Bona fide dispute over debt prevents winding up under inability-to-pay where prima facie proof of discharge exists, petition dismissed.

Winding-up petitions under the Companies Act are barred where the debtor-company admits liability but adduces prima facie proof of discharge sufficient to raise a bona fide dispute as to existence or quantum of the debt; the court exercises judicial discretion and must examine whether the plea of discharge has a substratum of truth and reasonable prospect of success. Prima facie evidence of payments, transfers or adjustments that could legitimately reduce or extinguish the claimed debt will preclude winding up. Applying these principles, evidence of payments and credit adjustments was held sufficient to raise a bona fide dispute, and the petition was dismissed.

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Issues: Whether a petition to wind up a company under Section 433(e) of the Companies Act, 1956 should be granted where the debtor-company admits liability but pleads discharge and the existence and quantum of the debt is disputed.

Analysis: Section 433(e) of the Companies Act, 1956 provides for winding up where a company is unable to pay its debts; the company court exercises judicial discretion before ordering winding up. Where the debtor-company admits the debt but pleads discharge in whole or in part, the burden shifts to the company to produce prima facie proof of discharge sufficient to raise a bona fide dispute. The court must examine the record and evidence to determine whether the plea of discharge has a substratum of truth and a reasonable possibility of success in an appropriate suit for recovery. Prima facie evidence of payments, transfers, or adjustments that could legitimately reduce or extinguish the claimed debt will establish a bona fide dispute and preclude winding up on that ground. In the present case, evidence supporting (i) a payment of Rs. 1,50,000 on behalf of the creditor-firm to a supplier, (ii) a sum of Rs. 46,000 remitted to a branch of the creditor-firm, and (iii) an adjustment/transfer of a credit of approximately Rs. 2,51,511.28 in favour of a person entitled to that credit collectively constitute prima facie proof sufficient to raise a bona fide dispute as to the existence and quantum of the claimed debt.

Conclusion: The petition for winding up under Section 433(e) is dismissed; decision is in favour of the respondent.

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