights, obligations and liabilities of the respective parties are still to be determined by the arbitrator in terms of the arbitration agreement dated June 20, 1986. Numerous questions which required to be determined by the arbitrator are enumerated and itemised, and the same are : (i) is the claim of the petitioner barred by limitation; (ii) has the liability of the respondent in terms of the agreement not been terminated ; (iii) can the amount claimed be termed as an admitted amount; (iv) is there any amount due and payable by the respondent to the petitioner as per the agreement ; (v) has the petitioner exhausted the remedies available to it under the agreement; (vi) can the petitioner claim any amount without taking steps for availing of the remedy provided by the agreement ; (vii) whether entitlement of the petitioner with respect to the interest has been waived by the petitioner ; (viii) can the petitioner claim lease amount in the absence of the termination of the lease ; (ix) if any amount is due, what is the amount due.
5. Further objections with respect to the territorial jurisdiction in terms of the agreement, vide which it has conferred on the Delhi court (sic) ; the petition being mala fide and with an ulterior motive for pressurising the respondent to make the payment in the absence of the basic ingredients constituting the basis for winding up of the respondent, are raised. It is averred that the arbitration clause is an in-built process and mechanism for determination or settling the disputes arising out of the agreement.
6. It would be expedient to notice at this stage the arbitration clause in the agreement verbatim as produced in the application, which runs as under :
'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'.
7. Before precisely referring the question for determination, my brother, Majithia J., noticed that in the judgment reported as Tirlok Chand Jain v. Swastika Strips (P.) Ltd. [1990] 2 PLR 655 ; [1991] 70 Comp Cas 197 (P & H), my learned brother, the late Tiwana J., while answering the question, 'can an application under Section 34 of the Indian Arbitration Act, be moved for stay of the proceedings in a petition under Sections 433, 434 and 439 of the Companies Act ?', relied upon a Division Bench judgment in Maruti Ltd. v. B.G. Shirke and Co. P. Ltd. [1981] PLR 732 ; [1981] 51 Comp Cas 11 (P & H), wherein the question answered is 'whether an arbitration clause to which the company is a party, continues to bind a company subsequent to the order of winding up as it did before'. Majithia J. observed that in fact the view taken by the Division Bench relied upon, runs contrary to the view taken by the single Bench. It is this problem which necessitated the reference. The operative part of the reference runs as under:
'The view taken in Maruti Ltd.'s case [1981] 51 Comp Cas 11 (P&H;) does not support the view taken by the single judge. The learned single judge in Tirlok Chand Jain's case [1991] 70 Comp Cas 197 (P & H) was of the opinion that the relief claimed in proceedings under Sections 433, 454 read with Section 439 of the Act was different than the one sought by way of arbitration. In Maruti Ltd.'s case [1981] 51 Comp Cas 11 (P & H), a Division Bench of this court took a firm decision that it was open to the parties in a petition for winding up or even in a petition filed after the order of winding up that in view of the arbitration clause further proceedings in winding-up petition be stayed and the matter be referred to the arbitrator. The view taken by the single judge runs contrary to the view taken in Tirlok Chand Jain's case [1991] 70 Comp Cas 197 (P & H).'
8. Resultantly, the question posed above was referred for the decision of the Division Bench.
9. Before adverting to the question referred, it would be expedient and necessary to notice the law laid down in Maruti Ltd. v. B. G. Shirke and Co. P. Ltd. [1981] PLR 732 ; [1981] 31 Comp Cas 11 (P & H). The proposition answered in Maruti Ltd.'s case [1981] 51 Comp Cas 11 (P&H;), is 'whether an arbitration agreement to which the company was a party continues to bind the company subsequent to the order of winding up as it did before ?' It is this question which was considered and answered by the said Division Bench. The Hon'ble Division Bench in the process of dealing with the said question observed as under (at page 14 of 51 Comp Cas):
'The question with respect to the contention of learned counsel for the parties that needs determination is : 'does a clause, existing in an agreement for making reference of disputes to arbitration, bind a company subsequent to the order of winding up as it did before, and such a clause does not impinge upon or take away the jurisdiction of the court'. In our view, the answer has to be in the negative. It may be observed at the outset that the contention of learned counsel for the parties is based on foundation, which is non-existent. What is pre-supposed by learned counsel for the parties is that mere existence of an arbitration clause in the agreement would take away the jurisdiction of the court to entertain the present proceedings but this approach is not legally tenable.'
