Madhya Pradesh High Court
Kailash Prasad Mishra And Ors. vs Medwin Laboratory P. Ltd. And Ors. on 17 December, 1985
JUDGMENT Mulye, J.
1. This order shall govern the disposal of I. A. No. 1264 of 1985 which is filed on behalf of the petitioner under Section 450 of the Companies Act, 1956, for appointment of a provisional liquidator.
2. The petitioners have filed a petition under sections 433(f), 439(1)(c) and (6), 397, 398, 400, 402, 403 and 539 of the Companies Act, 1956, read with rule 95 of the Companies (Court) Rules, 1959, with a prayer to wind up the company.
3. The respondent company, M/s. Medwin Laboratory P. Ltd., was incorporated on December 21, 1977, under the Companies Act, 1956, as a private limited company of which the registered office is at Indore. The authorised share capital of the company is Rs. 5 lakhs divided into 5,000 equity shares of Rs. 100 each. The amount of the paid-up capital is Rs. 3,54,200 divided into 3,542 equity shares of Rs. 100 each. The objects for which the company was established are as under :
(1) To manufacture, refine, import, export, buy, sell and deal in drugs, medicinal, chemicals and pharmaceuticals and preparation of all kinds and all substances, apparatus and things capable of being used in connection with such products.
(2) To carry on business as chemists, drysalters, druggists and pharmacists in all their branches.
4. Besides the aforesaid main objects, there are 56 other objects incidental or ancillary to the main objects, as per memorandum and articles of association of the company.
5. In the said company, the petitioners hold 1,680 equity shares and the shares held by the respondents are 1,800. Respondent No. 2, Ram Chandra Joshi, is the executive director of the said company. Further, according to. the petitioner, because of serious differences between Shri Om Prakash Ameria, who was appointed as a managing director of the company, and respondent No. 2 with regard to the policy matters of the company, respondent No. 2 approached petitioner No. 5, Shri Ram Kuber Dubey, to purchase shares which were held by Shri Om Prakash Ameria and his associates. Accordingly, petitioner No. 5 purchased 1,440 shares which were split up as under :
(a) Ram Kumar Dubey 1,010 shares
(b) Mrs. Mithala Dubey, w/o Mr. R. K. Dubey 250 shares
(c) Kailash Prasad Mishra (Petitioner No. 1) 100 shares
(d) Sanjay Dubey, s/o Shri R. K. Dube (Petitioner No. 4) 70 shares
(e)Arvind Dubey, s/o Shri Beni Prasad Dube 10 shares
6. Thereafter, petitioner No. 5 purchased some additional shares and thus the petitioners' group are holders of 1,680 shares.
7. Petitioner No. 5, Ram Kuber Dube, was appointed as a director of the company by the board of directors by a resolution dated January 25, 1980. Thus, according to the petitioner, on that date, there were only two directors, namely, petitioner No. 5 and respondent No. 2. Respondent No. 2, being a local resident of Indore, continued to have all the powers and responsibilities to run the company, petitioner No. 5, being a resident of Bhopal. Further, according to the petitioners, respondent No. 2 acted in a manner which was highly detrimental to the interest of the company, the shareholders and the public at large. That by his overt acts, unfair and illegal activities, he has defrauded the shareholders as well as the financial institutions with a view to making profit for himself. That respondent No. 2 committed acts of commission and omission in his capacity as an officer of the company. That he flouted with impunity the trust reposed in him and misused his fiduciary capacity. This resulted in utter lack of confidence in the conduct and affairs of the management of the company, which has lost its capital and the business had come to a standstill with little chance of its resuscitation.
8. The petitioner in para 6 of his petition has quoted instances of the alleged delinquent acts of respondent No. 2 with the result that the company is heavily indebted and the entire capital has been lost and liabilities have piled up. That the respondent company obtained a loan of Rs. 5,10,000 from M. P. Financial Corporation and issued 500 new shares of the value of Rs. 50,000. But instead of utilising the funds obtained from the M. P. Financial Corporation and by issuance of these shares, respondent No. 2 himself appropriated large sums of money from the coffers of the company and committed many illegalities which imposed heavy liabilities on the company with the result that the working capital is almost extinct, the resources of the company are completely blocked and the business has come to a standstill. The accounts maintained by respondent No. 2 were found to be false by petitioner No. 4, Sanjai Dube, who was appointed as a manager of the company and the stock pledged is spurious. In short, the company is heavily indebted to the tune of Rs. 17,96,001, the details of which are as under:
Rs. P. (1) M. P. Financial Corporation loan and interest amount (secured loan) 6,29,139.60 (2) Loan taken from respondent No. 3--Bank of India (secured loan) 6,71,541.00 (3) Industries Centre, Indore 1,763.00 (4) Money due to creditors 98,055.85 (5) Money due to depositors 1,40,487.70 (6) Remuneration, wages and salaries due to directors, officers and employees (approximately) 1,00,000.00 (7) Sales tax dues 1,27,766.00 (8) Electricity charges due to MPEB up to October, 1984 24,747.75 (9) Unpaid telephone bills 3,600.00 Total 17,96,001.00
9. Thus, including the amount of Rs. 3,54,200 due to shareholders, the total liability conies to Rs. 21,50,201. Thus, the substratum of the company has gone, there is no production and the business has totally come to an end. Respondent No. 2 has directed the company's money for his personal benefit at the cost of the shareholders as mentioned below:
Rs.
