Madras High Court
S. Palaniappan And Ors. vs Tirupur Cotton Spinning And Weaving ... on 11 October, 2002
Equivalent citations: [2003]114COMPCAS288(MAD), [2004]50SCL293(MAD)
Author: P. Sathasivam
Bench: P. Sathasivam
JUDGMENT P. Sathasivam, J.
1. This company petition has been filed by the petitioners for winding up of the respondent-company, namely, Tirupur Cotton Spinning and Weaving Mills Ltd., Tirupur, under Section 433(c) and (f) read with Section 439(1)(c) of the Companies Act, 1956.
2. The case of the petitioners as set out in the petition is briefly stated here-under :
3. The respondent M/s. Tirupur Cotton and Spinning and Weaving Mills Ltd. was incorporated under the provisions of the Indian Companies Act, 1913, on February 9, 1954. The authorised capital of the company as on the date of filing of this petition is Rs. 1,00,00,000 consisting of 6,30,000 equity shares of Rs. 10 each; 20,000 equity shares of Rs. 100 each; 3,000 cumulative preference shares of Rs. 100 each ; 14,000 redeemable non-cumulative preference shares of Rs. 100 each redeemable at 14 per cent. The issued capital of the company is Rs. 69,00,000 consisting of 3,000 cumulative preference shares of Rs. 100 each; 10,000 equity shares of Rs. 100 each and 4,20,000 equity shares of Rs. 100 each. Subscribed, called and paid up capital is Rs. 62,71,700 consisting of 65 cumulative preference shares of Rs. 100 each, 14,000 redeemable non-cumulative preference shares of Rs. 100 each, 8,646 equity shares of Rs. 100 each, 14,00,000 equity shares of Rs. 10 each. The object and nature of business are fully set out in the memorandum of association of the company. At the time of incorporation, the company had an authorised capital of Rs. 25,00,000 divided into 23,000 equity shares of Rs. 100 each ; and 20,000 shares of Rs. 10 each. The original promoters of the company were seven in number and they held 431 shares. The first directors of the company were O.K. Muthusamy Mudaliar, O.K. Palaniappa Mudaliar, K.S. Murugappan and A. Mariappa Mudaliar. The company was carrying on business and has put up a unit of spinning and weaving of cotton at Tirupur. In or about 1968 the petitioners along with their father and grandmother decided to acquire substantial interest in the company since the existing promoters would not run the business profitably. The petitioners along with their father M. Shanmugam and grandmother N.R. Alamelu Achi negotiated with the then existing promoters and acquired substantial interest in the company by allotment of shares in their favour. On October 15, 1985, M. Shanmugam died. In the meanwhile the Sick Industrial Companies (Special Provisions) Act, 1985, was enacted. The affairs of the company were referred to the Board for Industrial and Financial Reconstruction (in short "BIFR") a body constituted under the said Act for purposes of developing a rehabilitation programme to revive sick companies. As per the said scheme, M. Shanmugam Chettiar and his group were required to bring in funds of Rs. 20 lakhs as equity. They were allotted equity shares worth Rs. 20 lakhs consisting of 2,00,000 equity shares of Rs. 10 each. The BIFR had also sanctioned the scheme of revival, appointing a nominee director on the board of the company. At that time the petitioners were holding approximately 25 per cent, shares in the company. During August 2001, on enquiry, the petitioners came to understand that Shanmugam Chettiar and his group had entered into an agreement for sale of their shares to a third party, namely, R. Gurusamy and his nominees. They also came to understand that the company was proposing to hold an extraordinary general meeting on September 10, 2001. The company has taken a decision to sell all its assets. The resolution to sell the assets of the company and issue of 11, 359 equity shares of Rs. 100 each and 2,30,000 equity shares of Rs. 10 each have been proposed with fraudulent intention in order to enable the board of directors to make secret profits by sale of the valuable assets of the company. No funds have been brought to the account of the company. On the other hand, the funds have been diverted from the company. The book entries have not benefited the company in any way. Further, the issue of shares is an act of the shareholders of the company as well as the company. The board of directors of the company have indulged in acts of fraud, hence having no other effective alternative remedy, filed the present company petition. The persons in control of the affairs of the company are carrying on business in fraud. They are wrong-doers. The entire substratum of the company has gone. In the circumstances, the company has become liable to be wound up on the ground that it is just and equitable.
