M/S. IBA HEALTH (I) P. LTD.versusM/S INFO-DRIVE SYSTEMS SDN. BHD.

                      [2010] 12 S.C.R. 137


                 MIS. IBA HEALTH (I) P. LTD.                        A
                                v.
           M/S INFO-DRIVE SYSTEMS SON. BHD.
               (Civil Appeal No. 8230 of 2010)

                    SEPTEMBER 23, 2010
                                                                    B
         [S.H. KAPADIA, CJI AND K. S. PANICKER
                  RADHAKRISHNAN, J.]

      Companies Act, 1956:
                                                                    c
       ss. 433, 434 - Winding up petition by the creditor -
  Maintainability of - Held: Not maintainable when there is
  substantial dispute as to liability - If the debt is bona fide
  disputed, there cannot be "neglect to pay" within the meaning
· of s.433(1)(a) - "Bona fide dispute" implies the existence of     o
  a substantial ground for the dispute raised - On fact, there
  was bona fide dispute as to liability - Company Court erred
  in ordering winding up of the company - The approach of
  Company Court was very casual as it did not make any
  endeavour to ascertain as to whether the company sought to        E
  be wound up for non-payment of debt had a defence which
  was substantial in nature.

      ss. 434(1 )(a) - Commercial solvency - Held: An
 examination of the company's solvency may be a useful aid
 in determining whether the refusal to pay debt is a result of a    F
 bona fide dispute as to the liability or whether it reflects an
 inability to pay - If the debt is an undisputedly owing, then it
 should be paid - If the company refuses to pay, without good
 reason, it should not be allowed to avoid the statutory demand
 by proving, at the statutory demand stage, that it is solvent -    G
 The commercial solvency cannot be characterized as a stand
 alone ground.

      ss. 433, 434 - Winding up proceedings - Abuse of -
                              137
                                                                    H
    138      SUPREME COURT REPORTS                 [2010] 12 S.C.R.


A Held: A creditor's winding up petition implies insolvency and
  is likely to damage the company's creditworthiness or its
  financial standing with its creditors or customers and even
  among the public - A party to the dispute should not be
  allowed to use the threat of winding up petition as a means of
B enforcing the company to pay a bona fide disputed debt -
  Company Court should be guarded from such vexatious
  abuse of the process and cannot function as a Debt Collecting
  Agency and should not permit a party to unreasonably set the
  law in motion, especially when the aggrieved party has a
c remedy elsewhere.
        s.433 - Winding up petition - Publication in the
  newspaper about the filing of petition - Caution - Held: It may
  damage the creditworthiness or financial standing of the
  company and may also have other economic and social
D ramifications - Company Court, at times, has not only to look
  into the interest of the creditors, but also the interests of public
  at large and should be more vigilant so that its medium would
  not be misused - Public policy.

E         Words and phrases: "Bona fide dispute" - Meaning of

        The appellant company was originally incorporated
  as Medicom Solutions Pvt. Ltd. (Medicom). In Dec., 2005,
  it was acquired by two Singapore companies. The paid
  up capital of appellant was in excess of Rs.10.06 crores
F illt the end of 31.3.2009 and its fixed assets and
  investments were in excess of Rs.23.83 crores. At the end
  of 31.3.2009, it had made a profit of over Rs.15 crores and
  tlhere were over 300 employees working in the appellant
  company. The respondent company was incorporated in
G Malaysia which was originally incorporated as Bitech. The
  appellant and the respondent entered into the
  Cooperation Agreement on 18.2.2002. Pursuant to the
  said agreement, the respondent introduced the appellant
  tel one M/s. Solution Protoc for the sale and supply of
H
  IBA HEALTH (I) P. LTD. v. INFO-DRIVE SYSTEMS           139
                     SON. BHD.
certain software services and the appellant agreed to pay       A
to the respondent company certain commission charges
as set out in the said agreement.

      The dispute arose between the parties regarding the
payment of the commission charges which led the parties         B
entering into a deed of settlement dated 19.12.2003,
·pursuant to which the terms of the Cooperation
Agreement were superseded by the deed of settlement
and the appellant agreed to pay the commission charges
due to the respondent in accordance with the terms and          C
conditions set out in the deed of settlement. The
 respondent filed a suit for restraining the acquisition of
the appellant company alleging the breach of the terms
of the settlement deed. The parties entered into a
compromise on 18.3.2006, pursuant to which both the
 parties agreed to adhere to the terms and conditions of        D
the deed of settlement dated 19.12.2003.

      After the compromise was filed, the respondent
 received an amount of RM1 ,069,583.29 on 20.3.2006 from
the appellant. Alleging that, despite receiving periodical      E
 payments from Mis Solutions Protocol, the appellant
company had failed to honour its commitments as per the
deed of settlement and the compromise, the respondent
 issued an invoice to the appellant claiming an amount of
US$ 1,065,714.00 allegedly due towards fees for the             F
marketing services. A legal notice dated 16.8.2008 was
served on the appellant under Section 434(1 )(a) of the
Companies Act, 1956 to pay the amount within twenty
one days from the date of the receipt of that notice, failing
which the appropriate legal proceedings would be                G
initiated. The appellant replied that it had not violated any
of the terms and conditions of the said deed of
settlement or the compromise entered into by the parties
and that whatever amount received by the appellant prior
to.31.12.2006 from M/s Solutions Protocol was paid to the
                                                                H
    140      SUPREME COURT REPORTS            [2010) 12 S.C.R.

A respondent. The appellant also denied the liability to pay
  the amount demanded.

       The respondent filed a company petition praying for
  the winding up of the appellant company. The Company
  Judge held that the respondent company has established
8
  a prima facie case and ordered that the matter be re-listed
  for orders regarding advertisement to be published in the
  newspaper. The Company Judge also directed the
  parties to appear before thE' Mediation Centre at
C Bangalore for amicably settling the dispute. The appellant
  filed appeal before the Division Bench of the High Court
  which was dismissed. The said order was challenged in
  the instant appeal.

