Andhra HC (Pre-Telangana)
K. Appa Rao And Ors. vs Sarkar Chemicals Pvt. Ltd. on 21 July, 1993
Equivalent citations: [1995]84COMPCAS670(AP)
JUDGMENT Sivaraman Nair, J.
1. This petition is filed under sections 433(e), 434(1)(a) and 439(b) of the Companies Act, 1956, for an order winding up the respondent-company. The four petitioners are the creditors of the company. The authorised share capital and paid-up share capital of the company are Rs. 9,00,000 and Rs. 5,35,000, respectively. The shares are of the value of Rs. 100 each. It is stated that the company owes large amounts of monies to the mother of the first petitioner and the three other petitioners.
2. According to the averments in the petition, the mother of the first petitioner deposited an amount of Rs. 28,000 consisting of Rs. 5,500 on October 28, 1986; Rs. 9,500 on November 22, 1986, Rs. 2,000 on December 26, 1986, Rs. 4,000 on January 10, 1987, and Rs. 7,000 on February 5, 1987, with the company. Sri C. Ramachandra Rao describing himself as the managing director of the company had executed receipts on behalf of the company evidencing those deposits, bearing receipts Nos. 2/3, 2/14, 2/20, 2/23 and 2/26, respectively. The deposits should bear interest at 15 per cent. per annum. On the death of his mother, the first petitioner became entitled to recover the above amounts. He sent legal notice to the company on April 26, 1989. The managing director and the executive director of the company had acknowledged the above notices.
3. The second petitioner, likewise, deposited an amount of Rs. 30,000 on various dates. The managing director of the company had acknowledged receipt of the above amounts in receipts Nos. 2/11, 2/15, 2/19 and 2/21. He sent a legal notice requiring the return of the amount along with 15 per cent. interest. The managing director of the company received the notice on May 12, 1989, and the executive director on May 3, 1989.
4. The third petitioner, Smt. K. Anuradha, deposited a sum of Rs. 40,500 on various dates under receipts Nos. 1/44, 1/47, 2/1, 2/4 and 2/9, respectively. She also sent a notice on April 26, 1989, for the return of the above amount with interest. The managing director and the executive director received the above notices.
5. The fourth petitioner deposited a sum of Rs. 19,500 with the company on various dates which is evidenced by receipts Nos. 2/12, 2/17 and 2/25, respectively. Since the amount was not returned, she made a demand by legal notice dated April 26, 1989, which the managing director and the executive director received, on May 12, 1989, and May 3, 1989.
6. The petitioners submit that the managing director did not reply to the notices whereas the executive director sent registered notices dated July 10, 1989, disputing the fact of such deposits and the obligation of the company to pay back the same. The petitioners submit that the company is indebted to them in an amount of Rs. 1,18,000 and in spite of notices dated April 26, 1989, issued by them, the company had refused to pay the amounts. The petitioners submit further that the company is unable to pay its acknowledged debt and is, therefore, liable to be wound up under sections 433, 434 and 439 of the Companies Act, 1956.
7. Sri C. Ramachandra Rao, claiming himself to be the managing director of the company, has admitted the liability, whereas the executive director has seriously contested the liability. By order dated July 20, 1990, the court directed that counsel appearing for Sri Ramachandra Rao would file an additional counter-affidavit with all details and also state the manner in which the payments in question were received, how they were reflected in the company's accounts, and for what purpose they were utilised. The respondents were also directed to produce the minutes book and the relevant books of the company.
8. Counsel for the executive director, Sri Bapuji, was permitted to file an additional counter-affidavit with necessary details. In the additional affidavit, filed on behalf of Sri Ramachandra Rao, who claims to be the managing director of the company, it was stated that the company was incorporated on August 25, 1984, and he joined the company as the managing director with effect from September 29, 1986. He stated that he was functioning as such, and that the company had filed the requisite application for effecting changes in the constitution of the board of directors on October 28, 1986. On November 25, 1986, Sri Bapuji enclosed an extract of the minutes of the meeting held on September 29, 1986, along with the pro forma application evidencing the appointment of Sri C. Ramachandra Rao, as the managing director of the company. He submitted that Sri Bapuji himself had attested his (Sri Ramachandra Rao's) signature in his capacity as the executive director. Reference is also made to a letter dated June 24, 1989, issued by Sri Bapuji's sister-in-law, Smt. K. Nagamani, addressed to Sri C. Ramachandra Rao, managing director of the company, calling upon the company to pay an amount of Rs. 16,000 which she had lent to the company on various dates. The address of the above letter was said to be in the handwriting of Sri Bapuji. Sri Ramachandra Rao left for the United States on December 12, 1987, and returned only in April, 1988. He submits that he had handed over the minutes book, etc., along with the cheque book to Sri Bapuji, when he left, and that on his return, the same were not handed over to him back. It was submitted that it was, therefore, not possible for Mr. Ramachandra Rao to produce the books. Sri Ramachandra Rao, however, stated that the company had borrowed about 2.5 lakhs of rupees while he was its managing director during the period from September, 1986, to February, 1987. He stated that the amounts were spent for the company, viz., Rs. 72,000 for the factory building and godown, Rs. 48,000 for the acid storage tank, Rs. 45,000 for the kiln and chimney, Rs. 59,000 for raw materials, and the rest of the amount for sundries.
