2015 (4) TMI 922 - HC - Companies Law

Winding Up Petition & Equitable Set-Off Dispute: Split Decision on Admission

The case involved the admission of a winding up petition, the validity of an equitable set-off claim, the existence of a bona fide dispute, the ... Application for winding up - Doctrine of equitable set-off - Company deposited entire disputed sum in court - Difference of Opinion - Matter referred to Hon'ble Chief Justice - Held that:- Controversy - Whether Winding up petition can be accepted on the ground of principle of equitable set-off ? - Whether Winding up petition can be accepted even if particularly when the company deposited the entire sum in Court. Since we could not be ad idem on the ultimate result we direct this matter to be placed before the Hon’ble Chief Justice for appropriate assignment of the controversy to a third judge to have His Lordship’s views on the issue so that we could ultimately pass an order on the majority decision. Issues Involved:1. Whether the petition for winding up should be admitted.2. Whether the claim of equitable set-off by the appellant is valid.3. Whether the existence of a bona fide dispute can prevent the admission of the winding up petition.4. Determination of the relationship between the loan transaction and the share purchase agreement.5. The impact of the pending suit on the winding up petition.Issue-wise Detailed Analysis:1. Admission of the Winding Up Petition:The learned Single Judge admitted the petition for winding up on three grounds: the claim of Siddharth Sett was admitted in the latest balance sheet, the transaction was distinct, and the claim had no connection with the hold-back agreement or the pending suit. However, the appellant contended that the winding up process should not be admitted due to the existence of a bona fide dispute and the application of equitable set-off.2. Equitable Set-off:The appellant argued for the application of equitable set-off, claiming indemnification under the share purchase agreement due to undisclosed liabilities, such as the Travelport claim and pending tax assessments. The doctrine of equitable set-off, as discussed, is based on principles of equity, justice, and fair play, and is not explicitly defined in procedural law. The appellant's reliance on equitable set-off was challenged as the loan transaction was independent of the share purchase agreement, and no formal claim for indemnification was made to the respondent.3. Bona Fide Dispute:The appellant asserted that the existence of a bona fide dispute, due to the pending suit against the respondent and others for breach of the negative covenant in the share purchase agreement, should prevent the admission of the winding up petition. The principle that a winding up petition should not be used to enforce a debt where there is a substantial ground for dispute was reiterated. However, the court found that the suit and the winding up petition were based on distinct transactions, and the appellant's claim for indemnification was not sufficiently substantiated to constitute a bona fide dispute.4. Relationship Between Loan Transaction and Share Purchase Agreement:The court examined whether the loan transaction between the respondent and the appellant was connected to the share purchase agreement. It was determined that the loan transaction was independent, as evidenced by the balance sheet and correspondence between the parties. The appellant's claim for indemnification under the share purchase agreement did not impact the respondent's right to recover the loan amount.5. Impact of Pending Suit on Winding Up Petition:The appellant's pending suit against the respondent and others for breach of the negative covenant was considered. The court noted that the suit was for enforcement of the share purchase agreement and did not address the loan transaction. Therefore, the pending suit did not provide a valid defense against the winding up petition.Conclusion:The judgment resulted in a split decision. One judge supported the appellant's view, emphasizing the discretionary nature of winding up proceedings and the need to consider equitable set-off. The other judge upheld the admission of the winding up petition, finding no bona fide dispute or valid set-off claim. The matter was referred to the Chief Justice for assignment to a third judge to resolve the controversy based on a majority decision.