Bombay High Court
Prashant Khusalchand Shah vs Rinku Polychem Ltd. on 24 April, 1997
Equivalent citations: [2000]100COMPCAS170(BOM), AIR 1998 BOMBAY 203, (1998) 31 CORLA 406, (2000) 100 COMCAS 170, 1997 (100) BOM LR 213, 1997 BOM LR 100 213
Author: S.S. Nijjar
Bench: S.S. Nijjar
JUDGMENT S.S. Nijjar, J.
1. This petition has been filed for winding up of the company on the ground that it is just and equitable to do so under section 433(f) of the Companies Act, 1956. It is stated in the petition that the company was originally incorporated as Rinku Polychem Pvt. Ltd., on July 11, 1990, and subsequently converted into a limited company with effect from April 22, 1992. The main objects for which the company is incorporated, inter alia, consist of :
"To carry on in India and elsewhere in any place or places in the world, the business of processing, converting, producing, manufacturing, formulating, using, buying, acquiring, importing, storing, exporting, packaging, selling, distributing, transporting and otherwise dealing in, organic and inorganic chemicals of any chemicals, chemical products, alkalis, acids, tannings, essence, emulsions, solvents, chemical auxiliaries, pesticides, weedicides, insecticides, caustic soda, soda ash, carbon, hydro-carbons, petroleum, synthetic products, polymers, elastomers and resins of all types and grades and copolymers, formulations and in all forms, dyes and intermediates, paints, varnish, rubber chemicals, agro chemicals, textile auxiliaries, marine chemicals, photo-chemicals, industrial chemicals, fertilizers, gas and gases, materials of all kinds, salts, marine minerals their derivatives by-products and compounds of all kinds and descriptions, etc."
2. The authorised capital of the company is Rs. 10 crores comprising one crore equity shares of Rs. 10 each. The issued, subscribed capital of the company is Rs. 9,05,45,000 and the paid-up capital is Rs. 9,03,15,500. The petitioner is holding 30,000 fully paid equity shares of Rs. 10 each in the company. In January, 1994, the company entered the capital market through prospectus by making public issue of 60,00,000 equity shares of Rs. 10 each. The petitioner on the basis of believing the contents of the prospectus has subscribed for equity shares of the respondent-company by participating in the public issue and was allotted 30,000 shares. It is stated in the petition that several factors were hidden from the shareholders and there are glaring lapses of very serious nature. In the opinion of the petitioner the statutory authorities like the stock exchange, the SEBI and other responsible Government agencies ought not to have allowed unscrupulous elements to play with the hard-earned money of the investors. The issue ought to have been banned or allowed to have been devolved. It is stated that the petitioner was saddled with the shares of the respondent-company by gross misrepresentation of facts and the contract, if any, with the petitioner is voidable at the instance of the petitioner. It is further stated that the petitioner is entitled for the refund of the money of which he has been duped. The petition goes on to state that the company has been promoted by one family. None of them are formally educated at least in the field of chemicals. They were all associated with the family business of dealing in chemicals. Each of the brothers are connected with one or another company/firm forming a group of companies. These group of companies are heavily indebted and each one of them availed of loans from a single bank, viz., Dena Bank, Kharek Bazar branch, Mumbai. This bank has filed suits against each of the group companies/firms. In a number of cases a receiver has also been appointed. Reference is made to certain misrepresentations made in the prospectus. It is also stated that proceedings are pending against the directors and officers of the company with the customs and excise authorities. Even the public issue of the company was got subscribed to the extent of 90 per cent. by obtaining a bridge loan of Rs. 1.20 crores from Sangli Urban Co-operative Bank Ltd. The said bank has also issued notice against the company on the ground that the said loan was wrongly obtained. The petitioner understands that the said bank will file civil and criminal proceedings against the company. Furthermore, the company is a defaulter in filing statutory record or returns with the Registrar of Companies only with a view to withhold unlawfully the necessary information which a shareholder or a member of the general public is entitled to.
3. It is submitted by counsel for the petitioner that such kind of a company which is flouting statutory provisions deserves to be wound up. The company has misrepresented the facts in the prospectus and thus caused unlawful losses to the shareholders. It is, therefore, just and equitable to order the winding up of the company. In any event it is submitted that the petitioner has set out sufficient particulars to make out a strong prima facie case for the acceptance and admission of the petition. Counsel has relied on a Division Bench judgment of this court given in the case of Jivabhai Marghabhai Patel v. Extrusion Processes Pvt. Ltd. [1966] 2 Comp LJ 74 to canvass the submission that at this stage the petition cannot be dismissed merely because an alternative remedy may be available to the petitioner.
