Andhra HC (Pre-Telangana)
Krishnamsetty Basav Rao And Anr. vs Kobashi Machine Tools (P.) Ltd. And Ors. on 21 April, 2005
Equivalent citations: IV(2005)BC324, [2005]126COMPCAS426(AP), [2005]64SCL299(AP)
JUDGMENT S. Ananda Reddy, J.
1. This company petition is filed by the petitioners under Section 433(f), read with Section 439(1)(c) and (3) of the Companies Act, 1956 praying :
(a) That M/s. Kobashi Machine Tools Private Limited, respondent-company be wound up under the orders and directions of this hon'ble court and the official liquidator attached to this hon'ble court be appointed as liquidator of the company with its affairs, properties, books of account, vouchers, papers, etc., with all powers under Section 457 of the Companies Act, 1956 ;
(b) That pending the hearing and disposal of the petition, the official liquidator be appointed as provisional liquidator of the company under Section 450 of the Companies Act, 1956 with all powers, under the provisions of the Companies Act, 1956 ;
(c) That the cost of this petition and of the order to be made thereon be provided for.
2. It is stated that the first respondent-company--Kobashi Machine Tools Private Limited, (for short "the company") was incorporated in the State of A.P. under the provisions of the Companies Act, 1956 (hereinafter referred to as "the Act") on April 29, 1986, as a private limited company limited by shares. The registered office of the first respondent-company is at Plot No. 61/C, Road No. 15, Phase-I, Industrial Development Area (IDA), Jeedimetla, Hyderabad. The authorised capital of the first respondent-company is Rs. 1,00,00,000 (rupees one crore only) divided into 10,00,000 equity shares of Rs. 10 each. The issued, subscribed and paid up capital of the company is Rs. 1,00,00,000. All the shares of the company are held equally by two family groups--one represented by the first petitioner and the other represented by the second respondent.
3. The main objects of the company, as mentioned in the memorandum of association are (1) to manufacture and deal in all types of machine tools, testing equipment, measuring instruments, jigs, fixtures, components, accessories, sub-assemblies, etc., and other work-shop machine tools of every kind ; (2) to carry on the business of manufacturing, designing, dealing in or importing and exporting of all kinds of tools, including boring heads, tool posts, vices, mandrels, precision tools, pneumatic tools, hydraulic elements, gauges, surface plates, angle plates, straight edges, rotary tables, dividing heads and other precision equipment, devices for mechanical, electrical and hydraulic applications and operations. It is stated that the first petitioner and the second petitioner are the promoters of the company and they are first and permanent directors of the company, holding equal number of shares in the company from the beginning. It is also stated that the first petitioner along with the second petitioner is holding 5,00,000 equity shares of Rs. 10 each ; while the second and third respondents are holding the remaining 5,00,000 equity shares of Rs. 10 each. It is further stated that the second petitioner and the fourth respondent have been co-opted as additional directors from April 1, 2001, and they were appointed as directors in the annual general meeting, dated September 29, 2001, and they have been continuing as directors of the company since then. It is further stated that one E.S. Raghavan was associated with the company from its inception and was receiving remuneration for his services. He was co-opted as director of the company with effect from April 1, 2000, by a resolution of the board of directors of the company, dated April 10, 2000. However, the second respondent did not agree for his continuance as a director of the company. Therefore, he was appointed as vice-president of the company by resolution of the board of directors dated April 11, 2002. It is stated that after the company was incorporated, it has set up its unit at Praga Tools Ancillary Estates at Bangalore in 1986 and started manufacturing components and sub-assemblies required for Praga Tools Ltd., as its ancillary. Later, after installation of CNC (computer numerically controlled) machinery, it has started manufacturing high precision and critical components for Aeronautical Development Agency and Gas Turbine Research Establishment at Bangalore, Liquid Propulsion Systems Centre and Vikram Sarabhai Space Centre at Trivandram, Defence Research Development Laboratory, Defence Metallurgical Research Laboratory and Bharat Dynamics Limited at Hyderabad, Indian Air Force Station at Kanpur, Ordnance Factory at Bhanur etc. Over the years, the company earned a name for itself and has been widely regarded as a leading manufacturer of high precision and critical components and sub-assemblies required for Defence, Aerospace and Aeronautical applications, and "Kobashi" became synonymous in its line of activity and has become popular. The company also received many awards, appreciations, and mementos from its customers. The turnover of the company in the year ended by March 31, 2001, was about Rs. 1,72,00,000 and for the year ending with March 31, 2002, was about Rs. 3,70,00,000. It is further stated that in 2001 M/s. Pratt and Whitney (a division of M/s. United Technologies Corporation), a major American Aero-engine company, showed interest to outsource components from the company and several representatives and technical teams of the American company came to the company and when an understanding was reached between the first respondent and the said M/s. Pratt and Whitney, a Standard Supplier Agreement was signed by the first petitioner on behalf of the company during November 2001.
4. While so, it is stated that the second respondent was not co-operating with the petitioners and did not allow the board meeting to be conducted on various occasions, even though the petitioner had proposed and sent notices to the second respondent. As a result of the non-co-operation of the second respondent, no resolution could be passed even to reappoint M/s. Nataraja Iyer and Co., as statutory auditors of the company and therefore, the accounts could not be finalised and even the salaries of the employees and the workmen were also not paid. It is further stated that the second respondent, with an oblique motive to carry on similar business as that of the first respondent, registered a company in the name of M/s. Kobashi Aerospace Manufacturing Technologies Private Limited on August 2, 2000, with the objects almost identical to that of the first respondent. It is also stated that the registration of another company was not within the knowledge of the petitioners and therefore, the petitioners were constrained to approach the regional director under the provisions of the Act objecting to the registration of the said company and also using the name of "Kobashi" as part in the name of the new company registered. It is also stated that the second respondent had opposed the appointment of Mr. E.S. Raghavan as a director of the company, and therefore, he was appointed as a vice-president of the company, even though the said Raghavan was associated with the company as an ex-employee of the Praga Tools, like the first petitioner and the second respondent. It is further stated that the objection taken by the petitioners as to the registration of the company by the second respondent identically as that of the first respondent was vindicated by the order of the regional director, where the registration granted in favour of the company of the second respondent was suspended, which is the subject-matter of writ petition before this court in W. P. No. 22475 of 2003. It is further stated that the second respondent co-opted some of his relatives as additional directors without intimating the same to the petitioners, which the petitioners came to know only from the office of the Registrar of Companies, and obtained a resolution in favour of the second respondent's new company consenting for the registration as to the name of the new company. It is stated that in view of the non-co-operation of the second respondent in conducting the board meeting for approving the annual accounts for the year ending with March 31, 2002, and also in carrying out other business of the board of directors, the affairs of the company had become stand still, and there is a deadlock in running of the company leading to non-holding of the annual general meeting for the last two years, i.e., 2002 and 2003 and the board meetings since last week of September, 2002. All efforts of the petitioners for reconciliation between the parties have failed and there is no hope for continuing the business of the petitioners with the respondents. Therefore, the petitioners were constrained to approach this court for an order of winding up of respondent No. 1-company on just and equitable grounds.
