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Kalyani Spg. Mills Ltd. v. M/S. Shiva Trading Co.

Calcutta High Court

Jul 17, 1978

Judgment

Subsequent
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Factual and Procedural Background

This is a winding-up petition presented on 30 March 1976 and made returnable on 10 April 1978. On the returnable date notice and a copy of the petition were to be served on the company; the company appeared and obtained leave to file an affidavit to show-cause why the petition should not be admitted.

The petitioning creditor's claim arose from contracts for the sale of cotton to the company governed by the bye-laws of the East India Cotton Association Limited. Disputes under the contracts were referred to arbitration. An arbitration award dated 31 August 1977 was made in favour of the petitioning creditor for Rs. 89,986.90 with interest at 15% per annum from 20 June 1976, and arbitration costs of Rs. 1,590. The company did not pay the awarded sum despite repeated requests and a statutory notice served on 24 January 1978 by the petitioning creditor's advocate. Consequently, the petitioning creditor filed the present winding-up petition.

The company raised defences including asserted counter-claims against the petitioning creditor's firm through sister concerns and pointed to a pending suit (Suit No. 9 of 1978: Kalyani Spinning Mills Limited v. Sree Annapurna Financial Corporation) for a substantial amount said to be due from one sister concern. The award in favour of the petitioning creditor had not been filed in court and had not been set aside or challenged.

Legal Issues Presented

Whether the winding-up petition can be said to be an abuse of the process of the court.
Whether a winding-up order can be passed in the present proceeding where an arbitration award in favour of the petitioning creditor has been made but not filed or set aside.
Whether, given an arbitration clause that provides for filing and enforcement of an award, the petitioning creditor may nevertheless enforce the award by presenting a winding-up petition (i.e., whether winding-up is a permissible alternative mode of equitable execution in these circumstances).
Whether the petitioning creditor is entitled to costs of proceedings for enforcement and realisation where the arbitration agreement contains a specific provision about enforcement and costs.

Arguments of the Parties

Petitioning Creditor's Arguments (Mr. P. C. Sen and Mr. A. C. Law)

The petitioner's claim arises from supplies of cotton governed by the East India Cotton Association bye-laws; disputes were referred to arbitration and an award was made in favour of the petitioning creditor.
The award has not been set aside and is final and binding on the parties; the award "has some legal effect" and is not mere waste paper (relying on Satish Kumar v. Surinder Kumar, AIR 1970 SC 833).
The petitioning creditor had options to enforce the award by obtaining judgment upon the award and execution, or to present a winding-up petition as a legitimate mode of equitable execution; presenting a winding-up petition is a recognized alternative in appropriate circumstances.
Relying on an earlier unreported decision (Dalhousie Jute Company Ltd v. Mulchand Laxmichand, Company Petition No. 176 of 1976), a party may present a winding-up petition even though the award has not been made rule of court, and thus the present petition ought to be admitted as not an abuse of process.
At the admission stage the court should determine only whether a prima facie case exists for the petitioning creditor and whether the petition is an abuse; here a prima facie case exists because the award in the petitioner's favour has not been satisfied.

Company's Arguments (Mr. A. C. Bhabra with Mr. J. L. Pugalia)

The correct mode of enforcement of an arbitration award is to file the award and obtain judgment upon it under the Arbitration Act (relying on the observation in Satish Kumar v. Surinder Kumar). Section 32 of the Arbitration Act (as argued) bars any other proceeding than those provided by the Act; hence, an award cannot be enforced by presenting a winding-up petition.
If the winding-up petition is admitted, the company would be deprived of its statutory rights under the Arbitration Act to challenge the award; the company must be permitted to avail itself of those remedies.
The arbitration clause between the parties specifically envisages enforcement by filing the award in court; the petitioning creditor, by presenting a winding-up petition, breaches that agreement and cannot take that route as a normal alternative.
The company has bona fide counterclaims and adjustments with related/sister firms (including a pending suit for approximately Rs. 99,919.78 against Sree Annapurna Financial Corporation), and some cheques purportedly paid have been dishonoured; therefore the company's dispute is real and not frivolous.
The company is a State of West Bengal undertaking employing many persons; a winding-up order would create serious socio-economic problems, and the petition should be taken off the file as an abuse of process.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Satish Kumar v. Surinder Kumar, AIR 1970 SC 833	The proposition cited: an arbitration award "is not a mere waste paper" and has some legal effect; it is final and binding on the parties unless and until it is set aside or made a rule of the court.	The court relied on the decision to the extent of holding that an award not set aside remains final and binding and has legal effect such that a winding-up court may treat it as clear and conclusive evidence of debt for the purposes of admission, subject to other reasons for refusing the petition.
Dalhousie Jute Company Limited v. Mulchand Laxmichand, Company Petition No. 176 of 1976 (unreported, decision dated 9 September 1976)	The earlier unreported decision held that a petitioning creditor was entitled to present a winding-up petition even though the award had not been filed and made a rule of the court under the Arbitration Act.	The court distinguished that earlier decision on its facts, noting that in Dalhousie Jute there was no provision in the arbitration agreement for filing and enforcement of the award as in the present case; therefore the earlier decision did not control the present case.

