Winding-up claims based on foreign ex parte judgments and unenforceable guarantees fail where a bona fide debt dispute exists.

A winding-up petition cannot rest on a foreign ex parte default judgment that is not on the merits or is opposed to natural justice, because such a judgment is not conclusive in India under Section 13 of the Code of Civil Procedure. The petition also cannot be supported by a guarantee in favour of a foreign subsidiary where the transaction lacked RBI approval and was inconsistent with FEMA and the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004. Where the company raises a bona fide and substantial dispute, winding up is not available as a debt-recovery remedy.

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Issues: (i) Whether a winding-up petition could be maintained on the basis of an ex parte foreign judgment that was not on the merits and was opposed to natural justice. (ii) Whether the guarantee executed in favour of the foreign subsidiary, in the absence of Reserve Bank of India approval and in the face of FEMA regulations, could sustain the debt claim so as to justify winding up.

Issue (i): Whether a winding-up petition could be maintained on the basis of an ex parte foreign judgment that was not on the merits and was opposed to natural justice.

Analysis: A foreign judgment is conclusive only if it satisfies the requirements of Section 13 of the Code of Civil Procedure, 1908. Where the judgment is not on merits or is rendered in proceedings opposed to natural justice, it cannot be treated as conclusive in India. The decree relied upon was a default judgment entered in the absence of the defendant, and therefore fell within the exceptions in Section 13. A claim founded on such a judgment could not form the basis of a winding-up petition as if it were an indisputable debt.

Conclusion: The foreign ex parte judgment was not enforceable as a conclusive basis of the debt claim.

Issue (ii): Whether the guarantee executed in favour of the foreign subsidiary, in the absence of Reserve Bank of India approval and in the face of FEMA regulations, could sustain the debt claim so as to justify winding up.

Analysis: The guarantee was examined against the Foreign Exchange Management Act, 1999 and the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004. On the facts, the guarantee was treated as an open-ended guarantee in favour of a foreign entity and as one not approved by the Reserve Bank of India. The Court held that such a transaction was hit by the regulatory framework and could not be treated as a secure and enforceable foundation for an undisputed debt. In any event, the company raised a bona fide and substantial dispute, and winding up cannot be used as a debt-recovery mechanism where such a defence exists.

Conclusion: The guarantee did not furnish an enforceable and undisputed foundation for winding up, and the defence was bona fide and substantial.

Final Conclusion: The debt claim was subject to a genuine and substantial dispute, so the winding-up petition was liable to fail and the appeal succeeded.

Ratio Decidendi: A winding-up petition cannot be maintained where the debt is founded on a foreign ex parte judgment not conclusive under Section 13 of the Code of Civil Procedure, 1908, or on an unenforceable guarantee, and the company raises a bona fide and substantial dispute.

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