TMI Blog1991 (9) TMI 276X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany and, lastly, for restraint from holding any extraordinary general meeting on February 18, 1991', or on any further date to consider and pass a resolution for removal of the petitioner from directorship of the said company. The Solitaire Hotels Pvt. Ltd. was incorporated under the Companies Act some time in the year 1985 by the then promoters of the company, Mr. Kishore Morumal Bachani and Mrs. Deepa Shivkar Bachani, the main objects being to own, construct, run, take over, manage, carry on the business of hotel, restaurant, cafe, tavern, bars, refreshment-rooms, boarding and lodging, house keepers, clubs, in India or in any other part of the world and to provide lodging and boarding restaurants, eating houses, bars, swimming pools, etc. The said company, however, was taken over by respondents Nos. 2 to 5. It appears that the issued and paid up share capital of the company was Rs. 1,02,000 divided into 1,020 equity shares of Rs. 100 each. Respondents Nos. 2 and 3 held 510 equity shares and the balance of 510 equity shares by respondents Nos. 4 and 5. The authorised share capital of the company is Rs. 50,00,000 divided into 50,000 equity shares of Rs. 100 each and 5,000 (12 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cording to the petitioner, he attended the office of the Economic Development Corporation (EDC), Goa, Daman and Diu. some time in February/March, 1989, to sign several documents including a deed of personal guarantee as EDC has agreed to give a loan of Rs. 85 lakhs to the company but, however, he does not have the copies of these documents. Without looking into the financial viability, according to the petitioner, respondent No. 2 negotiated purchase of an adjoining plot to expand the hotel and taking advantage of his ignorance and full faith that he reposed in respondent No. 2, respondents Nos. 2 to 5 took over the management and control of the company and the said project and started managing the company at their whims and caprice with the result that there was considerable delay, wasteful expenditure and escalation in cost. According to the petitioner, looking to the present status of the project, the hotel will not be complete before June, 1992, and the cost of the project will go up to more than Rs. 2.30 crores though originally the project was to involve only Rs. 1.20 crores. The petitioner then has levelled allegations of mismanagement that respondent No. 2 went on changing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refer to as the Rao group, and this decision was taken at a meeting alleged to have been held on June 19, 1990, at the Bombay Cricket Association Club, Bombay. The petitioner says that he was not given notice to either remain present at the meeting nor was he informed about the same. But to create a false evidence it has been shown in the minutes book that the petitioner was present at the said meeting. The decision to sell one-fourth of the shares of the company to the Rao group is in flagrant violation of the memorandum of understanding and with a view to get over the same, according to the petitioner, the records are fabricated to show as if he was a party to that decision, which is not, therefore, binding on him. The petitioner now says that, in fact, a fraud has been played on him as the statement of account shows the total investment by the Rao group to be Rs. 22.31 lakhs and this conspiracy has been hatched by respondents Nos. 2 to 5 to jeopardise and cause harm to his interests. The purported transfer of shares to the Rao group is invalid being in contravention of the articles of association of the company and the memorandum of understanding reached on June 6, 1990. Anot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oup. This, according to him, amounts to a fraud inasmuch as respondents Nos. 2 to 5 never received any premium for the shares sold to the Rao group though the petitioner was made to pay premium when he became the shareholder. The increase in the share capital and its allotment to the Rao group was a collusive act inter se between respondents Nos. 2 to 5 and the Rao group and in any event was in breach of the memorandum of understanding which clearly stipulated that increase in the share capital of the company can only be by an unanimous resolution ; that at any rate the petitioner had never consented to such increase. The entry of the Rao group into the company has not been kindly taken to by the petitioner and despite the petitioner's challenge and protest in that behalf, the same were ignored. All these actions, according to the petitioner, are made with a view to somehow harm the interests of the petitioner by taking unfair advantage of him. The petitioner now says that in view of the breach of understanding and memorandum and articles of association the petitioner was compelled to address a letter to the Maharashtra State Financial Corporation, which has also agreed to financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by respondents Nos. 2 to 5. He now says that, initially, the project was envisaged at Rs. 1.20 crores and now it is revised to Rs. 2.34 crores. The company has already received a loan of Rs. 85 lakhs from the EDC which has not been properly utilized and in view of the mismanagement of the company, it is not possible to carry out and complete the project. Even with the revised estimate of Rs. 2.34 crores, the project is not likely to be completed soon. Due to escalation a further