Patna High Court
Registrar Of Companies vs Chauhan Brothers Industries Private ... on 3 August, 1973
JUDGMENT Madan Mohan Prasad, J.
1. This is an application under Section 433(c) read with Section 433(f) of the Companies Act (hereinafter referred to as "the Act") for an order for winding up the company called Messrs. Chauhan Brothers Industries Private Ltd.
2. The aforesaid company was incorporated on 20th of May, 1958. It is said "that the main objects of the company, as per memorandum of association, are to purchase, take on lease, or otherwise acquire any mines, mining rights and metalliferrous land in India or else where and any interest therein and to explore, work, exercise, develop and turn into account the same ".
3. The company has only four shareholders, who also are the directors. The authorised capital of the company is Rs. 5 lakhs, there being 5,000 shares of Rs. 100 each. The issued, subscribed and paid up capital is Rs. 20,000 with 200 equity shares of Rs. 100 each fully paid up in cash. The four shareholders of the company hold 200 equity shares each having fifty shares. It is said that the company did not commence its business within one year of its incorporation. Further, it is said that the reserve and surplus of the company is nil and that the statement of profit and loss for the last three years, namely, years ending with 31st March, in the years 1968, 1969 and 1970, shows losses to have been incurred. It is further said that after the scrutiny of the balance-sheet as on 31st of March, 1967, a notice was issued to the company to show cause why it should not be wound up under the provisions of Section 433(c) of the Act. The company thereafter informed the Registrar that they were not inclined to carry on any business at the relevant time and they sought the advice of the Registrar whether it would be in order if the company was put into liquidation. The Registrar advised the company to put itself into liquidation. For the period of two years next, however, the company did not take any step in the matter. Thereafter the Registrar requested the Regional Director of the Company Law Board to accord sanction for the presentation of a petition for winding up in this court. The Regional Director also issued notice to the company calling upon the company to make its representation and representation was made but ultimately sanction was accorded by the Regional Director. Hence this application by the Registrar for an order for winding up.
4. The company has appeared and filed a counter-affidavit. It is said that the statements in the petition to the effect that the company had not commenced its business since its incorporation and that it had been incurring losses every year were based on the balance-sheet and profit and loss account of the company as on 31st of March, 1970. But it will appear that during the financial years 1970-71 and 1971-72 the company had commenced its business and had earned profits to the extent of Rs. 729.75 and Rs. 724'25 by way of coal commission. It is said that " though at the initial stage after incorporation of the company, due to other heavy engagements, the only shareholders-cum-directors of the company were not much inclined to carry on any business but subsequently in their letter dated August 7, 1971, written to the Regional Director, Eastern Region, Company Law Board, Calcutta, it was stated the company had proposed to set up an industry at Dhanbad Industrial Estate at Pradhan Khanta, Dhanbad, but due to some financial difficulties the setting up of the project has been delayed. "
5. The aforesaid letter has been attached as annexure " A ". It is further said that " all the collieries of the shareholders-cum-directors of the company have been nationalised by the Government and they are now very much interested and inclined regarding commencement of the company's business and if the company is allowed to be wound up irreparable loss and injury will be caused to them ".
6. A reply to this affidavit has been given by the Registrar of Companies. It is denied therein that the profits were to the extent mentioned in the counter-affidavit aforesaid and it is said that those statements were misleading and the correct position is " that these are the total earnings whereas the profits were meagre figures of Rs. 76'50 and Rs. 88*25 only in 1970-71 and 1971-72, respectively ". It is further said that the reason for the delay, i.e., financial disability alleged is not maintainable as it is not satisfactorily explained ; that the company never replied to the letter issued by the Regional Director asking the company to produce documentary evidence in support of the statement that they proposed to set up an industry at Dhanbad and that they could not do so on account of financial difficulties.
7. Learned counsel for the petitioner has urged that the facts which are not disputed in the present case are, firstly, that the company had not commenced its business until the year 1969 and 1970 ; that in the three years ending with March, 1968, 1969 and 1970, the company had been incurring losses ; that the company had no intention to carry on the business until the years 1969-1970 ; that the surplus and reserve were nil and that the company itself at the earlier stage sought the advice whether it would be in order to put it into liquidation. It has further been urged that the only fact upon which reliance can be placed by the company is that it had commenced business in the year 1970-71 and earned a small profit. This by itself, however, it is said is not enough to show that there was any good ground for the company not having commenced any business until then.
8. Upon these facts it is urged that an order of winding up of the company be passed.
9. Learned counsel for the company has, however, contended that the financial position of the company is not bad inasmuch as it appears from the petition itself that there is an excess of assets over the liabilities, that there is no complaint against the management ; that in spite of the fact that the company had not commenced business earlier it had started doing business and earned profit in 1970-71 and 1971-72 ; that there is no evidence to show that they would not run at a profit in future and that on account of nationalisation of coal industries the directors-cum-shareholders were free to devote themselves to any new industry set up by this company.