5. A counter is filed by respondents Nos. 2, 3 and 4 disputing and denying the allegations made by the petitioners in the company petition. According to the respondents, the petitioners illegally filed the present petition, even though no grounds do exists for an order of winding up on just and equitable grounds. The petitioners are trying to abuse the process of law and are intending to use the jurisdiction of this court to have their disputes with the respondents settled, which is evident from the various averments made in the petition. It is stated that the induction of Mr. E.S. Raghavan, as a director of the company with effect from April 1, 2000 is a creation by the petitioners themselves to gain control over the affairs of the company and tilt the balance in their favour and accordingly their intention was to take further steps to ensure they got majority in the board and thereby get additional shares allotted to them and divest the respondents particularly the second respondent, who is the chief architect of the company. It is admitted that the shares are held by two family groups--the petitioners and the second respondent. But, it is not known how the petitioners can claim that a person, who is not a shareholder can become a director in such a company. It is stated that the said E. S. Raghavan is a natural brother of Mr. E. S. Ranganath, statutory auditor of the company. The appointment of such a person is contrary to the conduct rules of the Institute of Chartered Accountants of India, and it goes against the principles of transparency. Therefore, the respondents have objected for being inducting of Mr. Raghavan, as a director. In fact, according to these respondents, the fact of appointing Mr. Raghavan, as a director came to be known to them only when they have approached the Registrar of Companies for verification of the records. It is stated that the petitioners were looking after the administration of the company, such as conducting annual general meetings, meetings of the board of directors and also having control over the books of account, cheque books, etc. The respondent has been signing all the documents as and when they were put up by the petitioners without looking into those papers deeply. But, however, the respondents came to know the oblique motive and attitude of the petitioners and therefore, when a proposal was sent for holding the annual general meeting, the respondents sought time as well as for the supply of all the relevant documents. The petitioner instead of re-fixing a date for holding the meeting and supplying the relevant documents sought for by the respondents, did not respond at all and no further proposals were sent for holding the annual general meeting. It is also stated that there is a lot of correspondence between the petitioner and the respondents, where the misconduct of the affairs by the petitioners were brought to light, and it was also made clear that the petitioners are in the custody of the records, minutes books, cheque books, common seal, etc. It is further stated that though a loan was granted in favour of Mr. E.S. Raghavan, in spite of repeated requests made by the respondents for recovery of the outstanding loan amount from the said Raghavan, the petitioners did not take any steps. Further, because of the attitude of the petitioners in non-conducting the meetings, the business of the company has come to a stand still, in addition to resulting in non-payment of salaries to the employees and the workmen. It is also stated that the petitioners have not been attending to look after the business of the company. They used to attend only to show their presence and used to spend a while in the administrative block and that too for the purpose of making strategies to obstruct the company from running properly and to create hassles to the respondents, who were deeply involved in procurement of orders and meeting the production deadlines and manufacturing commitments. It is stated that the first petitioner was assigned to look after the administration, not knowing that he will one day take undue advantage of his position, and damage the interest of the respondents, particularly the second respondent, who has devoted and who has been devoting all his time to procure orders, meet the commitments and enable the company to earn more and more revenue. It is stated that because of the sincere efforts of the second respondent, the company became monopoly in certain defence products, and on the other hand, the petitioners, after having failed in their attempt to grab the company, have decided to kill the commercially solvent respondent No. 1-company, and take more than what they deserve out of the company by applying pressure tactics, thereby causing not only loss to the company but also to the respondents, apart from denying the employment to the workers and employees, and also causing national loss by keeping idle the production machinery, which is producing critical and key-components, which are required to Defence and other important Departments of the Government of India. It is stated that the second respondent made sincere efforts to settle and solve the disputes and in the process availed of even the mediation so as to take over the unit either by the petitioners or by the respondents but the petitioners did not co-operate. It is also stated that there are other provisions providing remedies for the petitioners to get the matter resolved and winding up is not the perfect solution for resolving the disputes between the petitioners and the respondents. Therefore, the respondents sought for dismissal of the company petition filed by the petitioners.
6. When the matter was pending, the petitioners filed C. A. No. 1389 of 2004 seeking appointment of a provisional liquidator and in the said application, after hearing both sides, at the request of the parties, the assets of the company were got valued by chartered engineers and valuers in the presence of an advocate commissioner appointed by this court. During the course of hearing, as the assets of the company had already been valued and it was further stated that there were certain cash balance to the extent of Rs. 79,00,000 in the companies bank account and also a sum of Rs. 1,60,00,000 is to be received from its customers, and further, as it was stated that the liabilities of the company will not exceed Rs. 25,00,000, including the wages and salaries payable to its employees and workmen, this court proposed to the parties to give their offers for purchasing the unit, as this court felt that the order of winding up would kill the unit having very much high value serving important units of the Government. Though the respondents have given their offer in a sealed cover, the petitioners have not come forward to make such an offer, and counsel appearing for the petitioners represented that the petitioners are unable to give their offer. Therefore, the matter was heard finally.
