Arbitration clause alone does not stay winding-up proceedings; stay requires a bona fide, prima facie sustainable defence.

An arbitration clause in a lease agreement does not by itself entitle a company to stay winding-up proceedings under section 34 of the Arbitration Act, 1940. The company court must still assess whether the defence raised is bona fide and prima facie sustainable on facts and law before granting a stay. Where the record shows repeated demands, admissions of irregular payment, and no meaningful defence beyond a request for indulgence, no bona fide dispute requiring arbitral determination is established. In such circumstances, stay of the winding-up petition is neither just nor equitable, and the winding-up proceedings may continue.

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Issues: Whether the existence of an arbitration clause in the lease agreement entitled the respondent-company to stay the winding-up proceedings under section 34 of the Arbitration Act, 1940, and whether a prima facie bona fide defence was made out for reference of the dispute to arbitration.

Analysis: The agreement contained an arbitration clause, but the relief sought in the company petition under sections 433, 434 and 439 of the Companies Act, 1956 could not be diverted to arbitration as a matter of right. The company court was required to examine whether the defence raised was bona fide and whether it was likely to succeed on facts and law. On the record, repeated demands had been made and the respondent-company had not raised any meaningful defence beyond admitting irregular payments and asking for indulgence. The court found that no prima facie bona fide defence existed requiring determination by an arbitrator, and that stay of the winding-up proceedings was neither just nor equitable in the circumstances.

Conclusion: The application for stay under section 34 of the Arbitration Act, 1940 was rightly rejected, and the winding-up proceedings were allowed to continue.

Final Conclusion: An arbitration clause does not by itself bar winding-up proceedings, and stay will be granted only where the applicant shows a genuine and prima facie sustainable defence requiring arbitral determination.

Ratio Decidendi: The existence of an arbitration agreement does not create an absolute right to stay winding-up proceedings; stay depends on the company court's discretion and on the applicant establishing a bona fide, prima facie defence requiring arbitration.

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