10. Finally, the Division Bench answered the question in the following terms (at page 17 of 51 Comp Cas) :
'We hold that a clause existing in an agreement for making a reference to the arbitrator, continues to bind a company subsequent to the order of winding up as it did before, that such a clause does not impinge upon or take away the jurisdiction of the court and that it would be for the court to decide whether to try the dispute which has been brought before it or to stay the action where the other party applies in time and otherwise complies with the conditions of Section 34 of the Indian Arbitration Act, 1940.'
11. The Hon'ble Single Bench in Tirlok Chand Jain v. Swastika Strips P. Ltd. [1990] 2 PLR 655 ; [1991] 70 Comp Cas 197 (P & H), after noticing the arbitration clause in the agreement, observed as under (at page 199 of 70 Comp Cas) :
'A bare reading of clause 15 of the partnership deed dated March 16, 1989, clearly indicates that it has no relevance to the relief prayed for in Company Petition No. 39 of 1990, i.e., for winding up of the respondent company. It is beyond dispute that proceedings under Section 433/434 read with Section 439 of the Companies Act, are in a completely different jurisdiction than the one under which remedy or relief can be sought by way of arbitration. It is fallacious to conceive that the proceedings for winding up under the above-noted sections of the Companies Act in any way are proceedings for the recovery of any amount. On the contrary the above-noted provisions, record or codify the circumstances/grounds on which a company can be ordered to be wound up by the court. So, none of the disputes referred to in the above-noted Clause 15 of the partnership agreement can be co-related to the relief, in Company Petition No. 39 of 1990.'
12. Thus, from the observations of the Hon'ble single/judge, it would be discernible that the dispute referred to in the arbitration clause of the greement under consideration cannot be so co-related to the relief sought in the company petition. It was further observed that stay of winding up proceedings on an application under Section 34 of the Arbitration Act for referring the matter to the arbitrator cannot be granted in the facts of the case as none of the disputes referred to in the arbitration clause in a partnership agreement can be co-related to the relief sought in the company petition.
13. The issues referred are pristine, legal and arise at the very threshold of the subject of admission.
14. To appreciate the questions referred and the issues raised in their correct perspective, it is the bare minimum essential to notice the mechanism or processual nature, the object, the predominant purpose, import, as well as the conceptual aspect of the winding up and of the petition for it and also the resultant effect of the winding up of a company.
15. The company as generally understood is a juristic personality created by the statute. In order to destroy its existence the only mode is by its dissolution. In order to attain the said object, the existence of a company can be terminated by means of winding up, which is a step towards dissolution and termination of the juristic entity of the company. Winding up is to bring the activity consortium to an end. Winding up is adopted with the object of dissolution of company. It can be done when prima facie it appears that it cannot any more survive or its members want to close down the business.
16. The winding up of a company is governed by specific and precise legislation provided by the Companies Act which in itself is a self-contained complete code. On a brief reference to the skeletal provisions for winding up provided by Part VII of the Act which is prefatory a necessity (sic), the basic design appears, that the company can be wound up, either by the court or voluntarily or subject to the supervision of the court. Reference may be made to Section 425 of the Act. The Act specifically provides for the liabilities of the contributories, the obligations of directors and managers whose liability is unlimited, the nature of liability of contributories, the consequences on the death of a contributory, the insolvency of a member and so on and so forth.
17. Chapter II of Part VII of the Act provides the methodology, mechanism and procedural aspect for winding up a company by the court. In fact the question posed is to be answered with respect to the facts and circumstances in a proceeding for winding up by the court. The Legislature has expressly provided by Section 433 of the Act the statutory circumstances under which alone the court can order the winding up of a company. Shunning the order clauses, the relevant clause under which the company has been sought to be wound up by the petitioner runs as under :
'433. Circumstances in which company may be wound up by court--. . .
(e) if the company is unable to pay its debts ;
(f) if the court is of opinion that it is just and equitable that the company should be wound up.'
18. Sections 435, 436, 437 and 438 refer to the processual nature and jurisdiction of the court with respect to transfer or retaining the winding up proceedings in the district court. The Legislature in its wisdom has expressly provided that the winding up proceedings by a court can be initiated on an application for the said purpose to the company court by a person in the manner provided by Section 439 of the Act. It further provides certain concomitants necessary to be observed, which are not necessary to be referred to at this stage. The essential factor which can be taken note of at this stage is that the application can be made by a creditor or creditors including any contingent or prospective creditors, apart from other persons enumerated in the section. The terminus quo for commencement of winding up by the court has been statutorily provided by Section 441 of the Act, The relevant part of Chapter II expressly provides the power of a court in the winding-up proceedings.