4. The managing director and director of respondent-company have filed separate but identical counter statements. For convenience I shall refer to the counter statement of the managing director of the respondent-company. The respondent-company is a profit making concern and has no intention of closing down its business and there is no loss of substratum of the respondent-company. The respondent is an old well-established company. The respondent was incorporated in 1954 and has been in existence for nearly 50 years. The petitioners and other family members were in management and control of the respondent-company for nearly 20 years from 1968 to 1989. During this period the petitioner extensively mismanaged the respondent-company. Criminal prosecutions were launched against the petitioners and their families by the provident fund authorities. The company incurred huge losses and borrowed large sums of money. Due to this extensive mismanagement/ the respondent-company became a sick industrial company and a reference was made to the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985. The petitioners did not make any serious efforts to revive or rehabilitate the respondent-company even before the BIFR. The BIFR after consluta-tion with the financial institutions and the creditors of the company, by order dated February 14, 1990, sanctioned a revival scheme for the respondent-company. The scheme envisaged that the company would wipe out its accumulated losses by 1995-96 and achieve positive net worth by 1996-97. The BIFR reviewed and modified the scheme on July 9, 1996. The modified scheme envisaged inter alia clearance of over dues of Rs. 169 lakhs. The BIFR found that the company had cleared the term dues of IDBI, IIBI, and State Bank of Tra-vancore. The company had also cleared all the statutory and workers' dues and was in the process of selling the surplus land as envisaged in the scheme. The BIFR noted that the company had earned a profit of Rs. 122 lakhs during the 18 months ending on September 30, 2000. The profits included Rs. 49.32 lakhs on sale of assets (including surplus land). The company had thus totally wiped out its accumulated losses and its net worth had become positive by Rs. 77 lakhs. The BIFR ultimately was satisfied that the company had ceased to be a sick industrial company. The BIFR therefore closed the case. At this juncture, the petitioners instead of appreciating the hardships overcome by the company have sought to wind up the company. Some time after the order of the BIFR, the company experienced severe labour unrest. The board of directors of the respondent-company then decided to stop production in spin-
ning yarn. The board decided to diversify into other activities such as knitting of yarn since kintting was less labour intensive and more profitable. The board inducted Mr. Gurusamy as an additional director since he was already running a knitting business. The said Gurusamy invested about Rs. 3.97 crores into the respondent-company from his other concerns. These amounts were utilised for the settlement of the staff and workers and for partial repayment of the amounts due by the respondent-company to the State Bank of Travan-core. In addition to this investment, Mr. Gurusamy also purchased 3,55,600 equity shares from the old management Sri Shanmugam Chettiar, his wife and his son Krishnakumar. Mr. Gurusamy and his family members now hold more than 80 per cent of the share capital of the respondent-company while the petitioners hold only about 5 per cent. The petitioners who were responsible for the sickness never evinced any interest in the revival of the respondent-company. The resolutions have not been proposed with any fraudulent intent or with a view to make secret profits. The resolutions were carried with the requisite majority. The allotment of shares of Rs. 20,00,000 was made with the knowledge of and in pursuance of the orders of the BIFR. The Companies Act itself empowers the board to appoint additional directors and the managing director. The petitioners have alternate remedies in the Companies Act and under general law to ventilate their grievances. They have however failed to do so but are seeking the extreme step of winding up of the company.
5. In the light of the above pleadings, I have heard Mr. H. Karthik Seshadri, learned counsel for the petitioners and Mr. V. Ramakrishnan, learned counsel for the respondent-company.
6. The points for consideration are : (1) Whether the petitioners have alternative remedies and, if so, is the company petition maintainable ? and (2) Whether the petitioners have made out a case for winding up of the respondent-company ?
