What is bona-fide dispute?

If there is a bona fide and reasonable dispute as to a substantial part of the debt on which the petition is based, and the defence is a substantial one, the Court tends to refuse winding up. However, a dispute is considered to be substantial and genuine if it is bona fide and not spurious, speculative, illusory or misconceived. When the question as to genuineness of the dispute is put before the Court, the Company Court, at that stage, is not expected to hold a full trial of the matter. A bona fide dispute must be differentiated from ‘neglect to pay’. This means, even when a debtor company believes wrongly that it justified in law to refuse payment, such a refusal cannot be regarded as neglect to pay. On the contrary, where the debt is undisputed, the court will not act upon a defence that the company has the ability to pay the debt but did not choose to pay that particular debt.

Now the question which comes up is whether it is necessary to determine the exact amount of the debt disputed. In other words, can dispute as to the precise amount of the debt be considered ‘bona fide dispute’? The law in this regard is very clear and provides that where there is no doubt that the company owes the creditor a debt entitling him to a winding up order but the exact amount of the debt is disputed, the court can still make a winding up order without requiring the creditor to quantity the debt precisely. The principles on which the court acts are-

  1. that the defence of the company is in good faith and one of substance;
  2. the defence is likely to succeed in point of law, and
  3. the company adduces prima facie proof of the facts on which the defence depends.

Supreme Court

  • Amalgamated Commercial Trades (P.) Ltd. v. Krishnaswami, (1965) 35 Com Cases 456 (para 14)
  • Madhusudan Gordhandas & Co. vs. Madhu Wollen Industries Pvt. Ltd.,  (1971) 3 SCC 632 (para 21 & 22)
  • Pradeshiya Industrial & Investment Corporation of U.P. V. North India Petro Chemical Ltd., (1994) 79 CompCas 835 (SC)  (para 31)
  • Vijay Industries vs. NATL Technologies Limited,  (2009) 3 SCC 527 (para 32 & 33)
  • IBA Health v. Info-Drive Systems, (2010) 10 SCC 553 (para 17 & 20)

High Court(s)

  • Sharda Bhandari vs. Aananya Electronics Ltd., 48 (1992) DLT 723 (para 9) [Delhi High Court]
Non-payment or part payment for supply of defective products is ‘bona fide’ dispute under Section 433(e)
  • Praneet Enviroquips Private Limited, Chandigarh vs. Vishal Papertech (India) Ltd., (1999)4CompLJ280P&H
  • Trade Links Corporation vs. Nalanda Tobacco Co. P. Ltd., [1999]98CompCas227(AP)
  • Meenakshi Paper Mills (P) Ltd. vs. Sattarsons Packaging (P) Ltd., (2000)2CompLJ233(AP)
  • Sales Service Company vs. AKB Paper Mill Plant Suppliers (P.) Ltd., [2005]127CompCas447(Mad)