19. Further, in order to appreciate the issue raised in its correct and true perspective, some reference to the legislative background with respect to the power of the court expressly providing for the winding up proceedings appears to be inevitable. It deserves highlighting. Section 442 of the Act provides the power of the court to stay or restrain the proceedings against the company at any time after the presentation of the winding up petition and before a winding up order is passed. The provision of Section 442 of the Act runs as under :
'442. Power of court to stay or restrain proceedings against company. -At any time after the presentation of a winding up petition and before a winding up order has been made, the company, or any creditor or contributory, may--
(a) where any suit or proceeding against the company is pending in the Supreme Court or in any High Court, apply to the court in which the suit or proceeding is pending for a stay of proceedings therein; and
(b) where any suit or proceeding is pending against the company in any other court, apply to the court having jurisdiction to wind up the company, to restrain further proceedings in the suit or proceeding;
and the court to which application is so made may stay or restrain the proceedings accordingly, on such terms as it thinks fit.'
20. Again the court has been conferred with a power which it can exercise on hearing the winding up petition. It has been specifically and expressly provided by the Legislature by Section 443 of the Act which runs as under:
'443. Powers of court on hearing petition.--(1) On hearing a winding up petition the court may--
(a) dismiss it with or without costs ; or
(b) adjourn the hearing conditionally or unconditionally ; or
(c) make any interim order that it thinks fit ; or
(d) make an order for winding up the company with or without costs, or any other order that it thinks fit :
Provided that the court shall not refuse to make a winding up order on the ground only that the assets of the company have been mortgaged to an amount equal to or in excess of those assets, or that the company has no assets.
(2) Where the petition is presented on the ground that it is just and equitable that the company should be wound up, the court may refuse to make an order of winding up, if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.
(3) Where the petition is presented on the ground of default in delivering the statutory report to the Registrar, or in holding the statutory meeting, the court may,
(a) instead of making a winding up order direct that the statutory report shall be delivered or that a meeting shall be held ; and
(b) order the costs to be paid by any persons who, in the opinion of the court are responsible for the default.'
21. Section 446 of the Act specifies and enjoins on the court what is required to be done and can be done when a winding up order has been made or the official liquidator has been appointed either provisionally or otherwise. It runs as under :
'446. Suits stayed on winding up order.--(1) When a winding up order has been made or the official liquidator has been appointed as provisional liquidator, no suit or other legal proceeding shall be commenced or if pending at the date of the winding up order, shall be proceeded with against the company, except by leave of the court and subject to such terms as the court may impose.
(2) The court which is winding up the company shall, notwithstanding anything contained in any other law for the time being in force, have jurisdiction to entertain, or dispose of--
(a) any suit or proceeding by or against the company ;
(b) any claim made by or against the company (including claims by or against any of its branches in India) ;
(c) any application made under Section 391 by or in respect of the company ;
(d) any question of priorities or any other question whatsoever, whether of law or fact, which may relate to or arise in course of the winding up of the company ;
whether such suit or proceeding has been instituted or is instituted, or such claim or question has arisen or arises or such application has been made or is made before or after the order for the winding up of the company, or before or after the commencement of the Companies (Amendment) Act, 1960 (65 of 1960).
(3) Any suit or proceeding by or against the company which is pending in any court other than that in which the winding up of the company is proceeding may, notwithstanding anything contained in any other law for the time being in force, be transferred to and disposed of by that court.
(4) Nothing in Sub-section (1) or Sub-section (3) shall apply to any proceeding pending in appeal before the Supreme Court or a High Court.'
22. Finally, the consequences of the winding up have been provided by Section 447 of the Act, which runs as under :
'447. Effect of winding up order.--An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on the joint petition of a creditor and of a contributory.'
23. From the skeletal scheme of the Act, summarised and referred to in brevity above and what has been expressly provided, the brief design from short exordium appears to be that winding up of a company is provided by specific and precise legislation. It is a case of insolvency of a corporate-existence and I can safely venture to state that it can be equated with the bankruptcy of a person particularly when the company is sought to be wound up through the agency of the court for its inability to pay its debts or where it is found to be just and equitable that the company should be wound up. At this stage, it may be noticed that Section 434 defines the deeming provisions when the company would be deemed to be unable to pay its debts. I may further venture to state that the scheme and provisions of the Act obviously ensure that winding up of the company is for the benefit of all concerned with the affairs of the company particularly the creditors, shareholders and contributories, etc. In spite of the fact that winding up might have been sought by a single creditor or a person enumerated in Section 439 of the Act, it would be reasonable to infer that a petition for winding up would be deemed to be a representative action and is in public interest. It is a collective procedure. It is an accepted mechanism or methodology provided by the Act by which assets of the company are recovered, liabilities met, debts paid and if afterwards something is left, the same is distributed amongst the members.
