1992 (11) TMI 283 - HC - Companies Law

Appeal allowed, winding-up application stayed. Security orders shouldn't rely on doubtful defenses.

Dunlop India Limited Versus Anamika Udyog

The appeal was allowed, setting aside the lower court's order for security and admission of the winding-up application. The winding-up application was ... - Issues Involved:1. Validity of the security order for the winding-up petition.2. Principles for ordering security in winding-up petitions.3. Comparison of legal principles from previous judgments.4. Application of legal principles to the facts of the case.5. Final decision on the winding-up application and related orders.Detailed Analysis:1. Validity of the Security Order for the Winding-up Petition:The appeal challenges a receiving order in a winding-up petition where the petitioner was directed to advertise unless the company, M/s. Dunlop India Ltd., furnished security of Rs. 50 lakhs. The lower court's decision was based on doubts about the company's defense and followed a dictum from Ofu Lynx Ltd. v. Simon Carves India Ltd., AIR 1970 Cal. 418.2. Principles for Ordering Security in Winding-up Petitions:The court emphasized that if a debt is bona fide disputed, a winding-up application would not lie. Conversely, sham disputes do not make a debt disputed. The court discussed borderline cases where the defense might not appear sound but cannot be dismissed outright, necessitating a trial. The court opined that ordering security in such cases of doubtful defense would contradict the principle that disputed debts are not appropriate for winding-up applications. The court should not weigh the strength of the defense at the receiving stage but should dismiss the winding-up application if the defense might succeed at trial.3. Comparison of Legal Principles from Previous Judgments:The court reviewed the dicta in Ofu Lynx Ltd., which suggested that if the court doubted the bona fides of disputes, it could order security. However, the court disagreed with this test, stating it was not appropriate. Instead, the court referred to Machalec Engineers & Manufacturers v. Basic Equipment Corporation, AIR 1977 SC 577, which provided five tests for granting leave to defend in summary suits. The court highlighted that security should only be ordered when the defendant shows no issue that might resist the claim at trial, yet the court entertains some doubt and shows mercy.4. Application of Legal Principles to the Facts of the Case:The court noted that M/s. Dunlop India Ltd. made payments to the petitioning creditor after the contract period, leading to disputes about whether these were final payments or part payments. The statutory notice and subsequent responses raised doubts about both the claim and the defense. The court concluded that the lower court's reliance on post-contract payments to order security was incorrect. The principles from Machalec Engineers & Manufacturers should apply, where the court should not order security if the defense might succeed at trial.5. Final Decision on the Winding-up Application and Related Orders:The court set aside the lower court's order for furnishing security and admission, stating that M/s. Dunlop India Ltd. disclosed facts that could be a possible complete defense at trial. The winding-up application was permanently stayed, and the petitioning creditor was relegated to a suit. The court extended the injunction restraining the petitioning creditor from instituting a suit for three weeks and did not interfere with the order relegating the creditor to a suit. The appeal was allowed, and there was no separate order on the cross-objection filed by the respondent.Conclusion:The appeal was allowed, setting aside the lower court's order for security and admission of the winding-up application. The winding-up application was permanently stayed, with the petitioning creditor relegated to a suit. The court emphasized that security orders should not be based on doubtful defenses and reaffirmed the principles from Machalec Engineers & Manufacturers for granting leave to defend in summary suits.