10. In answer to this it has been urged on behalf of the petitioner that there was no good explanation for the company not having commenced its business until the year 1970-1971 ; that the argument with regard to the assets over the liabilities is misleading inasmuch as it takes into consideration intangible assets as well and that on account of nationalisation of coal the directors must have lost their capital invested in the colliery which would leave them financially weaker than earlier to carry on the business of this company at a profit.
11. The question which has to be answered is whether or not the company commenced business within one year from the date of its incorporation or suspended business for one year and if on that account it would be proper to order the winding up of the company. There is no dispute in the present case that for more than ten years which elapsed from the date of incorporation of this company in the year 1958 it had not commenced business, i.e., until 1970-71. It has been clearly stated in the letter dated 7th of August, 1971, sent by the company to the Regional Director, which is annexure "A ", that the company proposed to set up an industry at Dhanbad, but had not been able to take up the project because of not receiving financial assistance. In their affidavit their very case is that they had commenced business in the year 1970-71. In the letter (annexure "I") dated 6th of August, 1968, which the company had sent to the Registrar they had stated that they were not inclined to carry on any business at the relevant time. It appears from the letter (annexure " A ") that they were hoping that within the next one year some further arrangement would be possible. It appears from the letter (annexure " III ") dated 22nd September, 1971, from the Regional Director to the Company Law Board that they had been asked to furnish data and produce evidence to show that there was any good ground on which it could justifiably be hoped that arrangement would be possible to undertake the business for which the company had been registered : in other words, to show that what they said was not merely wishful thinking. It appears that no reply whatsoever was given by the company or its director to the aforesaid letter of the Regional Director. The only inference which can be drawn thus is that the directors were not in a position to furnish any such data or evidence in support of their hope.
12. Even at the hearing of this application there is nothing specific which has been said by way of the reasons which did not enable the company to commence the business. It said that " at the initial stage after incorporation of the company due to other heavy engagements the only shareholders-cum-directors of the company were not much inclined to carry on any business ". We do not know what were those heavy engagements. It is quite obvious that it was really disinclination on the part of the directors to carry on the business of this company which resulted in the non-commencement of the business for a long period of nearly twelve years. No good explanation has been given thus which could weigh in order to condone the delay in the commencement of the business and avoid an inference against the company.
13. The facts which emerge from the discussion aforesaid are (1) that the company had not commenced business for a long time after its incorporation ; and (ii) that there is no good explanation given by the company for not having done so. This circumstance by itself would justify an order for winding up of the company.
14. There are, however, other considerations, which equally weigh against the company. The first one is that there does not appear to be any tangible material on the basis of which it may be hoped that the company would be able to promote the objects mentioned in the memorandum of association in the near future. Its conduct in not supplying any data asked for by the Regional Director of the Company Law Board is also a pointer in that direction. The fact that no data has been put forward at any stage after the assertion of the directors in respect of their hope that the company would be able to do business is an important aspect of the matter. In the absence of any such data it is difficult for this court to say that the circumstances show that the company would be able to run the business at a profit. It may be mentioned in this connection that there were recurring losses in the first few years. Even though there were nominal profits during the two years, they did some business by way of taking contract for supply of coal, and this by itself would not suggest that the company is now in a position or is likely to be in such a position in the near future to be able to run the business with profit. This stray business, which brought them a nominal profit, will not be the governing circumstance in a situation in which the company finds itself.
15. There is another consideration, which is relevant, and that is that the reserve and surplus of the company appear to be nil. It is stated by the directors that they are owners of certain collieries and having lost them on account of nationalisation of such collieries, they are free to devote themselves for the purpose of this company. This is an argument which cuts both ways, inasmuch as it will appear therefrom that the company will not be able to secure business relating to such collieries. The memorandum of association itself shows that one of the main objects of the company was to acquire or take over as a going concern any business of colliery. The object of the company cannot be promoted at least in this field in view of the nationalisation of such industry. In view of all these considerations aforesaid I find that the company is not in a position to be able to carry on business at a profit.
16. The circumstances, which I have enumerated above, therefore, justify the conclusion that the company deserves to be wound up. It will be relevant in this connection to refer to a few decisions of different courts which support the view which I have taken. In the case of D. Davis & Co. Ltd. v. Brunswick (Australia) Ltd. [1936] 6 Comp. Cas. 227 ; A.I.R. 1936 P.C. 114 their Lordships of the Judicial Committee said that although no general rule can be laid down as to the nature of the circumstances which have to be borne in mind whether the case comes within the " just and equitable " clause, " the decisive question must be the question whether at the date of the presentation of the wind-ing-up petition there is any reasonable hope that the object of trading at a profit, with a view to which the company is formed, can be attained." In the case of Cine Industries and Recording Co. Ltd., [1942] 12 Comp. Cas. 215, 224 ; A.I.R, 1942 Bom. 231 Chagla J. referred to the aforesaid quotation from the decision of the Privy Council, relied upon it, and ultimately observed as follows :
" Therefore on the authorities the position seems to be that the substratum of the company is deemed to be gone when, (a) the subject-matter of the company is gone ; or (b) the object for which it was incorporated has substantially failed ; or (c) it is impossible to carry on the business of the company except at a loss which has been construed by the Privy Council to mean that there is no reasonable hope that the object of trading at a profit can be attained ; or (d) the existing and probable assets are insufficient to meet the existing liabilities."