24. In my considered view the predominant purpose of ordering the winding up of a company has deep roots in public policy and is a step not to permit the company to run its day to day business when it is unable to meet its commitments or has become sick or has meddled in its affairs to such an extent that it would not be in the interest of the public or the persons interested in it to permit the company to continue functioning.
25. So far as the conceptual aspect of winding up of a company is concerned, it has been well established precedently, it has been judicially expressed and well accepted that while ordering the winding up of a company by the court, when it is unable to pay its debts, or when it is just and equitable to do so, the court will keep in view : That the winding up is for the benefit of all concerned. The winding up does not result in conferring any special privilege on the petitioner, i.e., the creditor or any other person making the application for winding up. The petitioner-creditor has to wait for his turn as other similarly situated persons to recover his amount due. He stands pari passu with other creditors similarly situated. He has to establish his debts before the official liquidator after the passing of the winding up order as any creditor would have been able to do so.
26. The winding up proceedings cannot be treated as an alternative remedy of a suit for recovery nor as an execution proceedings. It may be a legitimate means for seeking enforcement of payment of a debt but it cannot be used as a lever to exercise pressure on the company to pay off the debts to a creditor. It cannot be allowed to become an illegitimate pressure in spite of the fact that the creditor cannot be compelled to avail of his ordinary remedy for the recovery of his debts. An order passed in a winding up petition is an order in rem. As a necessary and natural consequence of the same, the court attains the custody and control of the assets of the company which are released and distributed in the manner provided by the Act. The court is bound to keep in view the public interest. Primarily, the court is concerned not only with the interest of the petitioner or the creditors but it has to keep in view the interest of the company's shareholders, contributories, etc., also. It is said that winding up is only a process of expediting the resultant effect of a creditor, which is pari passu and a collective procedure for the benefit of all (sic).
27. While ordering the winding up of a company under Section 433(e) of the Act on the ground that the company is unable to pay its debts, it is enjoined upon the court to see before a petition can be admitted that the debt due is the debt for which the creditors can go to the company and at once demand payment. It is only after the company is unable to pay its debts and there is no bona fide defence to meet the demand of the creditors that the company can be ordered to be wound up. It is to be taken note of that in a winding up petition, winding up is prayed for, not the payment of money due. It cannot be treated as akin to a suit or institution of a suit for the recovery of the amount as the winding up judgment does not establish the debt, though the company court has a power to adjudicate upon the proof of the debt apart from the judgment, or the award of an agreement.
28. This court is also entitled to go behind the award, form of transaction in order to ascertain the truth of what is sought to be proved including the rights of the petitioner with respect to his locus standi to move the petition, e.g., to determine the character of the petitioner as a creditor. Before a winding up order is passed the court has to determine whether the petitioner is proved to be a creditor or admitted to be a creditor before he can secure an order for winding up.
29. The company court cannot convert itself into a court of original jurisdiction settling civil disputes in exercise of its power under Section 433 of the Act. It can order winding up of the company if it is satisfied of the need for winding up and not for settling disputes of civil nature. One of the tests as propounded in the series of other aspects taken in view, is whether the court should first grant a decree for an alleged debt and then convert itself into a kind of an executing court by passing a winding-up order ; whether a party should succeed in its defence or not on merits, should he be referred to the civil court or any other forum of its choice for its adjudication. Winding up can only be ordered after the court is satisfied that the debt is absolutely due, presently payable and the company is unable to pay, though the company court can go behind the disputes, agreement, award or can pass any order to determine whether the disputes sought to be raised are bona fide or not. Even where unconditional permission to defend has been granted by the civil court, courts cannot refuse the winding up solely on the ground that either a suit is maintainable for recovery or a decree or award is executable or the same cannot be executed for some reasons. It has the power to insist upon proof of debt.
