1992 (2) TMI 303 - HC - Companies Law

Court dismisses application to stay winding-up proceedings under Arbitration Act; emphasizes need to assess defense genuineness

Goetze India Ltd Versus Pure Drinks (New Delhi) Ltd.

The court dismissed the application to stay the winding-up proceedings under section 34 of the Arbitration Act, 1940. The respondent-company was directed ... Company when deemed unable to pay its debts Issues Involved:1. Validity and enforceability of the arbitration clause in the lease agreement.2. Whether the winding-up proceedings under sections 433, 434, and 439 of the Companies Act, 1956, should be stayed in favor of arbitration.3. Determination of a bona fide defense by the respondent-company.4. Applicability of section 34 of the Arbitration Act, 1940, in staying the winding-up proceedings.Detailed Analysis:1. Validity and Enforceability of the Arbitration Clause:The lease agreement dated June 20, 1986, between the petitioner and respondent included an arbitration clause (Clause 19), which stipulated that all disputes arising from the agreement would be referred to arbitration. The respondent-company invoked this clause to stay the winding-up proceedings under section 34 of the Arbitration Act, 1940. The court acknowledged the existence of a valid arbitration agreement but emphasized that the arbitration clause alone does not automatically stay the winding-up proceedings.2. Whether the Winding-Up Proceedings Should be Stayed in Favor of Arbitration:The Division Bench addressed the question of whether an arbitration agreement binds the parties in a company petition under sections 433, 434, and 439 of the Companies Act. It concluded that the arbitration clause does not grant an absolute right to stay the winding-up proceedings. The court must consider the specific facts and circumstances, the bona fides of the parties, and the nature of the dispute before deciding whether to stay the proceedings. The relief claimed under sections 433, 434, and 439 cannot be diverted to arbitration, and the arbitrator cannot order the winding-up of a company.3. Determination of a Bona Fide Defense by the Respondent-Company:The court examined whether the respondent-company had raised a bona fide defense that warranted arbitration. The respondent-company's defense was primarily based on the claim that the lease installments were irregular due to unprecedented rains and floods. However, the court found this explanation insufficient and noted that the respondent had neglected to pay the outstanding amounts despite multiple legal notices from the petitioner-company. The court concluded that the respondent-company did not have a prima facie bona fide defense that required determination by an arbitrator.4. Applicability of Section 34 of the Arbitration Act, 1940:The court reiterated that while section 34 of the Arbitration Act allows for the stay of legal proceedings in favor of arbitration, this provision does not apply mechanically in the context of winding-up petitions. The court must exercise its discretion and consider whether the arbitration clause and the defense raised by the respondent justify staying the winding-up proceedings. In this case, the court determined that staying the proceedings was not warranted as the respondent-company failed to present a credible defense.Conclusion:The application under section 34 of the Arbitration Act, 1940, to stay the winding-up proceedings was dismissed. The court directed the respondent-company to file its written statement to the main petition by April 3, 1992. The judgment emphasized that the arbitration clause does not automatically stay winding-up proceedings and that the court must carefully evaluate the circumstances and the bona fides of the defense raised by the respondent.