4. No affidavit-in-reply has been filed by the company. Counsel appearing for the company has made a number of submissions. Firstly it is submitted that the petition filed by the petitioner is an abuse of the process of the court. The petition has not been filed bona fide. The petitioner bought shares of the company with open eyes. The shares were bought by the petitioner in April, 1994. The petition has been filed in December, 1996. This fact is highlighted to show that there has been steep fall in the price of the shares. Consequently the petitioner is merely trying to pressurise the company into refunding the amount which the petitioner has spent on purchasing the shares. It is further submitted that the facts and circumstances as narrated in the petition even if accepted to be correct would not justify an order under section 433(f) of the Companies Act, hereinafter referred to as "the Act". In fact, the petitioner is acting wholly unreasonably, in bringing the present petition for winding up. Thus it is submitted that there is no just and equitable ground on the basis of which the company would be ordered to be wound up. Apart from this, it is submitted that a number of remedies are open to the petitioner for redressing any grievance that he may have. Reference in this connection has been made to sections 62 and 63 of the Act. Section 62 provides that if there is any untrue statement included in the prospectus the person who has been induced into purchasing the shares is liable to be compensated in the event it is found that such a person has suffered loss or damage due to such false statements. Apart from this, section 63 provides that if the prospectus includes any untrue statement, every person who authorised the issue of prospectus shall be punished with imprisonment for a term which may extend to two years or five, unless he proves that the statement was immaterial or that he had reasonable ground to believe that the statement was true. With regard to the other allegations there are adequate remedies in the Act. In the event of any violation of the statutory provisions of the Act, criminal proceedings can be taken against the directors of the company. Therefore, it is submitted that the petition is liable to be dismissed in limine on the ground that effective alternate remedies are available. Counsel has relied on a single judge decision of the Gujarat High Court in Atul Drug House Ltd., In re [1971] 41 Comp Cas 352. In this judgment the petition was dismissed as the petitioner did not disclose in the petition that alternative remedies were available. Referring to a number of judgments of various courts it has been held (page 375) :
"So, on the facts of the case, it must be held that not only the alternative remedies are open to the petitioners but also they have no sufficient case on the allegations which they have made and they are acting unreasonably in seeking to pursue this remedy by way of winding up petition without resorting to the alternative remedy at least under sections 397 and 398. The remedy under section 408 they have availed of and they have failed .....
In any event the petitioners not having availed of the remedies under sections 397 and 398, there is no justification whatever for this petition at this stage. Therefore, on all these grounds this petition must fail and it cannot be admitted as on doubtful assertions the petitioners are presenting the petition in a manner productive of such irreparable damage to the solvent company without availing of the ample alternative remedies. Therefore, the company petition is dismissed at the admission stage and the notice is discharged."
5. It is further observed in the said judgment (page 367) :
"Therefore, unless the constitution is such which results in complete, irresoluble deadlock and where there is no adequate remedy, the partnership principle must be invoked; while, in other cases, the ground of lack of probity in the conduct of the company's affairs must be established. The question of alternative remedy even when the partnership principle is invoked must assume great importance when the winding up is sought on the just and equitable grounds. In order to do justice to the petitioner, who is invoking jurisdiction of winding up under the just and equitable rule, the court could not do injustice to a solvent company by a public advertisement which would necessarily result in irreparable and irreversible harm. This is the most material distinction between bankruptcy proceedings and winding up proceedings. That is why the Legislature has in terms enacted in section 443(2) when such jurisdiction of winding up is invoked on just and equitable grounds, that the court may refuse to make up an order if it is of opinion that some remedy is available to the petitioner and that they are acting unreasonably in seeking to have the company wound up instead of pursuing such other remedy. The Legislature has introduced sections 397 and 398 in the Act which gave ample powers to the court, by passing all the necessary orders under section 402, compelling even purchase of the shares or interest of any members of the company by other members or the termination of the agreement between the company on the one hand and the office bearers or others and for passing any just and equitable order, so that a solvent concern could continue working in cases where, the affairs of the company are conducted in a manner prejudicial to the public interest or in an oppressive manner to the members concerned. The Legislature must, therefore, be taken to have clearly intended that the winding up jurisdiction even on partnership lines should be invoked at the instance of a contributory in such a solvent company only when there would be irresoluble deadlock, because of something in the constitution itself. Such a situation of irresoluble, complete deadlock would arise by reason of the very constitution itself in case of equally divided holdings of partners in a quasi-partnership, when by reason of only acting as per the constitution a deadlock would be created without any oppression or mismanagement, which could be remedied under sections 397 and 398 of the Act. Therefore, Divan's contention cannot be accepted that Ray J. was wrong in interpreting the settled legal position by confining the partnership principles to such concerns where there was complete, irresoluble deadlock."