7. Regarding the first contention, there is no dispute that the petitioners have filed the petition for winding up under Section 433(c) and (f) of the Companies Act. Section 433(c) reads thus :
"433. A company may be wound up by the court-- . . . (c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year ;"
8. I have already referred to the fact that the company was incorporated in 1954. As rightly contended by the respondent, it is not the case of the petitioners that the respondent-company has not commenced and carried on business within one year of its incorporation. In such a circumstance, the first limb of Section 433(c) does not apply to this case. As regards the second limb, it is clear that the requirement of law is that the company should suspend its business for a whole year. In other words, suspension for a period less than one year is not enough. Here again, as rightly stated, the petitioners have not even pleaded anywhere in the petition or in the affidavit that the respondent suspended its business for one whole year. In such circumstances, in the absence of specific pleadings and materials to show that the respondent has suspended its business for one year, I hold that this petition is not maintainable under Section 433(c) of the Act.
9. Now coming to the other provision, namely, Section 433(f), it runs as follows :
"(f) if the court is of opinion that it is just and equitable that the company should be wound up,"
10. The courts have held that a winding up petition is a remedy of last resort. Under Section 443(2) where the petition is presented on the ground that it is just and equitable that the company should be wound up, the court would not make any order for winding up if alternate remedies have not been availed of by the petitioners. In the counter statement it is specifically pleaded that the petitioners have alternative remedy under Sections 397, 398 and 408 of the Companies Act as well as other remedy by way of filing a civil suit. Learned counsel for the petitioners would contend that after the allotment of shares to Shanmugam Chettiar and his group after the order of the, BIFR in 1990, they held about 5 per cent, shares alone. According to him, under Section 399 of the Companies Act, for the petitioners to avail of the remedy of the Company Law Board, they will have to hold more than 10 per cent. Further, it is contended that inasmuch as the petitioners have committed the alleged act of fraud and the same is opposed to various classes of shareholders, the relief of winding up would be just and equitable remedy.
11. Before considering the above question, it is relevant to refer to Section 443(2) of the Act:
"443(2)... 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."
12. It is clear from the above provision that winding up is sought for in respect of a company on the ground that it is just and equitable, if the court 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 company court may refuse to make an order of winding up. The other remedy provided under Chapter VI is to present an application to the Company Law Board for relief in cases of oppression and mismanagement. There is no dispute that Sections 397 and 398 enable the aggrieved persons to approach the Company Law Board to ventilate their grievances. Section 402 of the Act provides matters to be considered by the Company Law Board on application under Sections 397 and 398 of the Act.
13. No doubt the right to apply under Sections 397 and 398 is subject to Section 399 of the Act. It is seen that persons to avail of the remedy of the Company Law Board will have to hold more than 10 per cent, of share capital. In this regard, it is relevant to refer to the admission of the petitioners in para. 9 of their company petition wherein it is stated that, ". . . The petitioners were holding approximately 25 per cent, shares in the company. . .". If this contention is correct, there is no reason why the petitioners cannot approach the Company Law Board under Section 399 of the Act. Further, even if the petitioners hold less than 10 per cent, they can approach the Central Government for permission to file the petition with the Company Law Board--(vide Section 399(1)(a) or obtain consent from other members under Section 399(3) of the Act). As rightly contended, absolutely there is nothing on record to show that the petitioners had approached the Central Government for permission and such permission was rejected. It is also not disputed that in any event the remedy of a civil suit is always available to the petitioners.
14. Now I shall consider decisions relating to just and equitable ground as found in Section 397 and the availability of alternative remedy under Sections 397 and 398. In Hind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91, the Supreme Court has held as follows (pages 106 and 107) :
"Section 433(f) under which this application has been made has to be read with Section 443(2) of the Act. Under the latter provision 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.
Again, under Sections 397 and 398 of the Act there are preventive provisions in the Act as a safeguard against oppression in management. These provisions also indicate that relief under Section 433(f) based on the just and equitable clause is in the nature of a last resort when other remedies are not efficacious enough to protect the general interests of the company . . .
It is not a proper principle to encourage hasty petitions of this nature without first attempting to sort out the dispute and controversy between the members in the domestic forum in conformity with the articles of association. There must be materials to show when 'just and equitable' clause is invoked, that it is just and equitable not only to the persons applying for winding up but also to the company and to all its shareholders. The company court will have to keep in mind the position of the company as a whole and the interests of the shareholders and see that they do not suffer in a fight for power that ensues between two groups."