Court's Reasoning and Analysis

The court proceeded by identifying the central enquiry as whether the winding-up petition was an abuse of the court's process and whether a winding-up order could properly be made on the material before it.

The court set out the legal framework it would apply: under section 433 of the Companies Act, 1956, the court has discretion to order winding up where the statutory grounds are made out, and under sections 439 and 443 the court has wide discretion in dealing with winding-up petitions. The court emphasised that each case must be considered on its own merits, having regard to:

the relationship between the parties;
the nature of the transaction;
the financial condition of the company;
the nature and substance of disputes raised by the company to the claim; and
whether a prima facie case has been made out by either side.

The court also indicated an additional factor to be considered: the possibility of the company paying the debt if the debt cannot be seriously disputed, and the socio-economic consequences of winding up a company (here a State undertaking employing many persons).

Turning to the arbitration agreement, the court highlighted that the contract's bye-laws contain a clause that both (a) empowers arbitrators to direct how arbitration fees and incidental costs shall be paid and (b) provides that, if a party refuses to perform the award and the award is filed in the appropriate civil court, that party "shall pay the costs between attorney and client in connection with the filing and enforcement of the award unless the court shall otherwise direct."

The court accepted that the award in this case had been made in favour of the petitioning creditor and had not been filed in court nor set aside. The petitioning creditor argued that the award, being final and not set aside, entitled it to present a winding-up petition as equitable execution; it relied on the Supreme Court observation that an award "has some legal effect."

However, the court concluded that where the arbitration agreement specifically provides for filing and enforcement of the award in court (and related costs), a winding-up petition could not be treated as a normal alternative mode of enforcement. The court therefore interpreted the arbitration clause as envisaging enforcement by filing the award (under section 17 of the Arbitration Act, as referenced by the court) and obtaining judgment upon it.

The court also found the company's challenge to the interpretation of the arbitration clause to be a bona fide dispute. The facts showing intertwined dealings between the petitioning creditor's firm and its sister concerns, and the existence of a pending suit by the company against one sister concern, led the court to regard the company's objections as having substance. Given these circumstances, and in light of the socio-economic impact of winding up a State undertaking, the court held it would be improper and amount to "gross injustice" to permit the petitioning creditor to proceed by way of winding-up on the present facts.

On balance, the court found that the petitioning creditor should pursue enforcement by filing the award and obtaining judgment and that the winding-up petition in the present circumstances constituted an abuse of the process of the court.

Holding and Implications

Core Ruling: The court ordered that the winding-up petition be taken off the file.

Order as to Costs: No order as to costs.

Implications

Direct effect on the parties: The winding-up petition is not admitted and is taken off the file; the petitioning creditor must pursue enforcement of the arbitration award by filing the award and obtaining judgment under the Arbitration Act if it wishes to realise the debt.
The court recognised a bona fide dispute about the interpretation and enforcement route provided in the arbitration agreement and relied on that finding in refusing to permit winding-up as an alternative mode of enforcement in this case.
The decision does not purport to establish a general rule that winding-up petitions can never be presented on the basis of an unfiled arbitration award; rather the court distinguished an earlier unreported decision on its facts and treated the issue as a serious question of law arising from the particular arbitration clause and surrounding circumstances.
No additional broader precedent is expressly declared in the opinion beyond the application of the statutory discretion under the Companies Act and the interpretation of the particular arbitration clause in these facts.

This summary is based exclusively on the content of the provided opinion.

Show all summary ...

1. This is a winding up petition which was presented on the 30th March, 1976, and made returnable on the 10th of April, 1978. On the returnable date notice along with a copy of the petition was directed to be served on the company. Thereafter, the company appeared and obtained leave to file affidavit to show-cause why the winding up petition should not be admitted.