7. At the time of hearing, learned counsel for the petitioners, while reiterating the contentions made in the company petition, sought for an order of winding up of the company. It is contended by learned counsel for the petitioners that there is lack of confidence between the parties, and as there are only two groups and because of lack of confidence and non-cooperation, the business of the company had come to stand still. Therefore, according to learned counsel, it would not be possible to resolve the disputes, except by winding up of the company under liquidation on just and equitable grounds. Hence, learned counsel sought for an order of winding up.
8. In support of his contentions, learned counsel for the petitioners relied upon the following decisions : (citations)
9. Learned counsel for the respondents, on the other hand, opposed the contention of the petitioners. It is contended that there are no justifiable grounds for an order of winding up of the company, just for the non-cooperation and non-co-ordination in running the unit by one of the two groups holding the shares. It is contended by learned counsel that there are other remedies available under the provisions of the Act to seek appropriate remedies before the appropriate authority, and winding up would result in killing a valuable and precious unit, which is not just and proper. Learned counsel reiterated the stand of the respondents that the respondents are willing either to take the unit or to part with the unit by receiving or by paying the amounts due in respect of the interest of the parties in the company. The non-co-operation, non-co-ordination and the adamant attitude of the petitioners clearly shows that they are interested only in killing the unit by seeking a winding up order, which this court may not incline to grant in the normal circumstances. Learned counsel also contended that winding up order against a company is only a last resort and not the first resort to resolve the disputes among the shareholders of the company. Therefore, learned counsel sought to dismiss the company petition.
10. Learned counsel for the respondents, in support of his contention, relied upon the following decisions : (citations)
11. In view of the above rival contentions, the issue to be considered in this company petition is whether there are any justifiable grounds to admit the petition seeking winding up of the first respondent-company on just and equitable grounds.
12. It is not in dispute that respondent No. 1-company was originally floated by the second respondent. Later, the business of the firm in which the first petitioner and the second respondent were the partners, was taken over, and thus the first respondent was established with its unit for carrying out the manufacturing activity, as is referred to earlier and evident from its memorandum of association. It is also clear from the material on record that over a period of time, the first respondent-company had earned the name apart from increasing its turnovers. It is specifically admitted by the petitioners that the turnover of respondent No. 1-company came to Rs. 1,72,00,000 by March 31, 2001, and Rs. 3,70,00,000 by March 31, 2002, which would have further gone up if it had been allowed to carry on its business normally, but unfortunately certain disputes arose. From the material it is also evident that the petitioners sought to induct one Mr. E. S. Raghavan, as one of the directors of the company, which was objected to by the second respondent. As is evident, the second respondent apprehended that the petitioners are trying to get the control over the respondent No. 1-company by getting additional shares allotted by a resolution of the board. In fact, the second respondent has stated that he came to know of the induction of the said Raghavan as one of the directors only as per the records of the Registrar of Companies. The material on record also clearly shows that there was correspondence between the petitioners and the second respondent, and apart from all other disputes there were proposals offering either to sell or purchase the share of the other. But, because of the non-co-operation of the petitioners, such a settlement had not taken place. This is also evident even when the court, during the course of hearing, proposed to give their respective bids/offers, for accepting the highest bid. In fact, learned counsel appearing for the petitioners obtained permission of the court to conduct a bid further after receiving the bids, but in spite of it, the petitioners have not come forward with their offer. From the above conduct, it is clear that the petitioners are not interested to get the matters resolved one way or the other, except seeking for an order of winding up.
13. Before proceeding further, it would be appropriate to refer to the decisions relied upon by the respective parties here.
14. Learned counsel for the petitioners relied upon the following decisions :
In Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch 426 (CA) where the winding up of a company on just and equitable grounds was considered. In that case, the company was incorporated in March 1914, with a nominal capital of 21,285 pounds divided into 20,285 preference shares of 1 pound each, 500 "A" ordinary shares of 1 pound each, and 500 "B" ordinary shares of 1 pound each. The whole of the capital was paid up or credited as paid up. The company's business was carried on successfully until June 1915, when differences arose between the petitioner and Rothman, and in August 1915 . Rothman brought an action against the petitioner for a declaration that he had been induced to enter into the agreement for the sale of his business to the company by fraudulent misrepresentation and non-disclosure, and asking for rescission or rectification and damages. Since that time the parties had been in a state of continuous quarrel. Under those circumstances it was contended by the petitioner that a complete deadlock had arisen and that the company ought to be wound up. Astbury J. held that it was not only "just and equitable", but essential in the interests of both parties, that the company should be wound up, and he made an order accordingly. On appeal, the appellate court confirmed the view of the learned single judge, observing that (page 431) :
"Certainly, having regard to the fact that the only two directors will not speak to each other, and no business which deserves the name of business in the affairs of the company can be carried on, I think the company should not be allowed to continue. I have treated it as a partnership, and under the Partnership Act of course the application for a dissolution would take the form of an action ; but this is not a partnership strictly, it is not a case in which it can be dissolved by action. But ought not precisely the same principles to apply to a case like this where in substance it is a partnership in the form or the guise of a private company ? It is a private company, and there is no way to put an end to the state of things which now exists except by means of a compulsory order. It has been urged upon us that, although it is admitted that the 'just and equitable' clause is not to be limited to cases ejusdem generis, it has nevertheless been held, according to the authorities, not to apply except where the substratum of the company has gone or where there is a complete deadlock. Those are the two instances which are given, but I should be very sorry, so far as my individual opinion goes, to hold that they are strictly the limits of the 'just and equitable' clause as found in the Companies Act. I think that in a case like this we are bound to say that circumstances which would justify the winding up of a partnership between these two by action are circumstances which should induce the court to exercise its jurisdiction under the just and equitable clause and to wind up the company."
