Kerala High Court
Kerala State Industrial Development ... vs Poonmudi Tea Pack Ltd. on 30 July, 1987
JUDGMENT S. Padmanabhan, J.
1. The Kerala State Industrial Development Corporation Ltd. (for short "the KSIDC") is the petitioner and the prayer is under Section 433 of the Companies Act, 1956, to wind up the respondent, Poonmudi Tea Pack Ltd. (for short " the company ").
2. The company was incorporated under the Companies Act as a public company limited by shares, on September 29, 1981, to carry on the business of manufacturers, blenders, processors and packers of tea in tea bags and other packets and other containers and to buy, seal, deal in and export all kinds of tea and tea products. One Shri K. T. Thomas approached the KSIDC with a proposal and KSIDC agreed to associate with him. Exhibit P-1, promotional agreement, was executed on November 14, 1979.
Cost of the project was estimated at Rs. 60 lakhs out of which Rs. 20 lakhs was to be, met by way of share capital and Rs. 35 lakhs to be raised by way of term loans and the balance by subsidy from Government. The equity share capital in the company to be promoted was KSIDC 26 per cent., the joint promoter, K. T. Thomas, 25 per cent. and the balance by public and financial institutions. The agreement provided that the nominee of K.T. Thomas should be the managing director and K.T. Thomas is not liable to retire.
3. K.T. Thomas was appointed as managing director. He nominated two directors in the board and the KSIDC nominated three as provided in the agreement. Towards its share of equity participation, KSIDC was to contribute for shares of Rs. 6.5 lakhs. Out of this, Rs. 2,80,000 was paid and 28,000 shares allotted. The agreement Was that further contribution towards share capital by KSIDC would be only after the share capital intended for the public is agreed to be underwritten by brokers, financing institutions or banks and till then all expenditure should be met by K. T. Thomas. K. T. Thomas claims to have contributed Rs. 4.82 lakhs, the whole of which was entered in the accounts as having been expended.
4. The project was to be completed and commercial production started by April, 1982. K.T. Thomas was not keeping up his promises and not taking effective steps to implement the project. He approached several banks and other financial institutions for term loans of Rs. 30 lakhs. All of them turned down the request on account of his antecedents. Now, it has become impossible to obtain finance to implement the project. Due to delay, the cost of the project far exceeded the estimate. The overrun in capital cost rendered the project unworkable and impossible. Report of the auditors for the year ended on April 30, 1984, revealed several irregularities and mismanagement. Though different alternatives were suggested, K.T. Thomas was not taking any effective steps to improve the situation. For these and other reasons, KSIDC lost confidence and filed this petition for winding up on the allegation that it is the only course now open. The petition was filed under Section 433(c) and (f) of the Companies Act.
5. On behalf of the respondent, the managing director, K. T. Thomas, in his counter and during arguments admitted that it became difficult to get term loans and implement the project, but contended that it was due to the lack of co-operation from the KSIDC. It is said that the petition for winding up is a drastic step which ought to have been resorted to only after attempting all other available steps in order to avoid winding up. It was argued that, being a joint promoter and contributor, KSIDC had the duty to take steps for implementing the project and their obligation is there in the provisions of exhibit P-1 also.
6. Now, we are only at the stage of admitting the winding-up petition in order to decide whether the advertisement should be made. Hearing given to the company under Rule 96 of the Companies (Court) Rules, 1959, is not for the purpose of deciding the manner of advertisement under Rules 24 and 25 but for deciding whether the advertisement should be made at all and the petition proceeded with. The question of advertisement and directions regarding advertisement will arise only when the court makes up its mind to admit the petition and proceed with the same. Especially when the petition is filed by a contributory, as in this case, it is the duty of this court before admitting the winding-up petition, to satisfy itself that there are prima facie grounds for winding up. Now, it is well settled that even after the court has admitted a winding-up petition, it can, on being moved for that purpose by the company or some other interested person, stay the proceedings and revoke the admission if it is so satisfied. It is true that such a situation has not arisen and no petition for stay was filed. Though a company could be wound up for reasons enumerated in Clauses (a) to (f) of Section 433, this petition is only under the just and equitable clause in Section 433(f) as well as under Section 433(c). Under Section 433(c), if the company does not commence its business within a year of its incorporation, or suspends its business for a whole year, that will be a ground for initiating winding up proceedings. Especially, in such a case, there is all the more reason for the court to be overcautious to find, on the allegations in the petition and the materials placed before it, that there are prima facie grounds. Even admission of a petition which will lead to advertisement of the winding-up proceedings is likely to cause serious injury to the company, if ultimately the application has to be dismissed. It will result in loss of reputation to the company and its credibility in the eyes of the public will be lost resulting in loss of business also. The interest of the applicant alone is not the predominant consideration. The interest of the shareholders of the company as a whole and other interests also will have to enter the area of judicial satisfaction before giving a verdict on the question of admission. The cause shown by the company will have to be carefully analysed along with the materials available and the allegations in the petition before deciding on the question of admission and issuing the advertisement. (See National Conduits P. Ltd. v. S. S. Arora [1967] 37 Comp Cas 786 (SC), George v. Alhimaltam Rubber Co. Ltd, [1965] 35 Comp Cas 17 (Ker) and Rind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwalla, [1976] 46 Comp Cas 91 (SC).