6. Relying on these observations, Mehta has pointed out the provisions of sub-section (2) of section 443 of the Act which reads as under :
"Where the petition is presented on the ground that it is just and equitable that the company should be wound up, the court may refuse to make an order of winding up, if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy."
7. A perusal of the said section clearly shows that the existence of an alternative remedy can be argued as a ground for dismissal of the petition. It is further argued by Mehta that the petitioner being a shareholder is a contributory as defined under section 428 of the Act. Section 439 gives various classes of persons who can present a petition for winding up. Sub-section (1)(c) provides that a contributory may present a petition for winding up. However, sub-section (4) of section 439 gives the instances in which the contributory can present a petition for winding up. Sub-section (4)(a) provides that a contributory shall not be entitled to present a petition for winding up unless the number of members in a public company is reduced to below seven. Sub-section (4)(b) provides that a petition cannot be presented unless the shares in respect of which the petitioner is a contributory have been held by him for the last six months. The petitioner in this case satisfies the condition under section 439(4)(b). Thus, the petition cannot be dismissed as not maintainable. Apart from this, it is further argued by Mehta that a perusal of the petition would show that the petition has been presented merely as a pressure tactic. Reference has been made to the averments made in paragraph 6 of the petition wherein it is admitted by the petitioner that all necessary permissions required under various statutes have been given by the statutory authorities at the time when the public issue was taken out. In paragraph 6 it has been further stated by the petitioner as follows :
"However, as far as the petitioner is concerned, the petitioner is saddled with the shares of the respondent-company by gross misrepresentation of the facts and the contract, if any, with the petitioner is voidable at the instance of the petitioner and the petitioner is entitled for the refund of the money of which he has been duped."
8. A perusal of the extract reproduced above would show that the real motive behind filing the petition is the loss that the petitioner has suffered due to purchase of the shares. The petitioner conveniently does not mention that the overall level of the shares from 1994 till 1997 has fallen considerably. Thus merely to pressurise the company into entering into some sort of compromise the present petition has been filed. Therefore, it is submitted by Mehta that the petition is neither bona fide nor is it in public interest nor is it just and equitable to order the winding up of the company. So far as the Division Bench judgment is concerned, it is the submission of Mehta that the ratio of the Division Bench is not to the effect that there is a total embargo on the court for refusing to entertain a petition on the ground of the existence of alternative remedy. In fact, a perusal of the Division Bench judgment would show that the Division Bench has categorically held as follows :
"It is true, as has been pointed out by Bhabha, that the court hearing the application may under sub-section (2) of section 443 where the application for winding up is made under clause (f) of section 443 refuse to make an order for winding up, if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy. The question that the court will have to answer will be whether other remedy is available which, in our view, must be an effective remedy and not merely a doubtful remedy, and whether the petitioners or petitioner is acting in an unreasonable manner in asking the company to be wound up."
9. The Division Bench has also held that each case must be considered on its facts and all circumstances bearing on the question have to be taken into account.
10. I have considered the rival contentions of the parties and I am entirely in agreement with the submissions made by Mehta. I find prima facie the petition has been filed merely as a pressure tactic. It is an abuse of the process of the court. Effective remedies are available to the petitioner under the Companies Act. Furthermore, I am of the opinion that the wide-spread publication of the acceptance or admission of this petition would cause irreparable loss to the company. This may result in a further fall in the price of the shares. This would not at all be in the interest of the shareholders. Rather than the petition being in public interest I am constrained to hold that the petition would do considerable damage to the interest of the other shareholders. Even otherwise, the petitioner is a contributory of the company. He is a member of the company. Very very strong circumstances would have to be pointed out by the petitioner to enable this court to come to a conclusion that the affairs of the company are being conducted in such a way, that it would be just and equitable to order the winding up of the company. In my view no such circumstances have been pointed out in the petition. Even if the allegations contained in the petition are accepted at face value, this would not amount to sufficient proof of mismanagement as to enable a petition filed under section 433(f) to succeed. In the facts and circumstances of the case I am of the considered view that the petitioner has failed to prima facie establish the ingredients of section 433(f) of the Companies Act. Even according to the petition the civil suits which have been filed, are filed against the sister concerns. None of these suits have been filed against the company against which the present petition has been filed. Furthermore, mere appointment of a receiver in the civil suits cannot lead to a conclusion that the said suits are bound to succeed. Thus this cannot be treated as a circumstance to establish the ingredients under section 433(f) of the Companies Act. Consequently I am of the view that the petition is wholly misconceived. The same is hereby dismissed with no order as to costs.