sum of Rs. one crore is liable to be invested. Already Rs. 1.90 crores has been incurred by way of expenditure and Rs. 40 lakhs are the outstandings payable to various parties. That going by the economic viability it is impossible to run the hotel on profit and, therefore, in order to stop the company from incurring further losses and its capital being eroded, the company should be wound up and for other ancillary reliefs which are already mentioned. When the petition was heard on urgent circulation On February 16, 1991, the company was directed to file an affidavit on February 22, 1991, but in the meantime an order was made restraining the passing of the proposed resolution to remove the petitioner from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied, for the company has been a company right from the beginning and it is again not a family affair in the sense that members of one family are the only shareholders. By its very nature he says that this is a company and it can be only governed by the predicates incorporated in sections 433 and 434 of the Companies Act and then he points out that clause ( f ) of section 433 is the only clause which the petitioner has invoked and in the fitness of things, therefore, it is necessary for this court to decide whether it is just and equitable. Before finding out whether it is just and equitable, let me consider the authorities on the subject as to how the dissolution of a partnership is applicable or not. These are the authorities which are relied upon by Shri D' Costa, learned counsel for the petitioner. In the decision of Great Indian Motor Works Ltd. v. Chandi Das Nundy [1953] 23 Comp Cas 287 (Cal), it is held that in the winding up of a private company, where it is nothing more than a partnership converted into a company, the court will apply to a very great extent the rules applicable to the winding up of a partnership. The principle being that where the partners cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o doubt lack of confidence in the conduct and management of the company's affairs is held to be a just and equitable ground for winding up. In so far as the decision in Bhashar Stoneware Pipes Private Ltd. v. Rajinder Nath Bhaskar [1988] 63 Comp Cas 184 (Delhi) is concerned, here again the facts were that the business was started as a partnership concern between four groups of family members and later on it was converted into a company. Material prima facie disclosed that there was oppression and mismanagement and further that the complaint was not of an isolated act but a consistent series of acts, lack of probity and fair dealings. Two authorities of the English courts are relied upon. The first case is in Tay Boh Choon v. Tahansan Sdn. Bhd. [1987] BCLC 472 ; [1987] 1 WLR 413 (PC) to suggest that when a company is in the nature of a partnership and the petitioner is sought to be removed from office as director, winding up orders can be made. The second case is in A Company, In re [1987] BCLC 133. This was a case of minority oppression. A question arose for appointment of a receiver. It is well-settled law that principles are to be applied to the given facts in a cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 1985 and the company was later on taken over by respondents Nos. 2 and 4 and this is clear from the memorandum and articles of association of the company. Though the shareholding was equal in so far as the petitioner and respondents Nos. 2 to 5 (Naik group and Khadawala group) were concerned that by itself does not give it a character of a partnership. Merely because the petitioner has averred that this is a glorified partnership, in my view, there is nothing to indicate that the structure of the company is a partnership even though it is restricted to some families in the beginning and thereafter to four families. Therefore, Shri D'Costa's contention that the principle of dissolution of partnership must apply to winding up proceedings cannot be accepted. The question, however, now remains as to whether it is just and equitable to wind up the company as sought by the petitioner. One of the main grievances of the petitioner appears to be the induction of the Rao group respondents Nos. 6 and 7 as shareholders of the company and that too without his consent by the purported sale of certain percentage of shares by respondents Nos. 2 to 5. The petitioner's case is that he was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken so that necessary amendment be carried out to the memorandum and articles of association of the company. The memorandum of understanding suggests that no business shall be transacted at any general meeting unless the requisite quorum shall be present at the commencement and continuation of the business. Several items are thereafter listed which shall not be transacted at any general meeting or at any meeting of the board of directors except with the unanimity of the petitioner on one side, respondents Nos. 2 and 3 on the second side and respondents Nos. 4 and 5 on the third side. The items are : "( a ) Increase in the share capital of the company. ( b ) Reduction in the share capital of the company. ( c ) Increase in the issued capital of the company ... ( h ) Appointment and/or removal of auditor. ( i ) Appointment and/or removal of directors... ( k ) Allotment of shares... ( m ) Transfer of shares". The petitioner does not dispute that he was present at this meeting where this memorandum of understanding was resolved. What is, how ever, pertinent to be