15. In Jaldu Anantha Raghurama Arya v. East Coast Transport and Shipping Co. Pvt. Ltd. [1958] 28 Comp Cas 20 ; AIR 1958 AP 259 a learned single judge of this court had an occasion to consider the scope of Section 433 of the Companies Act, 1956 and considered the words "just and equitable" as contained in Section 433(f) of the Act for winding up of a company. The respondent-company was incorporated as a private limited company having a share capital of Rs. 2 lakhs, divided into forty shares of Rs. 5,000 each, which are held by five shareholders, i.e., the petitioner and respondents Nos. 2 to 5. The main activity of the company was conducting the business of clearing and forwarding agents for loading goods in Masulipatam Port into Ships which anchor at a distance from the shore through country crafts owned and possessed by it. The petition was filed in view of the serious misunderstandings and loss of confidence among the two rival parties of the company resulting in deadlock and loss of business to the company, in view of the avowed intention expressed by all the shareholders to wind up this company, a fact demonstrated by the resolution dated August 26, 1956, in view of the hostile attitude of respondents Nos. 3 to 5, motivated by a desire to injure the interests of the company to promote their rival business in the same field, it is but just and equitable that the company should be wound up. A further ground on which the petition founded is that respondents Nos. 3 to 5 drew a sum of Rs. 50,000 and did not account for the same. The claim of the petitioner was opposed by respondents Nos. 4 and 5 alleging that the company is in a prosperous state earning large profits, that there are no debts to be paid by the company, and that misunderstandings per se would not justify an order for winding up of the company. The learned single judge, after considering the facts, recorded a finding at para. 22, as under (page 27) :
"From the above consideration of the respective averments made by the parties, it is safe to conclude (1) that there are serious misunderstandings among the shareholders of the company; (2) that the third respondent is actively engaged in promoting the interests of a firm which is conducting the same business ; and (3) that there has been no satisfactory accounting with regard to the sum of Rs. 50,000 by respondents Nos. 3 and 4."
16. Further, after discussing the case law the learned judge recorded the conclusion in para. 27, as under (page 28) :
"The above discussion of the law establishes that facts justifying an order for dissolution of a partnership would equally justify the making of a winding up order in the case of a small private company."
17. Accordingly, the petition was allowed, and winding up order was passed.
18. In Brown Forman Mauritius Ltd. v. Jagatjit Brown-Forman India Ltd. [2004] 1 Comp LJ 368 (Delhi); [2005] 126 Comp Cas 392 a company petition was filed under Section 433(f) of the Act. In the respondent-company, the petitioner and the second respondent were having equal shares and having equal representation on the company's board. In order to ensure equal status and power to the petitioner as well as the respondent, the chairman was not vested with a casting vote and board meetings could be convened only with the consent of one director of each of the parties. A joint venture agreement was entered into between the two groups providing for the termination of the arrangement in the event of a deadlock, as defined therein. There were certain disputes as to the non-contribution of the share capital as per the terms of the agreement. Therefore, a petition under Section 433(f) was filed before the Delhi High Court. The learned single judge after considering various judgments elaborately, held (headnote of Comp LJ) :
"It appears to be extremely important to keep in perspective the reality that a company is an artificial and juristic entity, and that its liability is limited. It has its own legal persona but where justice so requires, the veil by which its visage is rendered distinct from that of its management or shareholders, can be lifted. Compulsory winding up is a statutory relief primarily for these reasons, and not because a creditor demands it; on the contrary, it should be in the public interest. Courts have often declined to pass winding up orders even though an undisputed and an immediately unpayable debt has been disclosed. Where the prayer for winding up is predicated on the just and equitable grounds, public interest in contradistinction to those of either the shareholders or the creditors comes to the forefront. The jural role transforms into that of a doctor performing euthanasia. Inter se claims and disputes between shareholders, or debts owing to the company's creditors are not extinguished, but merely shifted to a different arena. It is on this understanding that the present case should be resolved, as has been done in the plethora of precedents presented before me by learned counsel for the parties. Firstly, it must be seen whether the substratum, or the vital purpose for which the artificial entity was constituted, has been decimated. In the present case, the future of the company is determined and regulated by the joint venture agreement which has been terminated by the petitioner. It has ceased to exist, but for it, being sustained by statutory lifelines. In this case, the board has stopped meeting; the capital required for its functioning is inadequate, and the respondent have declined to infuse and invest any more funds on the specious and evasive ground that it was 'need-based'. Even if the investment commitment was only need-based, the financial stringency faced by the company is all too evident and has resulted in the closure of its operations. It is the respondent's case that the company has been suffering losses year after year and as much as Rs. 250 lakhs in 1998-99. It can scarcely be disputed that the company's employees have left the company in droves, proverbially, much like rats fleeing a sinking ship. The sales of the company are commercially insignificant and cannot sustain it in the future, even if the most optimistic prognosis is adopted.
Since the shareholding is equally distributed between the petitioner and the respondent and neither of them has shown any proclivity of selling or acquiring the holding of the other--a deadlock in the management has manifested itself. This deadlock is also evident in that there is no consensus on the vital questions of injecting further funds into the company's coffers ; on the sales or depletion goals which the company should achieve ; and these warring parties are already embroiled in litigation. A mere overview of the disputes and rival contentions leaves one in no doubt that it is just and equitable to wind up the company. It is more than likely that the petitioner and the respondent may initiate further litigation including arbitration against each other and, therefore, it would be expedient for the company judge to abjure from expressing views on the respective claims. The focal concern must be the company's health alone.
Were it the case that the company was transacting a profitable business despite the non-co-operation between its major shareholders--the situation may be appreciably different and the court would refrain from winding up the company at the instance and insistence of one party. In the factual matrix, there appears to be no alternative but to end the existence of the company, and thereby put to a halt any further financial liabilities as also the perfunctory need to comply with statutory obligations such as holding annual general meetings, filing annual returns, etc. Secondly, if the party praying for the winding up of the company is itself guilty of approaching the court with unclean hands--it indubitably would not be entitled to equitable relief. No action of the petitioner can be viewed as symptomatic of unfair, inequitable or illegal conduct. The termination of the JVA, wrongly or otherwise, the non-fulfilment of post termination obligations are bilateral liabilities and are beyond the scope of this petition unless it is palpably and manifestly mala fide. This equally applies to the filing of petition within the ninety days period post-termination of the JVA. Thirdly, the contention that it would not be fair and proper to allow the petition till such time as the post termination obligations have been completed by the petitioner, or even to entertain it in these circumstances, does not appear to be sustainable. These obligations arise from the contract between the parties the breach of which is not the subject-matter of this winding up petition; the parties are equipped with legal rights and remedies in that regard. Fourthly, it is argued that this petition has been filed only because almost unbridled and untrammeled latitude has been granted to foreign investors; and hence, the petitioner does not need to collaborate with the respondent to transact business in India. Counsel for the petitioner has answered that even in the new regime--'no objection' from the respondent would be required and that the petitioner has no intention to market 'southern comfort' in India. What the court must keep in perspective is the conduct of the petitioner and the commercial viability of the company; it is not a relevant feature that the petitioner may incidentally find itself in an advantageous position after the winding up of the company. Learned senior counsel for the petitioner has categorically stated, with prejudice, that unless the respondent issues a 'no objection', the petitioner would not commence business in India. Thus, no action of the petitioner, either of omission or commission, can be said to be calculated or intended to bring the company to its knees.