Property purchased with money deposited in his personal account with State Bank of Indore 1,04,201.00 Navlakha Branch, Indore 25,351.00
10. For all these reasons, the petitioners have prayed that the company be wound up, an interim liquidator be appointed, that the shares held by respondent No. 2 be forfeited or annulled, assets belonging to the company which may be proved to have been removed or shifted by respondent No. 2 be restored to the company and respondent No. 2 be punished under Section 539 of the Companies Act for committing various criminal offences.
11. In reply to the show-cause notice of the main petition as also the application filed by the petitioners for appointment of a provisional liquidator, the respondents have denied the allegations as made by the petitioners. According to the respondents, petitioner No. 5 was serving till 1969 in National Pesticides, Vidisha, on a salary of Rs. 300 per month, but thereafter he managed to purchase the shares of the company by unscrupulous means by practising deception in collusion with his nephew, Sanjay Kumar Dube; that petitioner No. 5 was made one of the directors purely on account of the fact that as per the assurances held out by him, it was accepted that he would promote the business and interest of the company but the subsequent conduct and revelation of the true intention of the petitioners, however, crash landed these expectations. Further, according to these respondents, petitioner No. 5, though residing at Bhopal, was himself playing a prominent role in the conduct of the affairs of the company; that the State Bank had extended facility to the company in 1976 while the Bank of Baroda had extended the facility in 1978 whereafter the petitioners came into the picture in 1980. Thus, these respondents have also made serious allegations and levelled charges against the petitioners for their misconduct, instances of which have been quoted by them in the said reply. In short, they have totally denied the allegations made by the petitioners. Further, according to these respondents, who are majority shareholders, they are trying to revive the company and for this purpose have taken necessary steps to obtain restoration of the electric connection and that they hope to revive the company by bringing it to a profitable position within a couple of years. In fact, suits were filed by the M. P. Financial Corporation as also the Bank at the behest and instigation of petitioners Nos. 4 and 5, even though normally, these suits would not have been filed before 1989.
12. Learned counsel for the petitioners, after taking me through the documents which have been placed on record along with the petition, submitted that a bare perusal of these documents would indicate as to how respondent No. 2 has been acting against the interest of the company and has been indulging in selfish activities, has kept false and bogus accounts and admittedly, there being no production going on though heavy liabilities are piling up, it is necessary to appoint the provisional liquidator.
13. On the other hand, learned counsel for the respondents in support of the counter-allegations made by them submitted that the petitioners have not filed any rejoinder; that in fact it is because of the venomous attitude and activities of petitioner No. 5 that the company has reached the present state of affairs for which mainly and substantially the petitioners alone are responsible, though respondent No. 2 is trying his best to revive the company ; that within a period of one year, the respondent company hopes to start its production and thereafter earn some profits and, therefore, it is not necessary to appoint any provisional liquidator as no valid grounds are made out for such an appointment at this stage, especially when there are serious allegations and counter-allegations made by the parties against one another which are not admitted by either of the parties. Besides, the appointment of a provisional liquidator who would obviously be a stranger, as urged on behalf of the petitioners, would destroy the company and no useful purpose would be served.
14. After hearing learned counsel at length and after going through the material placed on record, I am of the opinion that it is not necessary to appoint a provisional liquidator at this stage. Appointment of a provisional liquidator is a drastic measure and should not be resorted to except in special circumstances. Both on authority and on principle, a provisional liquidator is not, in general, appointed before the hearing of the petition for winding up unless the company is shown to be insolvent or unless the petition is prosecuted by the company itself or shown to be unopposed. Before the court takes this drastic step, it must be satisfied that such an order is absolutely necessary. The appointment of a provisional liquidator for a company would in effect put a stop to the business though ultimately the court may refuse to wind up. A company may have liabilities exceeding its assets, but still may have in particular circumstances the capacity to meet demands from creditors, i.e., it may be in a position to meet its liabilities as and when they arise. In such circumstances a provisional liquidator should not be appointed. A provisional liquidator shall also not be appointed where the appointment is clearly against public interest.