          Allowing the appeal, the Court
D
          HELD: 1. When a creditor prefers an application for
    winding up for discharge of liability and there is a sub
    tantial dispute as to such liability, the Company
    ourt, at that stage, is not expected to hold a full tria
E    of the matter. It must decide whether the grounds appear to
    1e substantial. The grounds of dispute, of course, must no
      consist of some ingenious mask invented to deprive a
    1::reditor of a just and honest entitlement and must not be
    a mere wrangle. It is settled law that if the creditor's debt
    is bona fide disputed on substantial grounds, the court
F   should dismiss the petition and leave the creditor first to
    •~stablish his claim in an action, lest there is danger of
    abuse of winding up procedure. A dispute as to liability
    would be substantial and genuine if it is bona fide and
    not spurious, speculative, illusory or misconceived. The
G   Company Court always retains the discretion, but a party
    to a dispute should not be allowed to use the threat of
    winding up petition as a means of forcing the company
    to pay a bona fide disputed debt. If the debt is bona fide
    disputed, there cannot be "neglect to pay" within the
H   meaning of Section 433(1)(a) of the Companies Act, 1956.
  IBA HEALTH (I) P: LTD. v. INFO-DRIVE SYSTEMS         141
                     SON. BHD.
If there is no neglect, the deeming provision does not A
come jnto play and the winding up on the ground that the
company is unable to pay its debts is not substantiated
and non-payment of the amount of such a bona fide
disputed debt cannot be termed as "neglect to pay" so
as to incur the liability under Section 433(e) read with B
Section 434(1)(a) of the Companies Act, 1956. [Paras 17,·
20] [155-H; 156-A-D; 157-C-D]

     Amalgamated Commercial Traders (P) Ltd. v. A. C. K.
Krishnaswami and another (1965) 35 Company Cases 456          C
(SC); Madhusudan Gordhandas and Co. v. Madhu Woollen
Industries Pvt. Ltd. (1971) 3 SCC 632; Mediquip Systems (P}
Ltd. v. Proxima Medical Systems (GMBH) (2005) 7 SCC 42;
Vijay Industries v. NA TL Technologies Ltd. (2009) 3 SCC
527, relied on.
                                                              D
     2. An examination of the company's solvency may be
a useful aid in determining whether the refusal to pay
debt ts a result of a bona fide dispute as to the liability or
whether it reflects an inability to pay. If the debt is an·
undisputedly owing, then it should be paid. If the E
company refuses to pay, without good reason, it should.
not be allowed to avoid the statutory demand by proving,
at the statutory demand stage, that it is solvent. The
commercial solvency cannot be characterized as a stand
alone ground. In the instant case, both the parties were F.
in agreement that they were bound by the terms and
conditions of the deed of settlement. The deed of
settlement stipulated that the parties acknowledged the
obligation of Medicom to pay to Bitech the settlement sum '
subject to Medicom (or its representatives or nominees) G.
having received payments of sufficient value from Mis ..
Solution Protocol to enable the payment of upto the
maximum amount of the settlement sum to be made on
or before 31.12.2006, which is the cut-off date. Further .
one of the terms of the compromise was that the H
   142     SUPREME COURT REPORTS             [2010] 12 S.C.R.


A respondent would make reasonable efforts to persuade
  Mis. Solutions Protocol to settle the invoices of the
  appellant at the earliest. On a detailed analysis of the
  various terms and conditions incorporated in the deed of
  settlement as well as the compromise deed and the
B averments made by the parties, there is a bona fide
  dispute with regard to the amount of claim made by the
  respondent company in the company petition which is
  substantial in nature. The Company Court while
  exercising its powers under Se ;tions 433 and 434 of the
c Companies Act, 1956 would not be in a position to decide
  who was at fault in not complying with the terms and
  conditions of the deed of settlement and the compromise
  deed which calls for detailed investigation of facts and
  1examination of evidence and calls for interpretation of the
  various terms and conditions of the deed of settlement
0
  and the compromise entered into between the parties. A
  t~ompany petition cannot be pursued in respect of
  contingent debt unless the contingency has happened
  and it has become actually due. In the absence of any ·
  E!Vidence, it is not possible to conclude that M/s.
E Solutions Protocol had in fact paid any amount to the
  appellant company towards commission charges due to
  the respondent company before the cut off date. A legal
  notice prior to the institution of the company petition
  could be served on the company only in respect of a debt
F (then due) and a company could be wound up only if it
  was unable to pay its debts. In the instant case, there is
  a bona fide dispute as to whether the amount claimed is
  presently due and if, at all, it is due, whether the appellant
  company is liable to pay the sum unless they have
G r•eceived the same from M/s. Solutions Protocol. Where
  the company has a bona fide dispute, the petitioner
  cannot be regarded as a creditor of the company for the
  purposes of winding up. "Bona fide dispute" implies the
  existence of a substantial ground for the dispute raised.
H Where the Company Court is satisfied that a debt upon
  IBA HEALTH (I) P. LTD. v. INFO-DRIVE SYSTEMS          143
                     SON. BHD.
which a petition is founded is a hotly contested debt and      A
also doubtful, the Company Court should not entertain
such a petition. The Company Court is expected to go
into the causes of refusal by the company to pay before
coming to that conclusion. The Company Court is
expected to ascertain that the company's refusal is            B
supported by a reasonable cause or a bona fide dispute
in which the dispute can only be adjudicated by a trial in
a civil court. In the instant case, the Company Court was
very casual in its approach and did not make any
endeavour to ascertain as to whether the company               c
sought to be wound up for non-payment of debt has a
defence which is substantial in nature and if not
adjudicated in a proper forum, would cause serious
prejudice to the company. [Para 22, 23, 24] [158-B-H; 159-
A-H; 160-A-F]
                                                               D
      3. There has been an attempt by the respondent
company to force the payment of a debt which the
respondent company knows to be in substantial ·dispute.
A party to the dispute should not be allowed to use the
threat of winding up petition as a means of enforcing·the      E
company to pay a bona fide disputed debt. A Company
Court cannot be. reduced as a debt collecting agency or
as a means pf bringing improper pressure on the
company to pay a bona fide disputed debt. It is seen that
the jurisdiction of the Company Court is being abused by       F
filing winding up petitions to pressurize the companies
to pay the debts which are substantially disputed and the
Courts are very casual in issuing notices an.d ordering
publication in the newspapers which may attract adverse
publicity. An action may lie in appropriate court in respect   G
of the injury to reputation caused by maliciously and
unreasonably commencing liquidation proceedings
against a company and later dismissed when a proper
defence is made out on substantial grounds. A creditor's
winding up p~tition implies insolvency and is likely to        H
   144     SUPREME COURT REPORTS              [2010] 12 S.C.R.