Accordingly, the company is ordered to be wound up."
19. Learned counsel also relied upon a decision of the Bombay High Court in Darshan Anilkumar Patel v. Gitaneel Hotels Pvt. Ltd. [1994] 81 Comp Cas 805 and also a decision of the Karnataka High Court in Smt. Usha R. Shetty v. Radeesh Rubber P. Ltd. [1995] 84 Comp Cas 602 with reference to the powers of the company court for appointment of a provisional liquidator, pending the company petition even before admission. These two judgments are not relevant as the main company petition itself is taken up for hearing and was heard finally.
20.On the other hand, learned counsel for the respondents, in support of his contentions relied upon the following decisions :
21. In Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla the apex court considered the scope of Section 433(f) of the Act and the application of the principles in the case of dissolution of partnership. In that case, two shareholders holding 1,875 shares together with their family members filed a petition for winding up ; while the respondents and their family members held 3,125 shares, on the allegations of mismanagement and acts of ouster of the minority shareholders. The company court ordered winding up, which was assailed in appeal before the apex court. The apex court after considering all the facts elaborately laid down the principles how to deal with such a situation, and the relevant portion of the judgment is as under (page 104) :
"When more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members, who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besides, it is only when shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on the just and equitable ground. In a given case the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership. On the allegations and submissions in the present case, we are not prepared to extend these principles to the present company.
The principle of 'just and equitable' clause baffles a precise definition. It must rest with the judicial discretion of the court depending upon the facts and circumstances of each case. These are necessarily equitable considerations and may, in a given case, be superimposed on law. Whether it would be so done on a particular case cannot be put in the strait-jacket of an inflexible formula.
In an application of this type allegations in the petition are of primary importance. A prima facie case has to be made out before the court can take any action in the matter. Even admission of a petition which will lead to advertisement of the winding up proceedings is likely to cause immense injury to the company if ultimately the application has to be dismissed. The interest of the applicant alone is not of predominant consideration. The interests of the shareholders of the company as a whole apart from those of other interests have to be kept in mind at the time of consideration as to whether the application should be admitted on the allegations mentioned in the petition.
The question that is raised in this appeal is as to what is the scope of Section 433(f) of the Act. Section 433 provides for the circumstances in which a company may be wound up by the court. There are six recipes in this section and we are concerned with the sixth, namely, that a company may be wound up by the court if the court is of the opinion that it is just and equitable that the company should be wound up. Section 222(f) of the English Companies Act, 1948 is in terms identical with the Indian counterpart, Section 433(f). It is now well established that, the sixth clause, namely, 'just and equitable' is not to be read as being ejusdem generis with the preceding five clauses. While the five earlier clauses prescribe definite conditions to be fulfilled for the one or the other to be attracted in a given case, the just and equitable clause leaves the entire matter to the wide and wise judicial discretion of the court. The only limitations are the force and content of the words themselves, 'just and equitable'. Since, however, the matter cannot be left so uncertain and indefinite, the courts in England for long have developed a rule derived from the history and extent of the equity jurisdiction itself and also born out of recognition of equitable considerations generally. This is particularly so as Section 35(6) of the English Partnership Act, 1890 also contains, inter alia, an analogous provision for the dissolution of partnership by the court. Section 44(g) of the Indian Partnership Act also contains the words 'just and equitable'.
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.
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 interest of the shareholders and see that they do not suffer in a fight for power that ensues between two groups."
22. Saw Mills and Industries Ltd., In re, , the company petition was filed for compulsory winding up of the company by one of the shareholders. The company was being managed by managing agents. As the bank accounts were suspended in view of the presentation of a winding up petition, a receiver was appointed by the court to look after the affairs of the company pending disposal of the said petition. As the original petitioner had withdrawn the petition as not pressed, some other shareholders intervened to prosecute the petition. The facts as revealed show that a resolution was passed in the general body meeting for effecting sales of the assets of the company. Though the assets were notified there were no bidders for purchasing at the minimum up-set price. Thereafter, it was resolved to sell the company with all its belongings in the auction. At that stage one of the shareholders filed a civil suit. The company court while dealing with the petition filed under Section 433(f), found that the company is not an insolvent. The balance-sheet for the relevant period shows that the company had assets worth Rs. 4,67,061, and in fact, the opposite party in the winding up petition stated that the assets of the company are worth above Rs. 5 lakhs, and the liabilities were only to a tune of Rs. 27,094. The company court relying upon the decision of the Bombay High Court in Standard Aluminium and Brass Works Ltd., In re, AIR 1929 Bom 8 dismissed the petition.
23. In A.P. Pothen v. Hindustan Trading Corporation Pvt. Ltd. [1967] 37 Comp Cas 266 ; AIR 1968 Ker 149, the contributors holding 1996 out of a total of 4,000 shares, filed a petition for winding up of the company, while the remaining shareholders opposed it, and the winding up was sought for under "just and equitable" clause. The company court while rejecting the application observed (page 269) :
"One circumstances is sufficient to show that the petition is not bona fide but for some ulterior end. The case put forward in the petition is that the company had ceased to make a profit, that its assets were just sufficient to meet its liabilities, and that the petitioner and his friend were no longer prepared to risk their property in the company. Their property in the company consists of the shares held by them. If the averments in the petition were true these shares would be worth very little, and, in any event, not more than their face value. Members, who were opposed to the winding up offered to buy the shares of both the petitioner and his friend at twice their face value. This offer was rejected by the petitioner who demanded three times the face value, accompanying the demand with a counter offer to buy the shares of the members who were opposed to the winding up at the same price. This winding up petition, it seems fairly obvious, is an abuse of the process of the court being designed for the purpose of putting pressure so as to gain control over the affairs of the company."