17. In the case of O. P. Basra v. Kaithal Cotton and General Mills Co. Ltd. [1961] 31 Comp. Cas. 461 ; A.I.R. 1962 Punj. 151. Tek Chand J. relied on the Bombay case aforesaid and adopted the tests laid down by Chagla J. In the case before the learned judge the company had done no active business of any kind till the date of the petition and the argument on behalf of the company was that failure to do so should be condoned. The learned judge on that point held :
" Where the past delay is sufficiently accounted for and where the court is satisfied that there is a likelihood of the business being resumed, it may not exercise its discretionary power against the company, but if the court is satisfied that no business has been or is likely to be commenced, it should pass an order for winding up of the company on the petition of the shareholders. Suspension of a business for a whole year is usually deemed as an indication of absence of intention to carry on the business unless suspension has been satisfactorily accounted for."
18. Learned counsel for the company has, however, placed reliance on a decision in the case of Malabar Iron and, Steel Works Ltd. v. Registrar of Companies, [1963] 33 Comp. Cas. 886, 1965 Ker. 35. In that case the contention before the learned judges was that the ground for winding up stated in the petition was not the same as the ground specified in the order granting sanction. I am not concerned with that aspect of the matter. The learned judges then considered the question of discretionary nature of the jurisdiction under Section 433 of the Companies Act. Reference was made in this connection to the case of Metropolitan Railway Warehousing Co. Ltd., [1867] 36 L.J. Ch. 827 as "a direct authority for the proposition that the provision does not make the fact that a company has not commenced its business within a year from its incorporation anything in the nature of evidence of an act which gives a vested right to say that the company shall be wound up ; and that the court will not exercise the discretionary power conferred on it to wind up a company which has not commenced its business within a year from its incorporation, where the past delay has been sufficiently accounted for, and there is no evidence of any improbability of its commencing its business within a reasonable time". In the circumstances of the case before them the learned judges felt that there was justification for giving the company an opportunity to carry on business and, therefore, sitting in appeal, they reversed the decision given ordering the winding up of the company. In another case of Muralidhar Roy v. Bengal Steamship Company Ltd., [1920] I.L.R. 47 Cal. 654 the object of the company, inter alia, was to carry on business as carriers by river. The company had a fleet of two flats and a steamer, but they were acquired by the Government during the war and that led to a suspension of the business. That was urged as a ground for winding up of the company. Their Lordships held that this did not prove that the objects of the company could not be fulfilled. The suspension of the business was satisfactorily accounted for as being beyond the control of the company. It may be mentioned that the aforesaid decision has no application to the facts of the instant case for the simple reason that I do not find any good explanation at all offered by the company for having suspended the business for a very very long time. Reverting to the Kerala case aforesaid it needs merely to be stated that it is well settled that the court is not bound to order winding up of a company in case of suspension of the business or non-commencement of the business. But upon the authority of the decision in the case of Metropolitan Railway Warehousing Co. Ltd., [1867] 36 L.J. Ch. 827 upon which reliance has been placed by the learned judges, delay has to be sufficiently accounted for. As held by Tek Chand J., the suspension itself is an indication of the fact that the company is not willing or not in a position to carry on the business. This presumption, which arises out of the suspension for a particular period, has to be rebutted by producing circumstances which would show that the business had been suspended on account of good reasons. The question of explaining delay, therefore, becomes important. The decision in the Kerala case cannot be taken to be a decision for the proposition that even in the absence of any explanation for the suspension of the business and even without considering whether the company is in a position to carry on business at a profit the court should refuse to order winding up. These cases are, therefore, of no avail to the opposite party.
19. In view of the settled law on the point and facts, to which I have been drawn attention, I am satisfied that the proper order in this case would be to wind up the company.
20. There is one more point which needs mention. The present application mentions the provision of law, under which it has been filed, as subsection (c) of Section 433 of the Companies Act. It does not mention subsection (f). During the course of arguments, therefore, learned counsel for the opposite party pointed out that the question whether it would be just and equitable to order winding up of the company does not arise in the present case. Learned counsel for the petitioner has, however, stated that it is the facts alleged in the case which would invite the proper provision of law and even though a wrong provision of law is mentioned in the heading portion of the application, it is still open to the court to apply a correct provision of law. This argument of learned counsel is well-founded. The court does not get jurisdiction in respect of the matter only because of the provision of law mentioned by the applicant. It is for the court to apply the correct provision of law even though there may be a mistake about it. If the facts in the present case show, as they do, and this court is satisfied that it would be just and equitable to order winding up the non-mention of the provision of law is, in my view, of no avail. Considering the entire circumstances of this case, therefore, I am satisfied that both the grounds mentioned in Clause (a) and Clause (f) of Section 433 of the Act are satisfied and applied.
21. In the result, I direct that the company shall be wound up with effect from the date of the petition for winding up. The official liquidator is appointed to be the liquidator of the company and he will take charge of all the assets and records of the company and proceed with the work of liquidation of the company. The petition is, therefore, allowed. In the circumstances of this case, however, there will be no order for costs.