30. It is well-settled that bona fides or disputes which a company court is required to find out with respect to the averments of the petitioner, depends upon the facts and circumstances sought to be raised. Putting off liabilities or creating a defence would be considered and decided by the court. The court would fake into consideration the nature of the disputes, all other facts and circumstances including the conduct of the parties. The Winding up court while determining the necessity for winding up of a company will keep in view as the most important ingredients and material consideration, the company's inability to pay the debt, the basis of the creditor's due and denial of the payment. It is not the creditor's claim which is of prime importance for a winding-up order but it is the liability of the company to pay which is the prime consideration. It is on the inability of the company to pay its debts that public policy demands that such a company has no right to function as going concern. The court takes only the prima facie view. It may not decide the existence, effect or validity of an agreement including the arbitration agreement nor may it proceed to enforce it. It has been precedently further observed that mere pendency of an appeal does not destroy the creditor's claim. Similarly, mere pendency of the suit by itself cannot be put up as defence for winding up.
31. The composite picture from the scheme, provisions and sections of the Act emerges, which is not only discernible but is manifest and obvious, that on the passing of the winding-up order or the appointment provisionally or otherwise of the official liquidator of the Company. In the eye of law, the company still continues with its identity and juristic personality till it is finally dissolved. It is only the management of the company which is passed on to the official liquidator under the supervision of the court without affecting the company in any other manner. The only change which can be brought about is that the management of the company instead of vesting in the board of directors vests in the official liquidator under the supervision of the court. It is he who recovers the assets of the company and controls the same in accordance with law as well as manage the affairs of the company keeping in view the shareholders' and other person's interest. It is only after recovering the assets and meeting the liabilities of the company in accordance with the priorities set out by the Act and Rules, something is left over after meeting the demand of the company that the same is distributed amongst the interested persons of the company. The juristic personality of the company continues to exist till its final dissolution. All agreements or contracts of the company and all rights and liabilities of the company would too survive till the company is wiped off. It further emerges that on commencement of winding up proceedings, the Legislature has expressly conferred the power on the company court to stay the proceedings before any other authorities. It can pass such order as it thinks fit. In the same sequence, the Legislature has provided as would be obvious from a reading of Sections 442 and 446 of the Companies Act that no proceedings will either continue or commence after the winding up order is passed without permission of the company court. Of course, the company court has residuary powers to pass a specific interim order during pendency of the winding up proceedings in view of the peculiar facts and circumstances of each case. It is further clear it cannot be disputed that in case of passing of an order of winding up of a company, all disputes, claims, liabilities, etc., would be decided by the official liquidator or by the forum agreed upon by the parties or court, provided it is permitted by the company court in terms of Section 446.
32. At this stage, a reference to Section 9 of the Companies Act as well as Section 34 of the Indian Arbitration Act is necessary to find out the composite picture to answer the question posed. Section .9 renders by its operation all memorandum or articles of a company, agreements, resolutions, etc., whether registered prior to the commencement of the Act or after the commencement of the Act, as void to the extent they are repugnant to the provisions of this Act.
33. The Indian Arbitration Act with an object to cut short the delays and technical cumbersome procedure of civil courts protected the rights of the parties to an agreement to choose their own forum for the purpose of determining their disputes which they might have agreed upon to be decided by a private forum. It may be noticed that no statutory provisions have been pointed out in-the course of arguments which oust the jurisdiction of any court. At the most, the jurisdiction conferred on the forum agreed upon by the parties can be treated as a concurrent jurisdiction of that court to determine the disputes between the parties. It is axiomatically and jurisprudentially accepted that a party can neither by an agreement oust the jurisdiction of a court or authority conferred by the legislation nor confer jurisdiction. Even under the Arbitration Act, the parties choose their own forum to determine their disputes and the rights so determined under it can only be enforced through the agency of the court by making the award a rule of the court. At this point, we, may refer to the provisions of Section 34 of the Indian Arbitration Act, keeping in view the questions required to be answered in the reference. Section 34 runs as under :
'34. Power to stay legal proceedings where there is an arbitration agreement.--Where any party to an arbitration agreement or any person claiming under him commences any legal proceedings against any other party to the agreement or any person claiming under him in respect of any matter agreed to be referred, any party to such legal proceedings may, at any time before filing a written statement or taking any other steps in the proceedings, apply to the judicial authority before which the proceedings are pending to stay the proceedings ; and if satisfied that there is no sufficient reason why the matter should hot be referred in accordance with the arbitration agreement and that the applicant was, at the time when the proceedings were commenced, and still remains, ready and willing to do all things necessary to the proper conduct of the arbitration, such authority may make an order staying the proceedings.'