A damage the company's creditworthiness or its financial
  standing with its creditors or customers and even among
  the public. [Para 25] [160-H; 161-A-D]

         4. A creditor's winding up petition, in certain
8   situations, implies insolvency or financial position with
    other creditors, banking institutions, customers and so
    on. Publication in the Newspaper of the filing of winding
    up petition may damage the creditworthiness or financial
    standing of the company and which may also have other
C · economic and social ramifications. Competitors will be all
    the more happy and the sale of its products may go down
    in the market and it may also trigger a series of cross-
    defaults, and may further push the company into a state
    of acute insolvency much more than what it was when
    the petition was filed. The Company Court, at times, has
D not only to look into the interest of the creditors, but also
    the interests of public at large and should be more vigilant
    so that its medium would not be misused. A Company
    Court, therefore, should act with circumspection, care
    and caution and examine as to whether an attempt is
E made to pressurize the company to pay a debt which is
    substantially disputed. A Company Court, therefore,
    should be guarded from such vexatious abuse of the
    process and cannot function as a Debt Collecting
    Agency and should not permit a party to unreasonably
F set the law in motion, especially when the aggrieved party
    has a remedy elsewhere. [Paras 26, 27] [161-E-H; 162-A-
    B]
      5. In the facts and circumstances of the case, the
G order passed by the Company Court ordering publication
  of advertisement in the newspaper would definitely
  tarnish the image and reputation of the appellant
  company resulting in serious civil consequences and,
  thus, the order passed by the Company Court and the
H judgment of the Division Bench of the High Court is set
  IBA HEALTH (I) P. LTD. v. INFO-DRIVE SYSTEMS               145
                     SON. BHD.

aside. [Para 28) [162-C-E]                                           A

                     Case Law Reference:
 (1965) 35 Company             referred to            Para 18
  Cases 456 (SC)
                                                                     B
 (1971) 3 sec 632              referred to            Para 19

 (2005) 1 sec 42               referred to            Para 19

 (2009) 3 sec 527              referred to            Para 19

    CIVIL APPELLATE JURISDICTION : Civil Appeal No.                  C
8230 of 2010.

    From the Judgment & Order dated 21.10.2009 of the High
of High Court of Karnataka at Bangalore in OSA No. 36 of
2009.                                                                D

    R.F. Nariman, Chetan Chopra, Dheeraj Nair for the
Appellant.

    R.S. Hegde, P.P. Hegde for the Respondent.
                                                                     E
    The Judgment of the Court was delivered by

    K. S. PANICKER RADHAKRISHNAN, J. 1. Leave
granted.

     2. A Company Petition No. 41 of 2009 was filed by the           F
respondent herein under Sections 433(e) & (f), 434 and 439
of the Companies Act, 1956 before the High Court of
Karnataka at Bangalore (hereinafter referred to as the
Company Court) praying for winding up of the appellant
company on the ground that it had failed to pay a sum of US$         G
1,065,714.00 in terms of the Deed of Settlement entered into
by the parties on 19.12.2003 towards the fees for the marketing
services undertaken by the respondent for the appellant.

    3. Prior to the filing of the company petition, a legal notice   H
    146      SUPREME COURT REPORTS                [2010] 12 S.C.R.


A dated 16.8.2008 was served on the appellant under Section
  434(1 )(a) of the Companies Act, 1956, calling upon the
  company to pay the amount within twenty one days from the
  date of the receipt of that notice, failing which the appellant was
  informed that appropriate legal proceedings would be initiated.
B Specific reference was also made to the deed of settlement
  dated 19.12.2003 and the terms of the Compromise entered
  into by the parties on 18.3.2006 in O.S. No. 9655 of 2005
  before the City Civil Court at Bangalore.

      4. The appellant replied to the said notice vide its letter
C dated 28.8.2008 stating that it had not violated any of the terms
  and conditions of the said deed of settlement or the
  compromise entered into by the parties and that whatever
  amount received by the appellant prior to 31.12.2006 from M/
  s Solutions Protocol Sdn. Bhd., a company incorporated in
D Malaysia, was paid to the respondent. The appellant also
  denied the liability to pay the amount demanded. The
  respondent was advised not to indulge in any frivolous litigation
                                                         .
  against the appellant which would be at their risk and costs .

E       5. The Company Judge, however, admitted the company
  petition vide its order dated 17.9.2009 holding that the
  respondent company has established a prima facie case and
  ordered that the matter be re-listed for orders regarding
  advertisement to be published in the newspaper. The Company
F Judge also referred to certain clauses in the deed of settlement
  and the compromise petition and concluded prima facie that
  the appellant had undertaken to make future payments to the
  respondent. The Company Judge also directed the parties to
  appear before the Mediation Centre at Bangalore for amicably
G settling the dispute. Aggrieved by the above mentioned order,
  the appellant company filed OSA No. 36 of 2009 before the
  Division Bench of the High Court of Karnataka which was
  dismissed vide its judgment dated 21.10.2009 and hence, the
  present appeal before this Court.