15. In the present case, the petition is not filed by a creditor himself, but by a group of minority shareholders and it appears their apprehensions are that their investment as shareholders may not be lost, though at the hearing learned counsel for the respondents gave an offer that the respondents are ready to purchase the shares held by the petitioners to which learned counsel for the petitioners kept quiet. In what circumstances a provisional liquidator should be appointed have been laid down in a decision (Virendrasingh Motilal Bhandari v. Nandlal Bhandari and Sons P. Ltd. [1979] 49 Comp Cas 532 (MP)).
16. In Madhusudan Gordhandas and Co. v. Madhu Woollen Industries P. Lid. AIR 1971 SC 2600; [1972] 42 Comp Cas 125 (SC), it has been held that head note of AIR):
" In determining whether or not the substratum of the company has gone, the objects of the company and the case of the company on that question have to be looked into where the company alleges that with the proceeds of an intended sale of machinery it intends to enter into some other profitable business, the mere fact that the company has suffered trading losses will not destroy its substratum unless there is no reasonable prospect of it ever making a profit in the future and the court is reluctant to hold that it has no such prospect. "
17. This decision further holds that if the petition is filed out of improper motive to coerce the company in satisfying some groundless claims made against it by the petitioner, this material fact has to be taken into consideration in such petitions for winding up.
18. In the present case, the respondents have also taken the plea that the petitioners have filed this petition with an ill-motive to save their skin. The truth or otherwise of the allegations and counter-allegations is yet to be found out. Therefore, merely because the petitioners have made some allegations, in my opinion, on that basis alone the appointment of a provisional liquidator would not be proper (Virendrasingh Motilalji Bhandari v. Nandlal Bhandari and Sons P. Ltd, [1979] 49 Comp Cas 532 (MP) and Kilpset P. Ltd.v. Shekhar Mehra [1985J MPLJ 160; [1987] 62 Comp Cas 717 (MP).
19. The object of appointing a provisional liquidator is to ensure that there will be fair distribution of the assets of the company and that one creditor will not be permitted to benefit at the expense of the others. A provisional liquidator is not generally appointed before the hearing of the petition unless the company is shown to be insolvent. The dangers involved in appointing a provisional liquidator and then finding that there is no justification for making a winding-up order are obvious. The consequences to the company of the making of a wrong order in such a matter are far more serious than the granting of an injunction which has ultimately to be dissolved. The ground that as a particular project has been abandoned, or indefinitely postponed, the substratum of the company has gone or largely gone may perhaps be a ground for making a winding-up order, but it cannot possibly be a ground for appointing a provisional liquidator. Before the court takes such a drastic step as to appoint a provisional liquidator against the wishes of the company, the court must be satisfied that it is absolutely necessary to do so.
" It is perhaps convenient " , observed Sir John Romilly M.R., London, Hamburg and Continental Exchange Bank, In re: Emmerson's case, [1886] LR 2 Eq 231, 236 "that I should state what my practice is with reference to the appointment of provisional liquidators. Where there is no opposition to the winding-up, I appoint a provisional liquidator, as a matter of course, on the presentation of the petition. But where there is an opposition to it, I never do, because I might paralyse all the affairs of the company, and afterwards refuse to make the winding-up order at all. But when the directors themselves apply, or do not oppose the winding-up, then I appoint the provisional liquidator. "
20. Thus, considering the present state of affairs, I am of opinion that it is not just and equitable nor proper to appoint a provisional liquidator. However, learned counsel for the respondents submitted that the company hopes to start its production within a year from now and start making profits and also to liquidate its liabilities. He, therefore, submitted that the respondent company has no objection in submitting to this court the quarterly statement of accounts as also an interim report of the progress made by the company henceforth. Respondent No. 2 is, therefore, directed to give an undertaking to that effect within a period of three weeks from today. He is further directed to submit the quarterly statement of accounts of the company as also the progress made by the company in the matter of production and other activities and affairs of the company. The first quarterly statement shall be furnished by respondent No. 2 by March 31, 1986, and he shall so continue to furnish after every three months until further orders. Respondent No. 2 is also directed to keep a proper and detailed account of the affairs of the company. Respondent No. 2 shall within three weeks from today furnish a list of movable and immovable assets as also a list of liabilities of the company till this date. The respondents shall not alienate or in any way dispose of the movable or immovable assets of the company until further orders.
21. With these observations, the application, I.A. No. 1264 of 1985, is disposed of.