34. Learned counsel for the petitioner argued that an application under Section 34 of the Arbitration Act is not maintainable in the winding-up petition. There is no dispute which can be adjudicated upon by a private forum. An arbitrator cannot give the relief of winding up which is the sole jurisdiction of the company court. Lastly, it was argued that any provisions in an agreement ousting the jurisdiction of the company court would be void in view of the provisions of Section 34 of the Indian Arbitration Act. In order to support his submission, learned counsel for the petitioner, relied upon Tirlok Chand Jain v. Swastika Strips (P.) Ltd. [1990] 2 PLR 655 ; [1991] 70 Comp Cas 197 (P & H), Hind Mercantile Corporation Pvt. Ltd. v. J.H. Rayner and Co. Ltd. [1971] 41 Comp Cas 548 (Mad) and O.P. Gupta v. Shiv General Finance (P.) Ltd. [1977] 47 Comp Cas 279 (Delhi), Company Application No. 8 of 1979, in C. P. No. 147 of 1978, decided on July 12, 1979.
35. In reply to the arguments addressed, learned counsel for the respondents refuted the submissions made though he admitted the company court's jurisdiction for winding up. It was argued that though Section 34 of the Arbitration Act does not oust the jurisdiction of the company court for winding up, proceedings can be stayed and parties can be asked to get their disputes settled from an arbitrator. In support of his contention, he relied upon Star Trading Corporation v. Rajratna Naranbhai Mills Co. Ltd. [1971] 41 Comp Cas 1023 (Guj).
36. On dissection of the questions posed, the anatomy of the issue in hand emerges : (1) Whether an arbitration agreement between the parties to the company petition under Sections 433, 434 and 439 of the Companies Act binds the parties : and (ii) Can a party against whom the company petition is filed raise an objection that in view of the arbitration clause further proceedings in the company petition be stayed ?
37. I may venture to state, as even otherwise conceded at the Bar that as a broad proposition of law, there cannot be any dispute that an arbitration agreement between the parties to a company petition under Sections 433, 434 read with Section 439 of the Companies Act does bind the parties. Similarly, a party cannot be stopped from raising an objection or making a prayer that in view of the peculiar facts and circumstances of the case and the arbitration clause, further proceedings in the company petition be stayed. Whether a party can succeed in satisfying the court that liquidation proceedings should be stayed or not and the matter should be referred to the agreed arbitrator and thus succeed in their defence on the merits will vary and can be determined in the peculiar facts and circumstances-of each case.
38. I may further state at this stage that so far as the relevant question of binding nature of the arbitration agreement between the parties to the ompany petition is concerned, it has been authoritatively pronounced by the Division Bench of this court in Maruti Limited v. B.G. Shirke and Co. P. Ltd. [1981] 51 Comp Cas 11 ; [1981] PLR 732 that an arbitration agreement does bind the parties to it not only before the passing of the winding up order, but even after the passing of the same. The relevant part of the answer has been reproduced in the earlier part of the judgment and I respectfully agree with the said judgment.
39. Even otherwise, in view of the observations made above and the accepted principles that mere winding up of a company does not wipe off the company and the effect of winding up being only the taking over of the management of the company from the board of directors and vesting of the same in the official liquidator under the supervision of the court, it would not write off the rights or liabilities of the company under a valid agreement entered into prior to the winding up. All rights and liabilities of the company would continue to flow under the said agreement as the juristic identity of the company continues till the company is finally dissolved. There cannot be any gainsaying that in spite of the agreement including the arbitration agreement, binding between the company and the parties to the agreement, in view of the statutory and specific provisions of Section 446 of the Act, it would be within the jurisdiction of the company court, either to permit to continue the proceedings before the arbitrator or refer the dispute between the parties to the agreed arbitrator for its determination or determine the same itself keeping in view the facts and circumstances of each case.
40. Otherwise also, Section 34 of the Indian Arbitration Act confers discretionary jurisdiction on the court to stay the proceedings brought before it and refer the matter to arbitration but it does not oust the jurisdiction of the court. The only way to read the provisions of Section 34 are that it confers a special jurisdiction on a forum agreed to by the parties. Though it may be loosely termed as concurrent jurisdiction yet the court retains the jurisdiction. Section 34 does not oust the jurisdiction of the court. The award passed by the arbitrator settling the dispute inter se the parties cannot by itself be enforced except after it is made a rule of court.