24. In Naresh Kumar Aggarwal v. Davender Kumar Mittal [2001] 107 Comp Cas 527 (Delhi) the appellants filed a petition under Section 433(a), (e) and (f) read with Section 439 of the Companies Act, 1956 for winding up of the company. Though an application was filed under Sections 397 and 398 of the Act before the Company Law Board, prior to the filing of the aforesaid petition and certain interim orders were also obtained from the Board, the said petition before the Company Law Board was subsequently withdrawn by the appellants, and presented the petition for winding up. The first appellant contended that he is holding more than 99 per cent. shares and he is no longer interested in the running of the hotel at Mussoorie which was the purpose of incorporation of defendant No. 2-com-pany and therefore, appellant No. 2 company should be wound up on "just and equitable" ground. The said petition was dismissed by the company judge against which the appeal was filed. The first appellant claims that he was allotted 44,000 shares, but the said allotment was disputed and was the subject-matter of a civil suit. Therefore, the Division Bench confirmed the dismissal of the company petition, holding that there are no "just and equitable" grounds for an order of winding up in view of the pendency of the dispute before the civil court.
25. In Kilpest P. Ltd. v. Shekhar Mehra [1996] 87 Comp Cas 615 (SC) the company was promoted by its two first directors, having 1,500 shares and 1,625 shares. The two shareholders-directors fell out, as one of the directors was not attending the meetings of the company after September 1, 1981. A third person was inducted on the board of directors and thereafter the articles of association of the company were altered abolishing the post of joint managing director, and a resolution was passed by which the non-attending director was ceased to be the director. Therefore, the said ousted director filed a petition under Sections 397 and 398 of the Act. A single judge found it appropriate to try the petition as a winding up petition under Section 433(f) of the Act. A Division Bench, on appeal, set aside the order of the single judge. On further appeal, the apex court remanded the matter. The parties went to trial. The Division Bench of the High Court held that there are no merits in the petition, and the company could not be treated as a partnership concern and that there was no ground for winding up under "just and equitable" clause. The apex court, while dismissing the appeal, held that (headnote) :
"The appeal had arisen out of a petition under Sections 397 and 398. The Division Bench had exercised powers under Section 402 to appoint M as a director to protect his interests and guard against mismanagement. It had required D to return to the company a sum of Rs. 52,875 which he had wrongly appropriated to himself. It had directed the Registrar of Companies to enquire into other allegations of misconduct in which it found prima facie substance. The report filed by the Registrar of Companies showed that no substance was, ultimately, found therein. The company had meanwhile prospered. This was not a case for winding up the company.
Sections 397 and 398 of the Companies Act, 1956, provide relief to shareholders against oppression and mismanagement. The powers exercisable in such petitions by the courts and now by the Company Law Board, have been set out in Section 402. The promoters of a company, whether or not they were hitherto partners, elect to avail of the advantages of forming a limited company. They voluntarily and knowingly bind themselves by the provisions of the Companies Act. The submission that a limited company should be treated as a quasi-partnership should, therefore, not be easily acceptable. Having regard to the wide powers under Section 402, very rarely would it be necessary to wind up any company in a petition filed under Sections 397 and 398.
The primary consideration of the court should be that the general interests of shareholders should not be readily sacrificed at the altar of squabbles of directors for power to manage the company."
26. In M. Mohan Babu v. Heritage Foods India Ltd. (No. 1) [2002] 108 Comp Cas 771 (AP), the company judge of this court dismissed the application filed under Section 433(f) observing that the remedy under the said provisions is in the nature of a last resort and could not be invoked when other remedies are efficacious enough to protect the general interest of the company. The said decision of the learned company judge was even confirmed by a Division Bench of this court in appeal in K. Mohan Babu v. Heritage Foods India Ltd. (No. 2) [2002] 108 Comp Cas 793.
27. In Prashant Glass Works Pvt. Ltd. v. Banaras Beads Ltd. [2002] 111 Comp Cas 71 (All) a petition for winding up of the respondent-company was filed under the "just and equitable" clause under Section 433(f) of the Act, alleging that the respondent-company had not complied with the statutory requirements of the Act as the company did not submit the annual returns and failed to prepare and audit the accounts of the company. Therefore, the respondent-company was said to have acted in oppression to the minority shareholders' interest in the company. However, it was noticed that there were disputes between the two groups holding major shares and the matter was referred to an arbitrator, who gave an award and in pursuance of the award an application was filed under Section 391, read with Section 394 of the Act, in which a scheme of arrangement was proposed in conformity with the award of the arbitrator. Therefore, it was held that the petitioner has an alternative and efficacious remedy, but without availing of the said remedy he had approached the court for winding up. The said petition was, therefore, dismissed.
28. In B. Ramachandra Adityan v. Educational Trustee Co. Pvt. Ltd. [2003] 113 Comp Cas 334 (Mad), the company petition was filed against the first respondent-company alleging that the company had not carried on any business activity and the company was in existence only to enable the second respondent to have an absolute control in Thanthi Trust. It was also alleged that the corporate character of the company is retained not with any genuine object of carrying on any commercial activity or any other activity, but as an instrument to facilitate the second respondent to have control over the Thanthi Trust and to advance his personal enrichment. The company court while dismissing the said application held that (headnote) :
"The petitioner had failed to establish any deadlock in the affairs of the company and in the absence of any material to show that there was any deadlock in the affairs of the company, the company could not be ordered to be wound up under the just and equitable clause. Since the lack of confidence of the petitioner in the second respondent arose mainly out of the alleged diversion of funds of the trust, it was for the civil court to decide the question whether there had been any breach of trust committed by the second respondent. The petitioner had also not produced any material to show that he was oppressed or excluded from the management of the company. Though there were several allegations made by the petitioner against the second respondent and counter allegations had been made against the petitioner by the second respondent that would not constitute a ground to hold that it was just and equitable to wind up the company."