noticed is that the minutes of this very meeting suggest at item No. 4 that the budget as on June 6, 1990, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im does not appear to be correct. There is yet one more factor. The Rao group was inducted pursuant to the resolution at the meeting of the board of directors held at the Garware B.C.A. Club on June 19, 1990, and initially they made the payment of Rs. 2 lakhs. It was stipulated that they will in all make a substantial contribution. By various cheques and cash payments they made payments of over Rs. 15 lakhs commencing from June 20,1990, till October 29, 1990. The petitioner is the director of respondent No. 1 company and it is not possible to accept that he was ignorant of such a large amount of finances brought in by the Rao group and even if he pleads ignorance the law has to presume that he is in the know of things. Considering all these aspects, it appears that the petitioner's inter est in the company has dwindled and he wants some pretext or the other to level allegations and he now makes a grievance of induction of the Rao group to paint the other directors black which in reality is not supportable. I am, therefore, clearly of the opinion that induction of the Rao group into the company was known to the petitioner before their induction and there is nothing shady about the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 5 lakhs by way of 5,000 preference shares of Rs. 100 each and Rs. 13,33,200 by issuing 13,332 equity shares of Rs. 100 each. The petitioner says that he was not informed nor present at the meeting and he was in any case not aware. According to him, the increase in the issued share capital being in excess of the authorised share capital of the company is not permissible. This statement of the petitioner appears to be baseless. At any rate, it is a wanton allegation. There has already been an increase in the authorised capital and this had been discussed at the board meeting of February 15, 1990, much before the petitioner purportedly took up cudgels against the company and its directors and the so called unauthorised induction of the Rao group. It appears that the resolution was passed to increase the authorised share capital at an extraordinary general meeting dated March 16, 1990, and the same is proved to the hilt because the same had been reported to the Registrar of Companies. The respondents have produced Form No. 5 dated March 16, 1990, and Form No. 23. The filing fees were paid on April 3, 1990. All these are documents at exhibits R-6, R-7 and R-9. The petitioner's statem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a part-time secretary from July, 1990, as the authorised share capital of the company had been increased and by the operation of law the company was required to appoint a secretary and that is how Tanawala was appointed as secretary. Ordinarily, nothing turns on this appointment but the petitioner has done this on a purpose with the view to allege that respondents have fabricated evidence to suit them. The petitioner levelled allegations that the respondents have fabricated documents, made alterations in the minutes book and/or minutes are fabricated thereby suggesting that such fabrication was brought about after the institution of the petition and that Tanawala was a party to the same. In fact Shri Tanawala was appointed as part-time secretary of the company at a remuneration of Rs. 500 per month in July, 1990, and he was made a full-time secretary at the meeting held on October 14, 1990. It appears that the petitioner did not attend the earlier meeting of June 14, 1990. The appointment of the secretary was duly notified to the Registrar of Companies and that is clear from document at exhibit R-28 indicating the-appointment in the required form. The date of appointment is mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... os. 6 and 7 (Rao group) were made additional directors and allotment of additional shares were made to them. The petitioner wants to show that he was not a party to such allotment. There are enough documents to suggest, as produced by the respondents, that with the increase of the authorised share capital, the share capital was sought to be increased by issue of fresh rights. At some point of time prior to October 1, 1990, the petitioner was keen in bringing his brother-in-law one H. Ahuja and the board had passed a resolution that Shri Ahuja be inducted provided he agrees to sign all documents that are necessary as solicited by the financial institutions. Apart from this, it was also decided to induct the petitioner's brother, Mohan Luthria, as additional director on the board but then the petitioner had backed out of the same. Since the petitioner was insisting that they would like to keep his one-third shareholding the petitioner was asked to subscribe accordingly and in token thereof the petitioner had given a cheque for part payment but, however, that cheque bounced because of an error found by the bankers, namely, the discrepancy in the figures and words. The petitioner was g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has made grievance that though at one time he was called upon to take inspection of records and documents when his representative approached the company, he was denied the same on the ground that records and documents are at Goa. But the manner in which the petitioner has made claims in the petition as also produced several records themself show that the petitioner's allegations of no access to