H
  IBA HEALTH (I) P. LTD. v. INFO-DRIVE SYSTEMS 147
 SON. BHD. [K. S. PANICKER RADHAKRISHNAN, J.]
     6. Mr. R. F. Nariman, learned senior counsel appearing for A
the appellant company submitted that no grounds have been
made out even prima facie warranting interference by the
Company Court and to proceed further calling for an
advertisement in the newspaper or directing the partres to
appear before the Mediation Centre for amicably settling the B
dispute. Learned senior counsel submitted that the Company
Judge as well as the Division Bench have completely
misunderstood the terms and conditions of the deed of
settlement dated 19.12.2003 and the compromise entered into
by the parties on 18.3.2006. The learned senior counsel also           c
submitted that if at all the respondent is aggrieved, the remedy
open to the respondent is to approach in the Civil Court and
not by way of a winding up petition, especially when there is
substantial dispute between the parties. Learned counsel also
submitted that the company is commercially solvent and
                                                                 0
capable of discharging its debts, if legally due.

     7. Mr. R. S. Hegde, learned counsel appearing for the
 respondent company submitted that the Company Court as well
as the Division Bench of the High Court have correctly came
to the conclusion that prima facie grounds have been made out          E
under Section 433(e) & (f) read with Section 434 of the
Companies Act. The learned counsel submitted that the
appellant company has failed to comply with the terms and
conditions of the deed of settlement dated 19.12.2003 and the
compromise entered into by the parties dated 18.3.2006.                F
Learned counsel submitted that the appellant company is not
in a position to pay off its debts and it is just and equitable that
the appellant company be wound up.

FACTS IN BRIEF
                                                                       G
     8. The appellant [M/s IBA Health (India) Private Limited]
was originally incorporated as Medicom Solutions Private
Limited. The name of the appellant company was changed to
M/s IBA Health (India) Private Limited in December 2005
following its acquisition by IBA Health (Asia) Holding Pte.            H
    148      SUPREME COURT REPORTS               [2010] 12 S.C.R.


A Limited and IBA Health (Singapore) Pte. Limited, both of which
  are entities incorporated in Singapore. The paid up capital of
  the appellant company was in excess of Rs.10.06 crores at the
  1end of 31.3.2009 and its fixed assets and investments were in
  1excess of Rs.23.83 crores. At the end of 31.3.2009, it had made
s a profit of over Rs.15 crores and there were over 300
  E~mployees working in the appellant company. The respondent
  is a company incorporated in Malaysia which was originally
  incorporated as Shari Information Technology Systems Sdn.
  Bhd. and subsequently changed its name to Info-Drive Systems
C Sdn. Bhd.
         9. Pursuant to a Cooperation Agreement dated 18.2.2002
    entered into by the appellant and the respondent, the
    respondent introduced the appellant to one Mis. Solutions
    Protocol Sdn. Bhd. for the sale and supply of the appellant's
D   Hospital Information Systems (HIS) Software applications and
    for that service, the appellant company agreed to pay the
    respondent company certain commission charges as set out
    in the said agreement. The dispute arose between the parties
    re!garding the payment of the commission charges which led
E   the parties entering into a deed of settlement dated
    1!3.12.2003, pursuant to which the terms of the cooperation
    aweement were superseded by the deed of settlement and the
    appellant agreed to pay the commission charges due to the
    respondent in accordance with the terms and conditions set out
F   in the deed of settlement.

          10. Alleging breach of the terms of the deed of settlement,
    th1~ respondent filed a civil suit being O.S. No. 9655 of 2005
    before the City Civil Court, Bangalore for restraining the
G   acquisition of the appellant by IBA Health (Asia) Holding Pte.
    Limited and IBA Health (Singapore) Pte. Limited. The parties
    entered into a compromise on 18.3.2006, pursuant to which
    both the parties agreed to adhere to the terms and conditions
    of the deed of settlement dated 19.12.2003.

H         11. After the compromise petition was filed, the respondent
  IBA HEALTH (I) P. LTD. v. INFO-DRIVE SYSTEMS 149
 SON. BHD. [K. S. PANICKER RADHAKRISHNAN, J.]

received an amount of RM1 ,069,583.29 on 20.3.2006 from the          A
appellant. Alleging that, despite receiving periodical payments
from M/s Solutions Protocol Sdn. Bhd., the appellant company
had failed to honour its commitments as per the deed of
settlement and the compromise entered into by the parties, the
respondent issued an invoice dated 2.2.2007 to the appellant         B
claiming an amount of US$ 1,065,714.00 allegedly due towards
fees for the marketing services. Since the appellant declined
to pay the amount demanded, the respondent issued a legal
notice dated 4.7.2007 calling upon the appellant to pay the
above mentioned amount within fifteen days from the receipt          c
of the notice, failing which the appellant was informed that the
legal proceedings would be initiated against it. Reference was
also made to various terms and conditions incorporated in the
deed of settlement.

     12. Appellant replied to the said notice on 19.7.2007 stating   D
that it had not violated any of the terms and conditions of the
deed of settlement dated 19.12.2003 and pointed out that
whatever amounts received by the appellant from M/s Solutions
Protocol Sdn. Bhd. were paid over to the respondent. It was
stated that the appellant company had received no other              E
payments till 31.12.2006 after they made payment to the
respondent on 20.3.2006. Further, it was pointed out that the
invoice dated 2.2.2007 had no basis as it has been issued to
M/s IBA Health Limited, a company incorporated in Australia
and was not a party to the cooperation agreement or the deed         F
of settlement. The respondent company was advised not to
indulge in any frivolous proceedings against the appellant,
which it was stated would be at their risk and costs. The
respondent company then issued a legal notice dated
16.8.2008 under Section 434 of the Companies Act calling             G
upon the appellant to pay the amount demanded within twenty
one days from the date of receipt of notice, failing which the
appellant was informed that appropriate legal proceedings
would be initiated. The notice was replied by the appellant
company vide letter dated 28.8.2008 denying its liability.           H
    150         SUPREME COURT REPORTS              (2010] 12 S.C.R.