15. In Daulat Makanmal luthria v. Solitaire Hotels Pvt. Ltd. [1993] 76 Comp Cas 215, the Bombay High Court (Panaji Bench, Goa) has held that (p. 239) :
"The scheme of the Companies Act particularly after its amendment in 1956, would make one thing clear: A winding up has to be resorted to only when other means of healing an ailing company are of absolutely no avail. Remedies are provided by the statute in very many matters concerning the management and running of a company. A special forum itself has been created, and with an expertise and daily experience in relation to the problems in the working of the companies--the Company Law Board. It now adjudicates many such disputes which come before it as provided under the law. The Registrar of Companies has got an overseeing authority in relation to enumerated matters. These safeguards are visualised for the protection of the individual shareholder, who in the scheme of things, may not be in a position to have a close view of the working of the company and many of its deals. The important right of the majority of the shareholders to replace a group mis-managing its affairs or lacking in probity is always there. Experience, has, however shown that the majority could be manipulated by those with ideas in mind and money to back. Sections 397 and 398 confer valuable rights even on the minority to seek the aid of a vigilant court in redressing their grievances. If pursued properly and effectively, many of the misdeeds of an erring or dishonest management could be checkmated and/or remedied by resort to such proceedings. This scheme of the Companies Act lies at the bottom of evaluation of the principles which insist on keeping at bay a winding up process, except in very compelling circumstances".
16. In Suresh Kumar Bansal v. U.P. Mineral Products Ltd. [1996] 87 Comp Cas 223, the Delhi High Court held that (p. 225) :
"For these grounds of oppression and mismanagement, alternative remedy is available. Resorting to this extreme remedy of winding up, to my mind, is not necessary. It is only when there is no practical possibility of remedying the mismanagement that it becomes a proper case for winding up on the just and equitable ground. Doing of an unauthorised business and entering into ultra vires transactions will not furnish a just and equitable ground for an order of winding up. Reference can be had to the decision of the Supreme Court in the case of Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp Cas 543 as well as to the judgment of the Division Bench of this court in Bhaskar Stoneware Pipes Pvt. Ltd. v. Rajinder Nath Bhaskar [1988] 63 Comp Cas 184. On the ground of reduction of the share capital, mismanagement and oppression, the petitioners can invoke the jurisdiction of the Company Law Board under Section 397 and can file civil suit for seeking relief. To my mind, the remedy of winding up is not the answer, and, therefore, the petition as such is not maintainable under Section 433(f) of the Act."
17. In the winding up petition, the petitioners have mainly pleaded three grounds for winding up the respondent-company, namely, loss of substratum, fraud by sale of assets, fraud of issuing further shares to Shanmugam Chettiar and his group. In such circumstance, as rightly observed in the above decisions, I am of the firm view that the petitioners can very well invoke the jurisdiction of the Company Law Board under Section 397 of the Act or can file civil suit for seeking relief. In the light of the scheme of the Companies Act, particularly after its amendment, I am of the view that a winding up has to be resorted to only when other means of healing an ailing company are of absolutely no avail. Considering similar situations, a special forum itself has been created, and with an expertise and daily experience in relation to the problems in the working of the companies, that is, the Company Law Board, if the said forum is pursued properly and effectively, many of the misdeeds of an erring or dishonest management could be checkmated and/or remedied by resort to such proceedings. It is also not proper to encourage petition for winding up of company without first attempting to sort out the dispute and controversy between the members in the domestic forum. As observed by the Supreme Court in Hind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 whenever "just and equitable" clause is invoked, that it is just and equitable not only to the persons applying for winding up but also to the company and to all its shareholders. Considering all the above aspects, I accept the objection raised by the respondent that the petitioners have effective alternative remedy under Sections 397 and 398 of the Companies Act, accordingly I hold that the present petition for winding up of the respondent-company is not maintainable and is liable to be dismissed. Though both parties have raised several contentions with supporting documents and judicial decisions to substantiate their respective claims, in view of my above conclusion, I am of the view that it is unnecessary to consider the same.
18. In the light of what is stated above, the company petition is dismissed with liberty to the petitioners to avail of the alternative remedy provided under the Companies Act to ventilate their grievances. No costs. Consequently, Company Application No. 1306 of 2001 is closed.