2. The petitioning creditor's claim arises out of a transaction by sale of diverse quantities of cotton to the company at agreed rates. The said contract between the parties were governed by the bye-laws of the East India Cotton Association Limited. It appears that disputes arose between the parties and under the arbitration clause of the contract, the same was referred to the arbitration of the East India Cotton Association Limited and an award dated the 31st of August, 1977, was made in favour of the petitioning creditor by which the company was to pay a sum of Rs. 89,986.90 together with interest thereon at the rate.of 15% per annum from 20th of June, 1976, till the date of payment and the costs of arbitration as awarded is Rs. 1,590. As the company did not pay the said sum awarded in favour of the petitioning creditor by the Tribunal of Arbitration in spite of repeated requests and reminders, the petitioning creditors caused a statutory notice to be served on the company through its advocate on record, Jalan & Company, dated the 24th of January, 1978. The company did not pay the amount and consequently the present winding-up petition has been filed. The points involved in this application as to whether the winding-up petition can be said to be an abuse of the process of the court and for that purpose it is necessary to find out whether a winding up order can be passed in this proceeding.

3. To arrive at such a finding the court has to see whether the winding up petition can be said to be an abuse of the process of the court and for that purpose it is necessary to find out whether a winding-up order can be passed in this proceeding.

4. To arrive at such a finding, the court has to see whether the petitioning creditor has got a valid and legal claim which is either admitted or cannot be disputed both in fact and in law and, lastly, whether the winding up petition which ordinarily is not an alternative to usual procedure for the realisation of debts, but a summary mode of equitable execution, and whether it should be permitted or not, it is for the court to decide having regard to the facts and circumstances of a particular case. It is quite true that under s. 433 of the Companies Act, 1956, the court is given a discretion to pass an order of winding up if any of the grounds set out thereunder is made out, but at the same time under ss. 439 and 443 of the Companies Act, 1956, wide discretion has been given to the court in dealing with a winding-up petition. In short, it appears that each case has to be considered on its own merits having regard to the relationship between the parties, nature of the transaction, financial condition of the company as well as the nature of the disputes raised by the company to the claim of the petitioning creditor and whether a prima facie case has been made out either for the petitioning creditor in respect of its claim or the company regarding its defence to the claim and to my mind another factor should be considered as to the possibility of the company paying off the debt assuming the same cannot be seriously disputed having regard to the socio-economic problem to be created in case the winding up of the company is ordered.

5. In this case, the contract between the parties was governed by the rules and bye-laws of the East India Cotton Association Limited, which contained an arbitration clause, inter alia, containing the following provisions:

“…(F) Arbitrators or their umpire whether appointed by the parties or the Chairman or the Board shall have the right to decide and state in their award how and by whom the arbitration fees and costs of awards and other charges incidental to the arbitration shall be paid. In the absence of any specific direction in the award such cost shall be paid by the disputing parties in equal proportion.

If either party to a dispute submitted to arbitration refuses to abide by and perform the decision of the arbitrators or the Umpire or the Board as the case may be and the award is filed in the appropriate civil court having jurisdiction in the matter he shall pay the costs between attorney and client in connection with the filling and enforcement of the award unless the court shall otherwise direct.”

6. Now, it is an admitted fact in this case that the disputes between the parties under the contract were referred to arbitration under the arbitration clause and the award has been made which is not yet filed in court and has not been set aside or challenged in any proceeding. Therefore, the question was raised in this application whether having regard to the specific clause in the arbitration agreement for enforcement of the award, if the same is not satisfied by the party against whom the award is made, would the party, who can enforce the award for realisation of the sum awarded, be entitled to the costs of such proceeding for enforcement and realisation. The petitioning creditor can also enforce the award by way of winding-up proceeding and also there is another question raised by the company that the petitioning creditor's firm, being a sister concern of other firms, Sree Annapurna Financial Corporation and Narendra Kumar Additya Kumar, which had dealings and transactions with the company, that is, the said three firms supplied cotton to the company and purchased cotton yarn from the company and the mutual claims were adjusted and in relation to such transactions, one of the said firms Sree Annapurna Financial Corporation has become liable to pay a large sum of money to the company and in fact, the company has already filed a suit in this court being Suit No. 9 of 1978 (Kalyani Spinning Mills Limited v. Sree Annapurna Financial Corporation) for a decree for Rs. 99,919.78 together with interest and costs and the said suit is still pending. It is also alleged by the company that some cheques paid by the petitioning creditor and also its sister concern in favour of the company in purported payments of the price of the cotton yarn supplied by the company to the said firm have been dishonoured by non-payments. Therefore, in short, the company also has some sort of counter-claim against the petitioning credi???tor's firm through its sister firm having common partner or common???persons in control and management of the said three firms. That is the???substance of the contentions raised by the company in this application.