29. In K. Venkateswara Rao v. Phoenix Share and Stockbrokers (P.) Ltd. [2003] 115 Comp Cas 818 (Bom) the respondent-company was formed by four friends--the petitioner and three others, who became the directors of the respondent-company. The petitioner held 50 per cent. of the equity shares and the remaining 50 per cent. equity shares were held by the other three directors. There was an agreement and understanding among the other directors and the petitioner that the other directors would be in charge of the management and that the petitioner would not participate in the management of the company. On a petition under Section 433(f) of the Companies Act, 1956, alleging lack of probity and good faith in the conduct of the affairs of the company by the directors, the Bombay High Court, while dismissing the petition, held (headnote) :
"That the fact that relations between the petitioner and the directors had lost the basis of mutual trust and confidence which was the foundation of the business was evident because the parties had signed an agreement to part company with each other and that the petitioner's shares were to be purchased by the directors for Rs. 2.25 crores. Prior to the agreement there was nothing on record to substantiate any of the allegation made by the petitioner in the petition. There was no complaint or grievance made by him in respect of holding of meetings, the absence of minutes, siphoning off of funds by the directors and the allegations of monetary mismanagement. The petitioner was only a sleeping director, his status therefore, in reality appeared to be that of an investor of Rs. 3 crores in the venture of the company which was looked after by the other directors. There was not even a single concrete instance of oppression of the petitioner by the directors. Apart from making a bald allegation in the petition there was absolutely no material to substantiate the charge of oppression by the directors. Though there might be some irregularities in the maintenance of the minutes and some business transactions of the company, yet all such allegations even cumulatively had not made out a case for the winding up of the respondent-company. There was no just and equitable ground for winding up of the respondent-company on the basis of the allegations made by the petitioner. There was hardly any material to conclude that there was a prima facie case for admission of the petition under Section 433(f) of the Act.
(ii) That the allegations required deeper investigation under Sections 397, 398 read with Section 402 of the Act. The Company Law Board could consider the agreement, entered into between the parties, in the context of its powers under Section 402(f) and (d) of the Act. Though the petitioner had an alternative and efficacious remedy available under Sections 397 and 398 of the Act he had been acting unreasonably in seeking to have the company wound up instead of pursuing the other remedy.
(iii) That there was nothing on record to conclude that the company's affairs were being conducted in a manner prejudicial to public interest or in a manner oppressive to the petitioner. Barring a minor grievance of non-receipt of notices and the manner of maintenance of the minutes book there was no allegation or material to point out oppressive conduct of the other directors towards the petitioner. No facts were found to warrant exercise of the extraordinary jurisdiction to order winding up of the company on the just and equitable ground."
30. In Smt. Saraswathi Gopalakrishnan v. Surana Textile Mills Ltd. [2004] 119 Comp Cas 917 (Mad), the petitioner filed a petition under Section 433(f) of the Act for winding up of the respondent-company stating that the petitioner held 2,000 shares in the company, and though she was a director of the company, the company was not sending her any information relating to the working of the company, that the company had furnished false information to the Registrar of Companies that she had retired as director, that there had been serious diversion of nearly forty four lakhs of rupees to other businesses, when admittedly the business of the company itself was doing badly, that the company had failed to pay dividends. The petitioner admitted that she had filed a separate proceedings to ventilate her grievances against the company. The company in its counter statement stated that the petitioner did not care to attend board meetings of the company and violated Section 283(1)(g) of the Companies Act, 1956, that she also failed to attend three consecutive meetings of the board of directors, and therefore, ceased to be a director of the company, that there had been no siphoning off of funds or diversion of funds by the company, and the Companies Act does not make it mandatory for companies to declare dividend, that the company was a flourishing profit-making company, had a large export turnover and had earned a coveted status as a Government recognized export house, that the company directly employed about 300 workmen and staff, that the petitioner had not only effective alternative remedy available, the petitioner herself had admitted that she had filed separate proceedings to ventilate her grievance against the company, and hence the petition was liable to be dismissed. The company court, while dismissing the petitioner observed that the aggrieved person has to approach the Company Law Board for relief in case of oppression or mismanagement. In the light of the effective remedy under the provisions of the Act, and when genuine and attractive alternative remedy was available, a winding up petition based on the "just and equitable" ground could not be sustained by the company court. The relief based on the "just and equitable" clause under Clause (f) of Section 433 is in the nature of a last resort when other remedies are not efficacious to protect the general interest of the company. The petition was, therefore, dismissed.
31. Learned counsel for the respondents relying upon the above decisions contended that if the company is ordered to be wound up, the goodwill of the company as well as existing machinery would lose its value. Even if the assets of the company are disposed of by the liquidator appointed by the court, the same would damage the reputation and goodwill of the company, which was built up and developed over a period of time, in view of the efficient and prompt functioning of the company, and also the quality of the products that are supplied to its customers. Any of the above acts would cause damage to the company as well as to the shareholders. Even at this stage also counsel for the respondents has reiterated that the respondents are willing either to purchase the shares of the petitioners or to sell the shares of the respondents, if the petitioners are prepared to purchase or sell. But, however, sought to contend that the interest of the company should be safeguarded, which would also protect the interest of number of persons employed in respondent No. 1 company as well as the interest of other shareholders. It is stated that respondent No. 1 company was flourishing like anything, which is evident from the surplus cash available, apart from the substantial increase in the turnover from year to year before the functioning of the company was affected by the acts of the petitioners.
32. Learned counsel for the petitioners, on the other hand, sought to contend that the solvency or profitable running of the company would not come in the way of the court for ordering winding up on just and equitable grounds. It is also contended that there was no allocation of work in the company between the two directors and all the returns that are being filed before the statutory authorities are being signed by both the directors. Therefore, there is no merit in the contention of the respondents that the first petitioner is responsible for non-convening and non-conducting of the meeting of the board of directors or the annual general meeting. Learned counsel also contended that as there is no mismanagement or oppression, the petitioners have no other efficacious alternative remedy, except to approach this court in view of the deadlock existed in the management of the company. Hence, learned counsel sought for an order of winding up of respondent No. 1-company.