9. It is also revealed that the petitioners and others have filed 32 suits against the company for recovery of amounts due from the above company. Sri Ramachandra Rao, therefore, supported the petitioners for the winding up of the company.
10. Sri Bapuji had filed an affidavit in reply to the affidavit of Sri Ramachandra Rao. He states that the petitioners are close relations of Sri Ramachandra Rao and the petition was filed in collusion with the alleged creditors. The third petitioner, Smt. K. Anuradha, is the daughter of Sri Ramachandra Rao and the daughter-in-law of the first petitioner and the fourth petitioner is the daughter of the first petitioner. The first petitioner is the brother-in-law of Sri Ramachandra Rao and they are residing in the same house as Sri Ramachandra Rao. He submitted that there was no need for the company to borrow heavily as it was alleged to have done during the period from September, 1986, to February, 1987. The amounts were not spent for any purpose of the company. As a matter of fact, the company had not virtually been functioning after its inception. It is stated that Sri Ramachandra Rao, who assumed to be the managing director of the company had himself filed six suits in the court of the District Munsif, Kovvur, viz., O.S. Nos. 732 of 1989, 734 of 1989, 63 of 1990, 65 of 1990, 68 of 1990 and 192 of 1990 for the recovery of the amounts of Rs. 14,500, Rs. 6,160, Rs. 10,975, Rs. 13,775, Rs. 13,650 and Rs. 5,075, respectively, from the company. The five suits, viz., O.S. No. 728 of 1989, 730 of 1989, 74 of 1990, 75 of 1990 and 76 of 1990 are said to have been filed for the recovery of Rs. 6,525, Rs. 14,500, Rs. 13,725, Rs. 8,700 and Rs. 14,500, respectively, against the company by Smt. C. Rajavamsee Devi, wife of Sri Ramachandra Rao, on the basis of receipts signed by her husband on behalf of the company. The third petitioner, Smt. K. Anuradha, daughter of Sri Ramachandra Rao, filed O.S. Nos. 70 of 1990, 71 of 1990, 73 of 1990 and 322 of 1990 for the amounts of Rs. 13,725, Rs. 10,010, Rs. 10,010 and Rs. 20,000, respectively, against the company on the basis of similar transactions. Sri Ramachandra Rao's mother-in-law who is also the mother of the first petitioner has filed O.S. Nos. 325 of 1989, 736 of 1989, 24 of 1990, 43 of 1990 and 72 of 1990 for the amounts of Rs. 10,150, Rs. 7,200, Rs. 2,200, Rs. 5,800 and Rs. 13,775, respectively, on the basis of identical transactions against the company. The maternal first cousin of Sri Ramachandra Rao has filed four suits, viz., O.S. Nos. 18 of 1990, 28 of 1990, 37 of 1990 and 66 of 1990 for the amounts of Rs. 13,725, Rs. 11,600, Rs. 7,250 and Rs. 10,875, respectively. The fourth petitioner who is the daughter of the first petitioner and niece of Sri Ramachandra Rao filed two suits O.S. Nos. 20 of 1990, and 69 of 1990, for the recovery of a sum of Rs. 21,407 whereas the son-in-law of the first petitioner filed five suits, O.S. Nos. 119 of 1989, 22 of 1990, 26 of 1990, 67 of 1990 and 171 of 1990, for the amounts of Rs. 8,700, Rs. 13,050, Rs. 12,325, Rs. 9,475 and Rs. 7,250, respectively, for an aggregate amount of Rs. 50,800.
11. It was, therefore, submitted that all the claimants who had lent monies have filed suits in the court of the District Munsif, Kovvur, and the transactions are similar, in that they are based on receipts issued by Sri Ramachandra Rao, as the managing director of the company. It is asserted that Sri Ramachandra Rao is not a shareholder of the company. He was not elected as one of its directors.
12. Reference is made to clause 29 of the articles of association of the company; clause (b) of which provided that "Sri C. Bapuji shall be the managing director of the company for a term of five years from the incorporation of the company". Clause (a) provides that "the board shall have power to appoint from time to time any one of its members as the managing director of the company, for a fixed term not exceeding five years at a time and upon such terms and conditions as the board thinks fit. The board may by resolution vest with such managing director such of the powers hereby vested with the board generally as it thinks fit, and such powers may be made exercisable for such period or periods and upon such conditions and subject to such restrictions, as it may determine."