41. I may again venture to state, as also has been observed in the precedents cited above by the learned counsel for the petitioner, that no jurisdiction by an agreement can be conferred for winding up of a company upon the arbitrator particularly in view of Section 9 of the Companies Act. It is the special jurisdiction conferred by the statute on a court alone, and cannot be taken away or restricted or ousted by the mutual agreement of the parties. It is further so for the reason that it is essentially not for the benefit of the petitioner-creditors alone as it is undisputedly for the benefit of all concerned, i.e., creditors, shareholders, debtors and contributories, etc. A company petition is a representative petition on behalf of all for bringing it to the notice of the company court that either the company is unable to pay its debts as envisaged by Section 433(e) of the Act, or it is just and fair in the facts and circumstances of the case to wind up the company. The arbitration agreement may bind the parties to the agreement but the same cannot affect the rights and liabilities of the other creditors, contributories, etc., who were not privy to the arbitration agreement but have got a right to seek the winding up of the company. Though the party may be a party to the arbitration agreement seeking the winding up does not do so only on his own behalf but also on behalf of others, as observed in the earlier part of judgment. It has been observed in O.P. Gupta's case [1977] 47 Comp Cas 279 (Delhi) that where there is an arbitration clause in the memorandum of association to refer any dispute amongst the members to the arbitrator, the party cannot seek the stay of proceedings under Section 34 of the Arbitration Act in proceedings under Sections 397 and 398 of the Act as Section 9 of the Companies Act overrides the memorandum and articles, etc., which are contrary to the provisions of the Companies Act, secondly on the ground that Sections 397, 398 and Section 434 deal with the jurisdiction for winding up or to regulate and manage the affairs of the company, is within the jurisdiction of the court and cannot be referred to the arbitration. It was further observed that it is the duty of the court to protect the interest of the creditors, etc., though a reference has been made that there have to be strong circumstances to stay the proceedings and refer them to the arbitrator. It is essentially for the court to decide or adjudicate in each case under what circumstances the court should stay the proceedings.
42. In Star Trading Corporation v. Rajratna Naranbhai Mills Co. Ltd. (in liquidation) [19711 41 Comp Cas 1023 (Guj), the company went into liquidation and the official liquidator sought permission to sue in a suit for recovery wherein the question was raised that in view of the arbitration agreement between the parties the civil court was excluded from the jurisdiction, in view of Section 446(2) of the Act. The hon'ble court found that since on the winding up of a company, it does not cease to exist as a company as no transformation takes place in so far as its legal or juristic entity is concerned, the rights also continue to exist and only the board of directors are changed and the management of the company goes to the official liquidator. Thus, the court can grant permission to sue in suitable circumstances or otherwise proceed himself.
43. In Company Application No. 8 of 1979 in C. P. No. 147 of 1978, the Hon'ble Bench of this court observed after noticing the arbitration clause in the said case that proceedings under Sections 433, 434 read with Section 439 of the Companies Act, 1956, are completely a different jurisdiction, than the one regarding which remedy can be sought by way of arbitration under the clause in question. It is fallacious to conceive that the proceedings for winding up under the provisions of Sections 433, 434 and 439 of the Companies Act, are by way of recovery of amount touching the various provisions of the scheme. Under the provisions of Section 433, the Legislature codified the circumstances/grounds on which a company may be ordered to be wound up by the court. Section 434 provides as to under what circumstances a company may be deemed to be unable to pay its debts. The proceedings in the said petition cannot be taken to be the proceedings for the recovery of disputed debts or proceedings regarding the settlement of the disputes arising out of the rights and liabilities of the conditions of the scheme. Consequently, the application was declined. Similar are the observations made in Tirlok Chand Jain's case [1971] 70 Comp Cas 197 (P & H). Even the Division Bench judgment which the learned single judge observed having gone contrary to the judgment of the Division Bench reported in Maruti Ltd's case [1981] 51 Comp Cas 11 has observed on page 14 that the arbitration clause does not even after referring the disputes to an arbitrator, take away the jurisdiction of the company court, for winding up. It has been categorically laid down that 'what is pre-supposed by learned counsel is that the mere existence of an arbitration clause in the agreement would take away the jurisdiction of the company court to entertain or dispose of any suit or proceeding and any claim made by or against the company. But this approach is not legally tenable'.
44. 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 it 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.
45. At the same time, I may venture to state that merely because a winding-up petition has been filed, it would not automatically render the arbitration agreement between the parties nugatory, since it is for the company court to determine whether the debt is due, or the creditors have locus standi to file a petition for winding up, being, in fact a creditor, particularly in view of the dispute with respect to his being a creditor having been raised by the company is bona fide, and the company petition not having been shown to be akin to a suit or proceedings for the recovery of the amount. It would be for the court which is to see only a prima facie case, to determine whether the dispute requires to be gone into in an elaborate proceeding before determining the need for winding up. It is for the company court to decide while striking a balance between the public interest and desirability of the company to be wound up in the absence of special circumstances. In case of a dispute arising out of a contract under which the petitioner claimed the amount due in which there is an arbitration clause, the company court may decide to refer the dispute to arbitration.