A   Further, it was also pointed out that any attempt to initiate
    proceedings under Section 433(e) of the Companies Act, 1956
    has to fail as there is no debt payable by the appellant.

       13. We are, in this case, primarily concerned with the terms
  a1nd conditions of the deed of settlement followed by the terms
8
  of the compromise entered into by the parties on 18.3.2006 in
  O.S. No. 9655 of 2005. In order to examine the rival contentions
  raised by the parties, it is useful to refer to the terms and
  conditions incorporated in the above mentioned documents.
  The relevant terms and conditions of the deed of settlement
C dated 19.12.2003 are as follows:

          "1.    MEDICOM has agreed to pay and BITECH has
                 agreed to accept up to the maximum amount of
                 Ringgit Malaysia Eight Million Six Hundred
D                Thousand (RM 8,600,000) only as full and final
                 settlement subject to terms and conditions
                 hereinafter contained (hereinafter referred to as the
                 "Settlement Sum").

          2.     The Parties hereto agreed that the Settlement Sum
E
                 is formulated based on the following proportions of
                 the total amounts of MIDICOM produce license fee
                 and/or all other payments received by MEDICOM
                 from SP and/or SP/JV by virtue of the HICT
                 Package I Contract:
F
                  i.    Eleven (11 %) percent of the MEDICOM HIS
                        software applications produce license fee,
                        subject to a maximum of Ringgit Malaysia
                        Six Million Two Hundred Thousand (RM
G                       6,200,000) only;

                  ii.   Subject to a maximum of Ringgit Malaysia
                        Two Million Four Hundred Thousand (RM
                        2,400,000) only:
H
 IBA HEALTH (I) P. LTD. v. INFO-DRIVE SYSTEMS 151
SON. BHD. [K. S. PANICKER RADHAKRISHNAN, J.]

         a.     Twelve (12%) percent for implementation          A
                and business process re-engineering fees
                only, for payments received by MEDICOM on
                or before 31st December, 2003;

         b.     Five (5%) percent for implementation and
                                                                 B
                business process re-engineering fees only,
                for payments received by MEDICOM after
                31st December, 2003;

         iii.   The Settlement Sum as indicated in sub-
                paragraphs (i) and (ii) above is only towards    c
                the amount received from SP and/or SP/JV
                for any of the 13 named hospitals along with
                scope of modules/deliverables agreed as
                part of HICT Package I Contract. BITECH
                shall not be entitled to any amount in respect   D
                of any new hospitals added to HICT
                Package I Contract or replacement hospitals
                to HICT Package I contract or change in
                methodology and scope of supply;
                                                                 E
         iv.    BITECH shall have· no claims either now or
                anytime in future on payments received by
                MEDICOM from SP and/or SP/JV on any
                other items of deliverables not specified in
                Clause 2(i) or Clause 2(ii) above, howsoever
                designated, including Software Maintenance,      F
                Annual Maintenance Charges (AMC),
                customization, per diem charges, local
                expenses, airfare & travel expenses,
                accommodation expenses and the like.
                                                                 G
   3.   The Settlement Sum shall be valid for payments
        received by MEDICOM from SP and/or SP/JV
        under the HICT Package I Contract and/or the HIS
        software applications modules contracted for the
        HICT Package I Contract with SP/JV only and it is        H
    '152        SUPREME COURT REPORTS             [201 O] 12 S.C.R.


A                conclusively agreed to that BITECH shall not in any
                 circumstances whatsoever be entitled in law or
                 otherwise for any payment for any other contracts
                 including contracts involving MEDICOM and
                 Solutions Protocol from the Government of Malaysia
B                or otherwise, whether in Malaysia or any other
                 country.

           4.    The Parties hereto hereby acknowledge that the
                 obligation of MEDICOM to pay BITECH the
                 Settlement Sum shall always be subject to
c                MEDICOM (or its representatives or nominees)
                 having received payments of sufficient value from
                 SP and/or SP/JV to enable the payment of up to
                 the maximum amount of the Settlement Sum to be
                 made on or before 31st December, 2006
D                (hereinafter referred to as the "Cut-Off Date") and
                 in the event that such payments are not received on
                 or before the Cut-off Date, the Parties agree that
                 BITECH shall receive a proportion of the total value
                 of payments received by MEDICOM (or its
E                representatives or nominees) to be calculated in
                 accordance with Clause 2(i) and (ii) above.

           5.    BITECH may designate a nominee to receive
                 payments from MEDICOM constituting the
F                Settlement Sum, the identity and address of which
                 shall be communicated MEDICOM and Solutions
                 Protocol in writing upon the execution of this Deed
                 of Settlement.

                 )()()(   )()()(   )()()(
G
                 )()()(   )()()(   )()()(


           7.    The Settlement sum shall be initiated for the
                 process of payment by MEDICOM to BITECH in
                 the following manner:
H
                        •
 IBA HEALTH (I) P. LTD. v. INFO-DRIVE SYSTEMS 153
SON. BHD. [K. S. PANICKER RADHAKRISHNAN, J.]

           i.       For all or any amounts received by               A
                    MEDICOM up to 31 December 2003,
                    MEDICOM shall issue and establish an
                    irrevocable Letter of Credit (LC) to BITECH
                    in the proportions set out in Clause 2(i) and
                    (iia) within 10 working days from 31st           B
                    December, 2003; and

           ii.      For any amounts received by MEDICOM
                    from SP/JV after 31 December 2003
                    onwards, MEDICOM shall issue and
                    establish an irrevocable Letter of Credit (LC)
                                                                     c
                    to BITECH in the proportions set out in
                    Clause 2(i) and (iib) within 21 working days
                    from the date the payment is received by
                    MEDICOM.
                                                                     D
           )()()(   )()()( )()()(


           )()()(   )()()( xxx

     19.   This Deed of Settlement shall be governed by and
           construed in accordance with the law of India and         E
           the parties hereto submit to the exclusive jurisdiction
           of the courts of Bangalore, India."