33. If the facts of the case are examined in the light of the decisions relied upon by both sides, though, according to the petitioners, a private limited company has to be considered on the principles of a partnership firm, as was considered in Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch 426 (CA) the said principle was not accepted by the apex court in Kilpest P. Ltd. v. Shekhar Mehra [1996] 87 Comp Cas 615. Further, the claim of the petitioners is that the conduct of the respondents, especially the second respondent, resulted in the lack of probity in the conduct of the affairs of the company. Though the petitioners have referred to lack of probity in the conduct of the affairs of the company, but did not elaborate the conduct of the second respondent. Further, the correspondence and the reference made in the petition shows that the first petitioner proposed to convene the meeting of the board of directors and, according to the first petitioner, the second respondent did not co-operate for convening such meeting. But, a perusal of the material shows that the second respondent requested the petitioners to furnish certain material relating to the items of agenda in the board meeting and also sought for some time, so as to look into the material relating to those items of agenda. But, it appears that the first petitioner did not respond to the said request of the second respondent and did not supply the material sought for by the second respondent and also did not convene the meeting on any other subsequent date, as requested by the second respondent. The correspondence between the parties also show that the first petitioner never had taken any steps to convene the meeting of the board of directors or even the general body meeting on any subsequent date. But, however, it was contended that as there is no allocation of work between the petitioner and the second respondent, the second respondent can also convene such meeting, but the second respondent did not do so. But from the material on record it is clear that the first petitioner is in possession of all the records, which fact, as alleged by the second respondent, was not disputed. When once all the records relating to the conduct of the business of the company as well as the meetings of the board of directors, and general body meeting, are in possession of the petitioners, the petitioners cannot attribute the failure to convene the meeting to the second respondent. In the absence of the custody of the books relating to the affairs of the company, it would be difficult to hold that the second respondent failed to convene the meeting of either board of directors or the general body meeting. In fact, it was alleged that all the returns that are being filed before the statutory authorities are being signed and presented by the first petitioner only and this was also not disputed, though it was claimed that the returns that are being filed before the Registrar of Companies, are being signed by both the directors. Apart from that, it is not a case where the second respondent has not come forward to settle the disputes, if any, with the petitioners. In fact, the petitioners have stated in the affidavit that the second respondent has offered initially a sum of Rs. 1.5 crores to the share of the petitioners, which was later increased to Rs. 2.25 crores, but the petitioners did not even state whether they had any such intention to offer to the respondents and if any such offer has been made, what was the offer. Further, the conduct of the petitioners even before the court, who have declined to come out with their offer, shows that the petitioners are interested only to close down the company by an order of winding up. Though learned counsel for the petitioners relied upon a decision of the Delhi High Court in Brown Forman Mauritius Ltd. v. Jagatjit Brown-Forman India Ltd. [2004] 1 Comp LJ 368 ; [2005] 126 Comp Cas 392 that was a case where both the petitioner and the respondent had shown any intention of either purchasing or selling, and therefore, it was held that there is a deadlock in the affairs of the company, and therefore, ordered winding up. But, here, that is not the situation. Here, only one party, i.e., the petitioners, who are neither willing to purchase the shares of the respondents nor willing to sell their shares to the other side. Further, the catena of judgments relied upon by counsel for the respondents clearly show that an order of winding up is only a last resort and before coming to the conclusion for ordering winding up, the court has to look into not only the interest of the company but also the interest of the public. In fact, in such circumstances in A.P. Pothen v. Hindustan Trading Corporation Pvt. Ltd. [1967] 37 Comp Cas 266 ; AIR 1968 Ker 149 the court held that the petitioner is not a bona fide but for some ulterior end, approached the court. The petitioner and his friends, who filed a petition for winding up, whose shares would be worth very little and in any event not more than their face value, but, however, the members, who were opposing the winding up, offered to buy the shares of both the petitioner and his friends at twice their face value. The rejection of such offer by the petitioner, who demanded three times the face value, it was held that the winding up petition is an abuse of process of the court, being designed for the purpose of putting pressure so as to gain control over the affairs of the company.
34. Further, it was the contention of the respondents that the petitioners have got other alternative remedies available under law, and therefore, they can approach the authorities for the alternative remedies. But, however, learned counsel contended that this is not a case where the petitioners are pleading oppression and mismanagement in which case Sections 397 and 398 provides the remedy before the Company Law Board. But, as could be seen from the contentions and the claims of the petitioners, even in the case of lack of probity in the conduct of the affairs of the company as alleged by the petitioners against the other party, would also be covered by the proceedings under Sections 397 and 398 of the Act, as even such conduct would also amount to oppression, as referred to under Section 397 of the Act. Further, the petitioners themselves have stated the intention and anguish of the second respondent, which he had expressed in his letter, which was quoted by the petitioner in para. 28 of the petition, stating that it is time that there must be consensus either to work together or to divide amicably, but, however, without sacrificing the name, reputation and goodwill of the company, and without any precondition to winding up the work, as that process would prevent passing on of the benefits, and making this very clear as the name of the company has a registration with DRDO and other Defence and space organizations and as such any change in it or dissolution of the company would ultimately lead to losing of prestigious contracts and orders. From that, it is very clear that though the second respondent has been trying to co-operate with the petitioners and get the disputes, if any, settled between them in order to safeguard the interest of the company. But, the petitioners are not co-operating, and, in fact, intend to bring an end the flourishing industrial unit, in order to fulfil their selfish and egoistic desire.
35. In the light of the above facts, as the winding up order, as contemplated under the provisions of Section 433 of the Act, is a discretionary, this court declines to exercise such discretion in favour of the petitioners, who have come up before the court with an ulterior end and not in the interest of the industrial unit, seeking the relief of winding up of the company.
36. Therefore, the company petition is dismissed. The petitioners shall pay the cost of valuation of the assets of the first respondent-company.