13. It is asserted that Sri Ramachandra Rao did not have any case that he was one of the members of the board of directors. He could not, therefore, have been elected as the managing director of the company. Even assuming that the articles of association could be amended by altering clause 29(a) thereof, that required a special resolution. Sri Ramachandra Rao has no case that there was any such special resolution adopted by the company. Sri Bapuji, therefore, submits that Sri Ramachandra Rao was not the managing director of the company and the receipts alleged to have been executed by him were not capable of creating any liability on the part of the company. It is stated that Sri Ramachandra Rao, who is a post-graduate in commerce, might have obtained the signature of Sri Bapuji on some paper making him believe that he was assisting the latter in the management of the company. A specific statement is made to the effect that neither the company nor its board of directors had authorised Sri Ramachandra Rao to borrow any amount or receive any deposit on behalf of the company. It is, however, admitted that he was given a limited power to operate the bank accounts. Sri Bapuji asserts that none of the liabilities alleged to have been created by Sri Ramachandra Rao in collusion with his close relatives binds the company. It is, therefore, his case that the amounts which are claimed to have been deposited by the petitioners and the inability of the company to return which is said to be the reason for filing the petition for winding up of the company, do not exist as a matter of fact or law. Winding up of a company is a serious proceeding with drastic consequences. It may perhaps be the last resort. Its effect is to decimate the company. The courts shall ordinarily be wary in ordering winding up, except when no other course is left open. It may be that the substratum of the company has been eroded disabling the company to honour its obligations. It may be the company has become insolvent. It may be that the continuance of the company may be oppressive of its constituents and creditors. In all such extraordinary situations and only on proof of the existence of such circumstances, can a court initiate proceedings for winding up. Even when notice is ordered in cases which do not call for such drastic action, the consequences on the company may be disastrous.
14. In cases of alleged inability of the company to pay its debts, the court is to be doubly cautious. It is a trite saying that a petition to wind up shall not be a more expedient substitute for recovery of monies. In all cases where such actions are based on refusal or inability of the company to pay under section 433(e) of the Companies Act, the court has to be satisfied, at least prima facie, that the liability does exist and the refusal or inability of the company is made out. In cases where the company has a prima facie sustainable defence or a bona fide dispute of its obligations to discharge the alleged debts or liabilities, the court may not entertain proceedings for winding up, much less order winding up. These are the principles emanating from the decisions of the Supreme Court including Amalgamated Commercial Traders (P.) Ltd. v. A. C. K. Krishnaswami [1965] 35 Comp Cas 456 and Madhusudan Gordhandas and Co. v. Madhu Woollen Industries Pvt. Ltd. [1972] 42 Comp Cas 125. It is also elementary that when the only reason for filing an application for winding up is an anxiety to recover amounts due from the company faster than usual, the fact that the creditors have approached the civil court for the same relief is a very relevant consideration for courts to consider in deciding whether proceedings for winding up need be entertained.
15. In this case, we have got a curious situation. According to clause 29 of the articles of association of the company, only a member of the board of directors can be its managing director. Sri Ramachandra Rao has no case that he was ever elected as director of the company. He could not, therefore, have been elected as the managing director. Sri Bapuji, on the other hand, was to be the managing director of the company for a period of five years from its inception. The company was registered on August 25, 1984. He could, therefore, continue as the managing director, till August, 1989. The provisions of clause 29 of the articles of association could have been changed, if at all, only by a special resolution. Sri Ramachandra Rao has no case that any such special resolution was ever passed by the company. The defence of Sri Bapuji that Sri Ramachandra Rao was not the managing director of the company, therefore, seems to me to be prima facie sustainable.
16. More curious is the conduct of Sri Ramachandra Rao in receiving deposits of Rs. 2,50,000 during the short period from September, 1986, to July, 1987, when he was said to have been effectively functioning as the managing director of the company. He had executed receipts in his capacity as managing director of the company. I verified from counsel whether in the suits pending against the company, Sri Ramachandra Rao, who had executed receipts has been impleaded as a party representing the company. I was informed that it has not been done; whereas Sri Bapuji as executive director is one of the parties. Six of the 33 suits are filed by Ramachandra Rao himself for the recovery of amounts which he advanced on the basis of receipts signed by him as the managing director of the company. Five other suits were filed by his wife, his daughter filed four suits, his mother-in-law filed another five suits, his son-in-law filed yet another five and the daughter and the first petitioner filed two suits each. All the above suits were filed on the basis of receipts executed by Sri Ramachandra Rao, as the managing director of the company.
17. Taking all these factors into consideration, I see considerable force in the submission urged by counsel appearing for Sri Bapuji, representing the company that Sri Ramachandra Rao, who was never even a shareholder or director of the company, had no authority to receive deposits or execute receipts. I am not pronouncing upon this aspect finally, because it may become material in the suits which are pending in the civil court. I see considerable force in the contentions urged by Sri Bapuji, on behalf of the company, that the winding up petition is a collusive action and lacks in good faith. Here again I need only state that I find considerable force in the submission without deciding this question finally.
18. On the basis of the above, I hold that the defence which the company has urged through Sri Bapuji is bona fide, that the company has made out a statable and reasonable defence regarding the debts allegedly due to the petitioners and that the petitioners have not made out circumstances justifying the initiation of proceedings for the winding up of the company. I, therefore, dismiss the company petition. No costs.