    14. Following the above deed of settlement, we have
already indicated that the parties had entered into a                F
Compromise on 18.3.2006 in O.S. No. 9655 of 2005.
Reference may also be made to clauses 2 to 6 of the said
Compromise deed, which are extracted hereunder:

           "xxxxxx                  )()()(
                                                                     G
           xxx )()()(               )()()(

     2,·   The Defendant has agreed that it will provide report
           once in two months to plaintiff, of defendant's
           invoices raised on M/s Solution Protocol Sdn. BHD,        H
    154        SUPREME COURT REPORTS               [2010] 12 S.C.R.


A               Malaysia and reports once in two months, of
                payment effected by M/s. Solutions Protocol Sdn.
                BHD, Malaysia in favour of the defendant pertaining
                to the transactions under HICT Package I Contract
                as referred in Clause 2(i}(ii) & (iii) of the Deed of
B               Settlement. Plaintiff assures that it will make
                reasonable efforts to persuade M/s. Solutions
                Protocol to settle the invoices of the defendant at
                the earliest.

          3.    The Defendant agreed to make future payments to
c               the plaintiff as per Plaintiffs entitlement and as per
                the defendant's obligation under the Deed of
                Settlement.

          4.    The Defendant, based on transactions pertaining to
D               the Deed of Settlement has paid the amount having
                become due and payable to the Plaintiff as on date.
                The Plaintiff accepts that it has received all
                payments due to it as on date from the defendant
                as per the terms of the deed of settlement.
E
          5.    The Defendant has already disclosed the right of
                the Plaintiff in respect of Deed of Settlement
                mentioned in the suit, to M/s IBA Health Limited,
                Australia in the understanding entered with them.

F         6.    This compromise shall be binding on the parties
                and shall not be construed as creating an
                executable decree.

                xxx xxx         xxx
G               xxx xxx        xxi.'
       15. The respondent company in company petition alleged
       that the appellant had failed to comply with the terms and
       onditions of the deed of settlement and since no payment w
H s forthcoming from the appellant company and, it was under
 IBA HEALTH (I) P. LTD. v. INFO-DRIVE SYSTEMS 155
SON. BHD. [K. S. PANICKER RADHAKRISHNAN, J.]
such circumstances, that a legal notice legal notice dated          A
16.8.2008 was issued on the appellant reminding of its
obligations under the deed of settlement. Further, it is also
stated that the respondent had reliably learnt that substantial
payment had been received by the appellant from M/s
Solutions Protocol Sdn. Bhd. and, in spite of that, the appellant   B
company had failed to honour its commitments under the deed
of settlement. Reference was also made to clause (4) of the
deed of settlement.

      16. Appellant company in its statement of objections stated
that it had paid the amount of RM 1,069,583.89 to the               C
respondent company in due compliance with the terms of the
deed of settlement. Further it was pointed out that the appellant
company had not received any amount from Mis Solutions
Protocol Sdn. Bhd. since its payment in March 2006. Further,
it is also pointed out that the appellant company had no            D
subsisting commercial dealings with M/s. Solutions Protocol
Sdn. Bhd. and that the respondent company should be put to
strict proof with regard to the transactions completed before
31.12.2006 and also the payments effected by M/s Solutions
Protocol Sdn. Bhd. to the appellant company. Further, it was        E
pointed out that the documents Annexure J1 to J9 did not
pertain to the appellant company and it had not received any
payment thereunder. Further, it was pointed out that the
allegations raised by the respondent company are totally
frivolous which would require detailed investigation, recording     F
of evidence and adjudication of the rights and obligations of
third-party entities and would fall beyond the scope of enquiry
to be conducted by the Company Court under Sections 433,
434 and 439 of the Companies Act, 1956 and if, at all, the
respondent is aggrieved, the remedy open is to approach the         G
Civil Court for adjudication of its claims.

SUBSTANTIAL DISPUTE - AS TO LIABILITY

     17. The question that arises for consideration is that when
                                                                    H
    156      SUPREME COURT REPORTS                 [2010] 12 S.C.R.


A there is a substantial dispute as to liability, can a creditor prefer
  an application for winding up for discharge of that liability? In
  such a situation, is there not a duty on the Company Court to
  examine whether the company has a genuine dispute to the
  claimed debt? A dispute would be substantial and genuine if it
8 is bona fide and not spurious, speculative, illusory or
  misconceived. The Company Court, at that stage, is not
  expected to hold a full trial of the matter. It must decide whether
  the grounds appear to be substantial. The grounds of dispute,
  of course, must not consist of some ingenious mask invented
C to deprive a creditor of a just and honest entitlement and must
  not be a mere wrangle. It is settled law that if the creditor's debt
  is bona fide disputed on substantial grounds, the court should
  dismiss the petition and leave the creditor first to establish his
  claim in an action, lest there is danger of abuse of winding up
  procedure. The Company Court always retains the discretion,
D but a party to a dispute should not be allowed to use the threat
  of winding up petition as a means of forcing the company to
  pay a bona fide disputed debt.

       18. In this connection, reference may be made to the
E judgment of this Court in Amalgamated Commercial Traders
  (P) Ltd. v. A.C.K. Krishnaswami and another (1965) 35
  Company Cases 456 (SC), in which this Court held that "It is
  well-settled that 'a winding up petition is not a legitimate means
  of seeking to enforce payment of the debt which is bona fide
F disputed by the company. A petition presented ostensibly for
  a winding up order but really to exercise pressure will be
  dismissed, and under circumstances may be stigmatized as a
  :scandalous abuse of the process of the court."