documents and records is not true. Several allegations of the petitioner of mismanagement and highhandedness on the part of the directors and respondent No. 2 in particular in the matter of the hotel project, viz. , grant and acceptance of tenders, employing contractors, technocrats, etc., do not appear to be correct. These agencies did accompany the petitioner and other directors including the Rao group to personally inspect and view the ongoing project at Goa, in July, 1990. The various reports of these agencies suggest that the peti-, tioner was personally present. Indeed the petitioner cannot deny that he had come at the company's cost by air and stayed at Hotel Mandovi along with other directors including the Rao group. Shri Usgaonkar indeed pointed out and not without justificatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ixit v. Utkal Flour Mills ( Pvt. ) Ltd. [1989] 66 Comp Cas 188 (Orissa), it is laid down that when the petition alleges losses by the company and misappropriation of funds and when the petitioner fails to substantiate those allegations, the petition cannot be allowed to dismantle an established company. In the light of the discussion above, the allegations of the petitioner about mismanagement, lack of probity and/or highhandedness must fail. Similar is the case in relation to the so called manipulation or actions rendered to cause prejudice to him. I also considered the matter in all its perspective to find out whether this petition could be admitted and not advertised in order to hold an inquiry. I have, however, not been able to satisfy myself on this score also. In my view immense harm will be caused to the company if relief as prayed for by the petitioner is granted. As already mentioned elsewhere the hotel is about to begin commercially. About Rs. 2 crores has already been dumped on the project. It is not denied that EDC as the main financial institution has nominated its nominee as one of the directors of the company. Not only the project as it stood then but even t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , reasons to believe that the petitioner is not that ignorant and even, according to him, he is a broker dealing in real estate at Bombay and also a financier. Perhaps, he thought when he invested in the company that his expectation of fast returns has not come about and once this expectation was belied, is using this petition as a pressure tactic because he wants to get out of the company and that too at a premium on his investment. A person who is well versed in business at Bombay and who took the risk of this investment in the company for the sake of his disappointment cannot be permitted to get an order from this court to wind up the company by throttling it at this stage, which by no standard can be called just and equitable. Petition rejected. At this stage Shri D'Costa, learned counsel appearing for the petitioner, makes a prayer for extension of the order restraining the shareholders from passing a resolution for removal of the petitioner as a director of the company and also that the minutes books which are before the court be not handed over to the respondents for a period of 20 days. Shri Usgaonkar, learned counsel for the respondents, has no objection to the prayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner but entered adverse findings against him. In view of the course we propose to adopt, it is unnecessary to undertake an exhaustive discussion on the various allegations and attacks made on the findings as rendered by the learned judge. Lack of probity on the part of the respondents in relation to the functioning of the company, siphoning off of the funds of the company to private coffers, omission to account for money actually received, manoeuvring in relation to transfer of certain shares, manipulations in regard to the entries in the minutes and other books maintained by the company, are some of the aspects which were highlighted in the course of the arguments addressed to us. We would assume, for the sake of argument, that all these allegations are made out. That could be the highest that the appellant could aspire for. Even then, do circumstances exist for the extreme step of winding up of a company having regard to the existing circumstances ? Inasmuch as the learned judge has answered the question in the negative, is there any reason or justification for interfering with that finding in appeal ? The legal principles that should guide a court are no longer in a gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressing 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. Some of the decisions which have indicated the principles, and stretching from 1968 to 1989 are as under : (1)S. S. Rajakumar v. Perfect Castings Pvt. Ltd. [1968] 38 Comp Cas 187 (Mad). (2) Lokenath Gupta v. Credits Pvt. Ltd. [1968] 38 Comp Cas 599 (Cal). (3) Jose J. Kadavil and K.T. Mathew v. Malabar Industrial Co. Ltd. [1986] 59 Comp Cas 969 (Ker). (4) Ga dadhar Dixit v. Utkal Flour Mills ( Pvt. ) Ltd. [1989] 66 Comp Cas 188 (Orissa). In the present case, one strong circumstance which dissuades us from resorting to the extreme and irretrievable step of proceeding with winding up is the stage which the company and its activities have reached. As noted earlier, it is almost at the threshold of the commencement of commercial operation. The project is in an attractive segment of tourism development ..... X X X X Extracts X X X X X X X X Extracts X X X X
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