7. Mr. P.C Sen, appearing with Mr. A.C Law, for the petitioning-creditor submitted that the claim of the petitioning-creditor arises out of supply of cotton to the company under agreements governed by the rules and bye-laws of the East India Cotton Association Limited. The company not having paid the price of the cotton supplied and having raised the dispute, the matter was referred to arbitration in terms of the arbitration clause of the contract and an award has been made in favour of the petitioning creditor. Therefore, Mr. Sen submitted that the said award has not been set aside and is final and binding on the parties. The company not having paid the sum payable under the said award to the petitioning creditor in spite of repeated requests and demands, the petitioning creditor has the right to present this winding-up petition which is a mode of equitable execution. Mr. Sen referred to the Supreme Court decision in Satish Kumar v. Surinder Kumar, AIR 1970 SC 833, wherein it has been held that the award is not a mere waste paper but has some legal effect. It is final and binding on the parties and it cannot be said that it is a mere waste paper unless it is made a rule of the court. Therefore, Mr. Sen submitted that the petitioning creditor had the option either to enforce the said award by obtaining a judgment upon award and execution of the decree passed therein against the company or to present a winding-up petition which is a legitimate mode and alternative method for equitable execution. Mr. Sen also referred to an unreported decision of mine in the Company Petition No. 176 of 1976 (Dalhousie Jute Company Limited v. Mulchand Laxmichand) delivered on the 9th of September, 1976, where a question arose whether a winding-up petition can be presented on the basis of an award which has not been filed and made a rule of the court. In the facts of that case, I held that the petitioning creditor was entitled to present the winding-up petition, even though the award was not made a rule of the court under the Arbitration Act for enforcement of the same. I understand that an appeal has been preferred from the said unreported decision of mine but no interim stay was granted and the appeal is pending. Mr. Sen, therefore, submitted relying on my said decision that in the present case also the same principle will apply. In my view, the facts in Dalhousie Jute Company's case was entirely different from the present case as there was no provision in the arbitration agreement for the enforcement of the award as in the present case or at least no such provisions were brought to my notice in the said case and, therefore, the present case will be governed by the agreement between the parties having regard to the specific provisions for the enforcement of the award.

8. Mr. Law and, thereafter, Mr. P.C Sen, who came at a late stage of the hearing, tried to interpret the said clause in the arbitration agreement that the parties agreed that in case the award is filed, then it will get the costs of filing and enforcement of the award but the intention of the party was not to exclude any other mode of realisation of the awarded amount-Therefore, the petitioning creditor had the option either to enforce the award by filing the same and obtaining judgment upon award or to present a winding-up petition by way of equitable execution. Mr. Sen also submitted that at this stage the court is only to find out whether a prima facie case has been made out by the petitioning creditor and whether the winding-up petition can be said to be an abuse of the process of the court. Mr. Sen submitted having regard to the admitted position that the award is in favour of the petitioning creditor, which has not been satisfied by the company at this stage, the winding-up petition cannot be said to be an abuse of the process of the court. Therefore, the winding-up petition should be admitted.