       19. The above mentioned decision was later followed by
G this Court in Madhusudan Gordhandas and Co. v. Madhu
  'Woollen Industries Pvt. Ltd. 1971) 3 SCC 632. The principles
  laid down in the above mentioned judgment have again been
  reiterated by this Court in Mediquip Systems {P) Ltd. v.
  Proxima Medical Systems (GMBH) (2005) 7 SCC 42, wherein
H
   IBA HEALTH (I) P. LTD. v. INFO-DRIVE SYSTEMS 157
  SON. BHD~·[K. S. PANICKER RADHAKRISHNAN, J.]
             ·'
 this CourYtield that the defence raised by the appellant-            A
 company w6~ a substantial one and not mere moonshine and
 had to be-finally adjudicated upon on the merits before the
 appropriate forum. The above mentioned judgments were later
 followed by this Court in Vijay Industries v. NA TL Technologies
 Ltd. (2009) 3 sec 527.                                               s
       20. The principles laid down in the above mentioned cases
  indicate that if the debt is bona fide disputed, there cannot be
  "neglect to pay" within the meaning of Section 433(1 )(a) of the
· Companies Act, 1956. If there is no neglect, the deeming            C
  provision does not come into play and the winding up on the
  ground that the company is unable to pay its debts is not
  substantiated and non-payment of the amount of such a bona
  fide disputed debt cannot be termed as "neglect to pay" so as
  to incur the liability under Section 433(e) read with Section
  434(1)(a) of the Companies Act, 1956.                               D

 COMMERCIALLY SOLVENT

       21. Appellant company raised a contention that it is
commercially solvent and, in such a situation, the question may
                                                                      E
arise that the factum of commercial solvency, as such, would
be sufficient to reject the petition for winding up, unless
substantial grounds for its rejection are made out. A
determination of examination of the company's insolvency may
be a useful aid in deciding whether the refusal to pay is a result
                                                                      F
of the bona fide dispute as to liability or whether it reflects an
inability to pay, in such a situation, solvency is relevant not as
a separate ground. If there is no dispute as to the company's
liability, the solvency of the company might not constitute a stand
alone ground for setting aside a notice under Section 434
(1)(a), meaning thereby, if a debt is undisputedly owing, then it     G
has to be paid. If the company refuses to pay on no genuine
and substantial grounds, it should not be able to avoid the
statutory demand. The law should be allowed to proceed and
if demand is not met and an application for liquidation is filed
under Section 439 in reliance of the presumption under Section        H
    158      SUPREME COURT REPORTS                 [2010] 12 S.C.R.


A 434(1 )(a) that the company is unable to pay it debts, the law
  should take its own course and the company of course will have
  an opportunity on the liquidation application to rebut that
  presumption.

        22. An examination of the company's solvency may be a
8
  useful aid in determining whether the refusal to pay debt is a
  result of a bona fide dispute as to the liability or whether it
  reflects an inability to pay. Of course, if there is no dispute as
  to the company's liability, it is difficult to hold that the company
  should be able to pay the debt merely by proving that it is able
C to pay the debts. If the debt is an undisputedly owing, then it
  should be paid. If the company refuses to pay, without good
  reason, it should not be able to avoid the statutory demand by
  proving, at the statutory demand stage, that it is solvent. In other
  words, commercial solvency can be seen as relevant as to
D whether there was a dispute as to the debt, not as a ground in
  itself, that means it cannot be characterized as a stand alone
  ground.

       23. We have gone through various terms and conditions
E of the deed of settlement as also the compromise agreement
  and the allegations raised in the company petition and the
  objections filed by the appellant company. Both the parties are
  in agreement that they are bound by the terms and conditions
  of the deed of settlement. The respondent maintained the stand
F that substantial payments have been released by Mis Solutions
  Protocol Sdn. Bhd. in respect of various invoices raised by the
  appellant on or before 31.12.2006, this is the cut off date
  mentioned in the deed of settlement. The appellant company
  categorically denied that it had received payments on or before
G 31.12.2006, except the amount already received from Mis
  Solutions Protocol Sdn. Bhd. had been paid over to the
  respondent. Clause (2) of the deed of settlement states that the
  parties had agreed that the settlement sum was formulated
  based on the following proportions of the total amounts of
H MEDICOM produce license fee and/or all other payments
  IBA HEALTH (I) P. LTD. v. INFO-DRIVE SYSTEMS                  159
 SON. BHD. [K. S. PANICKER RADHAKRISHNAN, J.]
 received by MEDICOM from SP and/or SP/JV by virtue of the             A
 HICT Package I Contract. Further, it is stated therein that the
 settlement sum shall be valid for payments received by
 MEDICOM from SP and/or SP/JV under the HICT Package I
 Contract and/or the HIS Software applications modules
 contracted for the HICT Package I Contract with SP/JV only and        ·B
 it was conclusively agreed to that BITECH shall not in any
 circumstances whatsoever be entitled in law or otherwise for
 any payment for any other contracts including contracts involving
 MEDICOM and Solutions Protocol from the Government of
 Malaysia or otherwise, whether in Malaysia or any other country.      C
 Further, Clause (4) also stipulated that the parties have
 acknowledged that the obligation of MEDICOM to pay BITECH
 the settlement sum shall always be subject to MEDICOM (or
 its representatives or nominees) having received payments of
 sufficient value from SP and/or SP/JV to enable tzhe payment
                                                                       0
 of upto the maximum amount of the settlement sum to be made
 on or before 31.12.2006, which is the Cut-off date. Further, it
 is seen that one of the terms of the compromise was that the
 respondent would make reasonable efforts to persuade M/s.
 Solutions Protocol to settle the invoices of the appellant at the
 earliest.                                                             E