46. The right to get the dispute decided by a private forum of its own choice cannot by itself be used by the company as a shield for winding up nor can the fact of there being an arbitration clause between the petitioner and the respondent-company by itself be termed as a bona fide dispute. The substratum of the thought for staying the winding-up proceedings during the pendency of the arbitration proceedings is fraught with grave consequences. There is no doubt that the court in the winding up proceedings does not decide the existence or validity of an arbitration agreement nor proceed to enforce it or modify it in any manner. The winding up court can and may take a prima facie view of the matter and nothing more. Invoking of the arbitration clause cannot be used as a roost to abuse the proceedings. The winding up proceedings cannot be allowed to be used as an instrument of illegitimate pressure as observed above but at the same time the creditors cannot be compelled to the ordinary civil remedy of a suit which undoubtedly is not only costly and slow but often results in an illusionary decree which may be a beginning of the problems. There are no provisions ousting the jurisdiction of the company court with certainty in deciding the winding-up petition. The company court is clothed with all the jurisdiction. A court can go behind the decree. Mere counter-claims or arbitration clause does not by itself lead to mechanical or automatic dismissal of the petition. No provisions have been pointed out by which the right to file a winding-up petition statutorily conferred can be obliterated by an agreement between the parties. The arbitration clause in itself is not a litmus test for bringing the winding-up proceedings to a halt. Mere arbitration agreement by itself is not sufficient to stay the winding-up proceedings.
47. It is manifest in view of the above discussion as also from a plain reading of the Companies Act that the company judge has unfettered discretion. The court will avoid laying down any parameters by which it is to be guided in exercise of its discretion with respect to staying the winding-up proceedings or to continue them, in spite of the arbitration agreement. Courts would not be bound to deal slavishly to the arbitration clause and stay the proceedings. It is in the peculiar facts and circumstances of a case that the company court may relegate the parties to another procedure available, otherwise it would not slavishly accept the arbitration clause and stay the proceedings. The arbitration clause cannot be permitted to be deployed as a ploy with an intention to delay the winding up proceedings. It may cover the dispute between the parties to the agreement, or relating to it but to see whether the debt is due to the petitioner, the question is to be examined, by the company court, and while considering the petition and questions on the merits, divorced from the provisions of the Arbitration Act and while determining the question, as observed above, no order under Section 34 of the Indian Arbitration Act may be possible.
48. A reading of the provisions of the Companies Act and the Arbitration Act as referred to above in the background of the Statement of Objects and Reasons for enactment of the Companies Act makes it clear that the Legislature has come forward with suitable provisions with respect to the stay of proceedings for winding up before the company court and has specifically provided the circumstances in which the proceedings can be stayed.
49. It will be too much, rather the very object of the provisions for winding up would be frustrated if the proceedings for winding up are stayed mechanically under Section 34 of the Indian Arbitration Act, when the application for winding up is still not heard and the court has not yet gone into to find out whether the debt is due and is payable. Mere arbitration clause itself is no justification for the stay of proceedings nor is it a complete defence in itself. The provisions of the company law being special provisions will override the general provisions. Since the arbitrator cannot grant a relief claimed in a winding-up petition, it would be a futile exercise to try the lis piecemeal.
50. If the arbitration clause by itself is permitted to operate mandatorily, requiring the court to stay the winding up proceedings, it may be deployed as a ploy to delay the winding-up proceedings without there being any bona fide dispute.
51. In view of the observations made above, after dissecting the whole scheme of the Act and keeping in view the predominant purpose of the winding up and taking into consideration the conceptual nature of the winding up proceedings the syndrome which emerges is, that mere existence of an arbitration clause would not strangulate the winding-up proceedings. It is for the company court, keeping in view the facts and circumstances of each case, the question involved for determination, the bona fides of the defence raised, the question requiring determination agreed to by the parties to be decided by the arbitrator and to determine the locus standi of the petitioner-creditor ; whether the debt is due to him or not or to determine the counterclaim of the company, which may necessitate a reference to the arbitrator and in the absence of which no reference to the arbitrator can be made or is possible, to stay the winding proceedings or not. It will be particularly so obvious when the winding up of the company is sought on the ground of the same being just and equitable.
52. 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.
53. In view of the discussion made above, it emerges that an 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.
54. 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.
55. 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.
56. So far as 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.
G.R.Majithia, J.
57. I agree.