9. Mr. A.C Bhabra, appearing with Mr. J.L Pugalia, for the company, submitted after drawing my attention to an observation in the said Supreme Court decision in Satish Kumar v. Surinder Kumar, AIR 1970 SC 833, that the only way for the enforcement of an award is to file the said award and obtain judgment upon award and then by execution of the same. Therefore. Mr. Bhabra, submitted that an award cannot be enforced by way of presenting a winding-up petition, as under the Arbitration Act, s. 32 bars any other proceeding than what is provided in the Arbitration Act. Therefore, Mr. Bhabra, submitted that if the winding-up petition is admitted, in that event, the company would be deprived of its right under the Arbitration Act, to challenge the award. In my view, the said contention of Mr. Bhabra cannot be accepted in abstract, as in the very same Supreme Court decision, it has been observed that the award is not a mere waste paper unless it is made a rule of the court. Therefore, for the purpose of taking it as a clear and conclusive evidence of the debt due, there is no bar for any court or the winding-up court; that is, when the award is not set aside, it remains final and binding on the parties and has some legal effect. Therefore, unless there is any other reason for which the court will not allow the winding-up petition to be proceeded with, in my view, there is no bar for a court to admit a winding-up petition on the basis of a valid, legal and binding award, which has not been set aside or challenged according to law. As it is well settled that the award can be challenged or set aside according to the provisions laid down in the Arbitration Act, and in no other way, and, it is admitted in this case that there is no such proceeding or challenge made to the award in any court of law under the provisions of the Arbitration Act, the possibility of challenging an award if the same is filed in court is something which the court cannot encourage or take any notice of, unless proceedings are taken and pending under the Arbitration Act, for setting aside the said award or on the face of it, the award is illegal or void.

10. Thereafter, Mr. Bhabra submitted that in the present case, by the arbitration clause itself the parties have agreed on the mode of enforcement of the award by filing the same and obtaining a judgment upon the award. Therefore, the petitioning creditor in breach and violation of the said provisions cannot present this winding-up petition. Mr. Bhabra, has rightly interpreted the provisions of the arbitration agreement, which I have set out before, that the parties agreed for the enforcement of the award by filing the same in court, in case the other party does not satisfy the said award, and, therefore, in the present case, the winding-up petition cannot be a normal alternative for an enforcement of the award. Mr. Bhabra further submitted that the petitioning creditor's firm and its other sister firm had dealings and transactions with the company and the company has a claim against one of the sister concerns of the petitioning creditor being Sree Annapurna Financial Corporation against whom a suit has been filed for the realisation of Rs. 99,000 odd and the same is still pending. Therefore, there is some sort of counter claim or right of adjustment due to the company against the petitioning creditor's firm for the sum due and payable to the company by one of the sister concerns of the petitioning creditor. Mr. Bhabra, therefore, submitted that in the present case, it cannot be said that the company has not raised a dispute in good faith or there is no substance in the defence of the company to the claim of the petitioning creditor either in law or in fact. Therefore, in this case it must be held that the winding up petition is an abuse of the process of the court, and should not be admitted. Mr. Bhabra, also submitted that the company is a State of West Bengal Undertaking and employed large number of persons and it will not be proper to wind up the company and the court should direct the winding-up petition to be taken off the file.

11. Considering the matter very carefully, I am of the view that the winding-up petition having regard to the provisions in the arbitration agreement for filing an award and enforcement of the same, cannot be allowed as an alternative to the enforcement of the award by due process of law, that is, filing the said arbitration award under s. 17 of the Arbitration Act, and obtaining a judgment upon award and enforcement of the decree.

12. Further, this is a serious question of law as to the interpretation of the arbitration agreement between the parties and in my view, the dispute raised in respect of the said interpretation is a bona fide dispute. As I have already observed the present case is entirely different from the case in which I have decided that without filing an award, a party can present a winding-up petition on the basis of the award as a valid and legal debt due and payable. In that case there was no specific agreement for filing the award and enforcement of the same by the process of the court. Further, in this case, it appears that the petitioning creditor's firm along with its sister firm had gross dealings and transactions with the company, that is, the petitioning creditor's firm and its sister concern supplied cotton to the company and the company in its turn supplied cotton yarn to the petitioning creditor's firm and its sister concern, and, having regard to the fact that a suit is pending, which is filed by the company against one of the sister concerns of the petitioning creditor, it cannot be said that the company's contention or the disputes raised as to the alleged claim of the company against one of its sister concerns, having common partners or persons in management, is without any basis. It will be most improper amounting to gross injustice to permit the petitioning creditor to proceed by way of presentation of the winding-up petition as a mode of equitable execution in the facts and circumstances of this case. Thereafter, giving my anxious thought over the matter and carefully considering the fact that the company is a State of West Bengal undertaking employing large number of persons and the petitioning creditor can well realise by the enforcement of an award its dues, if it is ultimately found to be payable from the company, I am of the view that it will not be proper to make a winding-up order, if ultimately the petition is admitted, as, it will also affect the socio-economic problem of the State. Taking into consideration all the factors, I am of the view that the winding-up petition at this stage must be held to be an abuse of the process of the court and should not be admitted.

13. In the result, I am making the following order:

The winding-up petition be taken off the file and no order as to costs: