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Tuesday, July 31, 2012

Conflict between Arbitration Clause & Court's vested power u/s. 433 (e) for winding up of Company

Existence of an arbitration clause does not oust the jurisdiction of this court to either entertain or to admit a petition for winding up

Hon'ble High Court of Andhra Pradesh in the case of: 

Integrated Broadcasting Co. (P.) Ltd. vs. Nettlink Ltd. [ 2012] 23 taxmann.com 371 (Andhra Pradesh) has held that a mere existence of Arbitration clause would not bar exercise of jurisdictional power by Court u/s. 433 (e) from entertaining winding up petition where a company is deemed to be unable to pay its debts.

High Court concluded by stating that,-

" the mere existence of an arbitration clause would not bar exercise of jurisdiction by this court under section 433(e) of the Companies Act for winding up of a company which is deemed to be unable to pay its debts. Proceedings under section 433/434 read with section 439 of the Companies Act are in a completely different jurisdiction than the one under which the remedy or relief can be sought by way of arbitration. Proceedings for winding up are not proceedings for recovery of any amount Tirlok Chand Jain v. Swastika Strips (P.) Ltd. [1991] 70 Comp Cas 197 (Punj. & Har.). The jurisdiction for ordering winding up of a company is a special jurisdiction which has been conferred on the High Courts. The object of passing such an order is that the assets of the company should be realised and debts paid expeditiously. The passing of such an order against the company has a serious consequence and, therefore, the jurisdiction has been conferred on the High Courts. The order of winding up can be passed on any of the grounds mentioned in section 433 of the Companies Act. It does not appear to be the intention of the Legislature that such a power can be conferred on an arbitrator. The petition for winding up cannot be treated as one for recovery of an amount of debt from the company William Jacks & Co. (India) Ltd. v. Saraswati Industrial Syndicate Ltd. [1986] 59 Comp. Cas. 876 (Punj. & Har.) and Hind Mercantile Corpn. (P.) Ltd. v. J.H. Rayner & Co. Ltd. [1971] 41 Comp. Cas. 548 (Mad.).

11. The jurisdiction of the company court will not be taken away by the mere existence of an arbitration clause Maruti Ltd. v. B.G. Shirke & Co. (P.) Ltd. [1981] 51 Comp. Cas. 11 (Punj. & Har.) and Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. [1999] 97 Comp. Cas. 683/22 SCL 156 (SC). The claim in a petition for winding up is not for money. The petition filed under the Companies Act would be of the effect that the company has become commercially insolvent and, therefore, should be wound up. The power to order winding up of a company is contained under the Companies Act and is conferred on the court. An arbitrator, notwithstanding any agreement between the parties, would have no jurisdiction to order winding up of a company, as such a power is conferred on, and is vested with, the court under the Companies Act - Haryana Telecom Ltd. (supra) and Prime Century City Developments (P.) Ltd. v. Ansal Buildwell Ltd. [2003] 113 Comp. Cas. 68/42 SCL 256 (Delhi). Even if an arbitration clause subsists between the parties, the High Court would have unfettered powers to entertain winding up petitions (Madhya Pradesh Iron & Steel Co. v. G.B. Springs (P.) Ltd. [2003] 117 Comp. Cas. 327/42 SCL 785 (Delhi)). In terms of the arbitration agreement, the arbitrator can always find out and adjudicate as to whether or not a company is functional and, if it was not functional, he could always find out the nature and status of its assets and can also issue directions and pass orders regarding dues and liabilities and also for taking recourse to the appropriate remedy Everest Holding Ltd. v. Shyam Kumar Shrivastava [2008] 16 SCC 774.

12. There is no conflict between the statutory relief of winding up and of the contractual right to have disputes settled by arbitration. Once a bona fide defence is shown to exist, arbitration will be the efficacious and proper remedy. Where, however, the defence is mala fide and a moonshine, arbitrable disputes would not exist and the company judge would have the power to pass appropriate orders Madhya Pradesh Iron & Steel Co. (supra). Existence of an arbitration clause does not oust the jurisdiction of this court to either entertain or to admit a petition for winding up."
Thank you !

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