       24. On a detailed analysis of the various terms and
  conditions incorporated in the deed of settlement as well as the
  compromise deed al"}d the averments made by the parties, we
  are of the consideretj view that there is a bona fide dispute with   F
  regard to the amount of claim made by the respondent
  company in the company petition which is substantial in nature.
  The Company Court while exercising its powers under Sections
  433 and 434 of the Companies Act, 1956 would not be in a
  position to decide who was at fault in not complying with the        G
  terms and conditions of the deed of settlement and the
  compromise deed which calls for detailed investigation of facts
· and examination of evidence and calls for interpretation of the
  various terms and conditions of the deed of settlement and the
  compromise entered into between the parties. A company               H
    160     SUPREME COURT REPORTS                [2010] 12 S.C.R.


A petition cannot be pursued in respect of contingent debt unless
  the contingency has happened and it has become actually due.
  In the absence of any evidence, it is not possible to conclude
  that Mis. Solutions Protocol Sdn. Bhd. had in fact paid any
  amount to the appellant company towards commission charges
8 due to the respondent company before the cut off date. A legal
  notice prior to the institution of the company petition could be
  served on the company only in respect of a debt (then due) and
  a company could be wound up only if it was unable to pay its
  debts. In this case, there is a bona fide dispute as to whether
C the amount claimed is presently due and if, at all, it is due,
  whether the appellant company is liable to pay the sum unless
  they have received the same from Mis. Solutions Protocol Sdn.
   Bhd. Where the company has a bona fide dispute, the petitioner
   cannot be regarded as a creditor of the company for the
   purposes of winding up. "Bona fide dispute" implies the
D existence of a substantial ground for the dispute raised. Where
   the Company Court is satisfied that a debt upon which a
   petition is founded is a hotly contested debt and also doubtful,
   the Company Court should not entertain such a petition. The
   Company Court is expected to go into the causes of refusal
E by the company to pay before coming to that conclusion. The
   Company Court is expected to ascertain that the company's
   refusal is supported by a reasonable cause or a bona fide
   dispute in which the dispute can only be adjudicated by a trial
   in a civil court. In the instant case, the Company Court was very
F casual in its approach and did not make any endeavour to
   ascertain as to whether the company sought to be wound up
   for non-payment of debt has a defence which is substantial in
   nature and if not adjudicated in a proper forum, would cause
   serious prejudice to the company.

G MALICIOUS PROCEEDINGS FOR WINDING UP

        25. We may notice, so far as this case is concerned, there
    has been an attempt by the respondent company to force the
    payment of a debt which the respondent company knows to be
H
  IBA HEALTH (I) P. LTD. v. INFO-DRIVE SYSTEMS 161
 SON. BHD. [K. S. PANICKER RADHAKRISHNAN, J.]
  in substantial dispute. A party to the dispute should not be       A
  allowed to use the threat of winding up petition as a means of
  enforcing the company to pay a bona fide disputed debt. A
  Company Court cannot be reduced as a debt collecting agency
  or as a means of bringing improper pressure on the company
  to pay a bona fide disputed debt. Of late, we have seen several    B
  instances, where the jurisdiction of the Company Court is being
  abused by filing winding up petitions to pressurize the
  companies to pay the debts which are substantially disputed
  and the Courts are very casual in issuing notices and ordering
  publication in the newspapers which may attract adverse            c
  publicity. Remember, an action may lie in appropriate Court in
  respect of the injury to reputation caused by maliciously and
  unreasonably commencing liquidation proceedings against a
  company and later dismissed when a proper defence is made
  out on substantial grounds. A creditor's winding up petition       0
· implies insolvency and is likely to damage the company's
  creditworthiness or its financial standing with its creditors or
  customers and even among the public.

PUBLIC POLICY CONSIDERATIONS
                                                                     E
     26. A creditor's winding up petition, in certain situations,
implies insolvency or financial position with other creditors,
banking institutions, customers and so on. Publication in the
Newspaper of the filing of winding up petition may damage the
creditworthiness or financial standing of the company and which      F
may also have other economic and social ramifications.
Competitors will be all the more happy and the sale of its
products may go down in the market and it may also trigger a
series of cross-defaults, and may further push the company into
a state of acute insolvency much more than what it was when          G
the petition was filed. The Company Court, at times, has not
only to look into the interest of the creditors, but also the
interests of public at large.

     27. We have referred to the above aspects at some length
to impress upon the Company Courts to be more vigilant so            H
    162     SUPREME COURT REPORTS                [2010] 12 S.C.R.


A that its medium would not be misused. A Company Court,
  therefore, should act with circumspection, care and caution and
  examine as to whether an attempt is made to pressurize the
  company to pay a debt which is substantially disputed. A
  Company Court, therefore, should be guarded from such
B vexatious abuse of the process and cannot function as a Debt
  Collecting Agency and should not permit a party to
  unreasonably set the law in motion, especially when the
  aggrieved party has a remedy elsewhere.

        28. In the above mentioned facts and circumstances of the
C case, we are of the view that the order passed by the Company
  Court ordering publication of advertisement in the newspaper
  would definitely tarnish the image and reputation of the appellant
  company resulting in serious civil consequences and, hence,
  we are inclined to allow this appeal and set aside the order
D passed by the Company Court dated 17.9.2009 in Company
  Petition 41 of 2009 and the judgment of the Division Bench of
  the High Court of Karnataka dated 21.10.2009 passed in OSA
  No. 36 of 2009, and we order accordingly. However, we make
  it clear that the observations and findings rendered by this Court
E in this proceeding will not prejudice the parties in approaching
  the appropriate forum for redressal of their grievances and, in
  the event of which, that forum will decide the case in
  accordance with law.

    D.G.                                          Appeal allowed.