7. Under Section 439(c) of the Companies Act, 1956, a contributory is also one of the eligible categories of persons entitled to file a petition under Section 433 for winding up. English law does not allow winding up by or at the instance of a shareholder. A contributory is a person who is liable to contribute to the amount unpaid on his shares in a limited liability company in the case of that company being wound up. Though the Indian law allows winding up at the instance of a contributory or contributories, it should be only as a last resort and for compelling reasons. Otherwise, the provision would operate as an instrument, in possible cases, of harassment and even blackmail. A contributory who is also a joint promoter is having the added moral and legal responsibility to see that the company is alive and it is brought up properly to serve the interest of the shareholders and the public having dealings with it. Once a petition is advertised, the business of the company is bound to suffer serious loss and injury. A proceeding for winding up under the " just and equitable " clause, under which a variety of grounds could be taken up, should be in the nature of a last resort when other remedies provided under the Companies Act are found not efficacious enough to protect the general interests of the company and meet the situation. A hasty petition without attempting to sort out the dispute and controversy in the domestic forum provided under the articles will have to be discouraged to the extent possible. Just and equitable grounds must be just and equitable not only to the petitioner but also to the company and all its share-holders. Principles of winding up cannot be liberally invoked. It is the duty of the company court to see that in a fight between groups for winding up, the interest of the company as a whole and that of the shareholders are not sacrificed. When there is a complete deadlock in the company due to lack of probity in the management and there is absolutely no possibility of smooth and efficient continuance, winding up may be justified. The factors to be considered may vary from case to case depending upon facts. If the allegation in the petition and the materials placed before the court, when taken along with the objection of the company, show that there is no possibility of revival of the company, then it will be a good ground on which the petition could be admitted and advertised.
8. It is true that mismanagement by itself may not operate as a good ground for winding up because Section 284 provides for removal of directors. That is a step which could be adopted in such cases. Section 397 provides for application to court for relief in cases of oppression and Section 398 provides for a similar relief in cases of mismanagement. These and others are procedures short of winding up. Winding up means that the concern is lost once and for all. But these aspects along with other items are valuable considerations in a winding-up petition.
9. Bearing these principles in mind, let us examine whether there are prima facie grounds for admitting and advertising the petition. I do not think that as argued on behalf of the respondent, a question of promissory estoppel as laid down in Gujarat Financial Corporation v. Lotus Hotels Pvt. Ltd, [1983] II SCWR 144; AIR 1983 SC 848, has arisen in this case. It was K. T. Thomas who approached the KSIDC with the proposal and KSIDC only agreed to associate with him because it is bound to do so. KSIDC is established and it is existing for the purpose of promoting and developing industries. The initiative came from K. T. Thomas and the KSIDC was only discharging its duty while co-operating with him to promote the company. There is no question of K. T. Thomas or the company acting on any solemn promise made by the KSIDC and incurring huge expenditure and putting themselves in a disadvantageous position, thereby making applicable the principle of promissory estoppel. Everything was the creation of K. T. Thomas. For his inaction and mismanagement which made the implementation of the project and working of the company difficult, he cannot blame anybody else.
10. The company was incorporated on September 29, 1981. It is not disputed that KSIDC contributed Rs. 2.8 lakhs but the entire amount has been expended. Report of the auditors show various items of mismanagement including the purchase of a building in the possession of somebody else. The purchase was for a huge amount but what is involved is only leasehold right. The project had to be completed and commercial production started in April, 1982. So far nothing could be done and the company was not able to start its business. This is evidently a valid ground under Section 433(c). Therefore, no question of loss of business on account of advertisement or loss of reputation will also arise. It is not disputed that the project estimate has gone much higher/Admittedly, the company or K. T. Thomas was not able to find funds so far to any extent and the contention is that funds could be found only with the cooperation of the KSIDC. KSIDC says that it has lost all confidence in K.T. Thomas and the company and there is no possibility of the company functioning by finding funds. These facts are not in serious dispute. The situation that various banks and other financial institutions refused to advance term loans on account of the antecedents of K. T. Thomas is a fact more or less established in the case. KSIDC is apprehensive in these circumstances. The apprehension cannot be said to be unreasonable, and the fact remains that even with the wholehearted co-operation of the KSIDC and by a change of management also, the position of the company cannot be revived. Under such circumstances, it may not be proper exercise of discretion to direct the KSIDC to take steps other than winding up, That will be putting the instrumentality of the State in a pitiable predicament at its expense and reputation. There is nothing to show that any change in the managing director or the board of directors will have any favourable effect. In such a background, it cannot be said that there is no prima facie ground for admitting and advertising the petition. There is nothing to show that any other method short of winding up is available to save the company or revive the same. There is no valid ground made out justifying dismissal of the petition at this stage.
11. The petition is, therefore, admitted and ordered to be posted for hearing after being duly advertised in Form No. 5 as provided in Rules 24 and 25 of the Companies (Court) Rules, 1959, in the Kerala Government Gazette as well as Indian Express, Cochin edition, and Mathrubhoomi, dailies, at the expense of the petitioner (KSIDC). The advertisement will have to be made not less than 14 days prior to the date fixed for hearing. Date of hearing is fixed as October 26, 1987.