TMI Blog1941 (11) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... turers, producers, exhibitors and importers of cinema films, photo plates, talkie or silent pictures, etc The last balance sheet of the company was filed on 5th December 1940, and the last annual general meeting of the company was held on 28th October 1940. The petitioner alleges that though the time for the meeting and the report as required by the provisions of the Companies Act and the articles of association of the company has long since expired, the company has not filed the balance sheet for the period ending 31st March 1941, and has not called the annual general meeting for the year 1941. Mr. Daphtary for the petitioner has conceded that there is no force in this contention of the petitioner. According to the balalce sheet for the year ending 31st March 1940, a dividend of 15 per cent, was declared. The petitioner says that the dividend was paid otherwise than out of the profits of the company and the directors of the company are responsible for the same. The petitioner further alleges that the management of the company has not been properly carried on and large expenses have been incurred and debited in the books of account of the company. It is further alleged that Chima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e committed several breaches of the provisions of the Companies Act and the memorandum and articles of association of the company. According to him, questions of considerable difficulty will arise in the winding up of the company and the mismanagement of the directors will have to be investigated and proceedings taken out against the directors in respect of the ulra vires borrowings and other acts of mismanagement and for the purpose of compelling the directors who are substantial parties to make good the loss caused to the company by their mismanagement and by defaults. He alleges that if the company is wound up on this petition there will be a substantial surplus for distribution amongst the share-holders. On these grounds the petitions to this Court to wind up the company. I might state at the very outset that one marked feature of this curious petition is the carefree manner in which the most serious allegations are made with a complete absence of particulars. The petitioner is a holder of 5 shares. In the course of the arguments Mr. Daphtary has stated to me that he was supported by holders of eleven shares, but there is nothing before me on affidavit on which I can hold t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Apna Ghar, Bhakta Vidur and Nai Duniya, and the company in its affidavit states that it has high hopes of not only meeting all the liabilities but of making considerable profits out of these films. According to the company, these three pictures will yield at least Rs. 11, 00,000, in view of the attractive cast and the stories which are of first rate character and two of the pictures Apna Ghar and Bhakta Vidur being double version picures in Hindi and Marathi. The history of this company is that after its incorporation it did not produce pictures itself but worked in partnership with a Calcutta film company the New Theatres, Limited. It was only after March 1939, that it started producing films and it was only in 1940 that the company managed to secure the services of reputed artists in the cinema world. The company declared 10 per cent. dividend for the year ended 30th June 1938, 10 per cent. dividend for the year ended 31st March 1939, and 15 per cent. for the year ended 31st March 1940. As regards the dividend for the year ended 31st March 1940, the petitioner alleges, as I have already pointed out, that this dividend was paid otherwise than out of the profits of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounds, one was inability to pay debts and the other was that it was just and equitable that the company should be wound up ; and it was urged on behalf of the petitioner that the company was commercially insolvent and, therefore, it was just and equitable that it should be wound up by the Court. There is another test laid down by the Privy Council in Davis Co. v. Brunswick (Australia), Ltd. [1936] AIR 1936 PC 114. In that case their Lordships stated (page 121) " the decisive question must be the question whether at the date of the presentation of the winding- up petition there was any reasonable hope that the object of trading at a profit, with a view to which the company was formed, could be at tained." It is, therefore, for Mr. Daphtary to satisfy me that there is no reasonable hope, as far as this company is concerned, that the object of trading at a profit, with a view to which the company was formed, can be attained. I have it on affidavit as I have already stated, that the company has today three films in process of completion, and the company expects to make profits by exploiting those films. They have, as I have stated, employed on large salary well-known stars. Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ley, L.J., (page 408): "The mere fact that the Court is of opinion that the business can not be carried on, or probably will not be carried on, in a successful manner is not sufficient. So, again, mere misconduct or mismanagement on the part of the directors, even although it might be such as to justify a suit against them in respect of such misconduct or mismanagement, is not of itself sufficient to justify a winding-up order." In In re The Great Northern Copper Mining Company of South Australia [1869] 20 LT 264 , the company had made no profit for the last four years and the working of it had been actually suspended for six months. As a matter of fact, the petitioner had come up before Lord Romily in 1865, and he dismissed it on the ground that it was for the shareholders to determine whether the company should go on or not. The petitioner came back to Lord Romily after four years and stated that the company was in a worse condition than it was before, nothing substantial having been done from that time till the time this petition was presented. Lord Romily in his judgment stated that he was very much disposed to think that upon the evidence the whole of the substratum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment, Kekewich, J., asked himself the question (page 717): "Is the substratum of the company gone? Is the subject-matter of the company gone?" and he came to the conclusion (page 718): "I must not forget that this is a bank. I must not forget one must know, does know what are the essentials of carrying on a banking business satisfactorily. There may be a further struggle ; but I cannot conceive it as possible I say it is impossible for the company to continue its business satisfactorily because it has not that without which a banking business cannot be carried on." Therefore on the authorities the position seems to be that the substratum of the company is deemed to be gone when ( a ) the subject-matter of the company is gone, or ( b ) the object for which it was incorporated has substatially failed, or ( c ) it is impossible to carry on the business of the company except at a loss which has been construed by the Privy Council to mean that there is no reasonable hope that the object of trading at a profit can be attained, or ( d ) the existing and probable assets are insufficient to meet the existing liabilities. None of these four tests can apply to the facts of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd fifty shares are held by Patel and Ramdutt, the rest of the shares being held by persons who have no connexion with the management of the company. One of the suggestions made by Mr. Daphtary was that if I wind up the company, the resolution passed at the extraordinary general meeting of the company ratifying the conduct of the directors would be of no effect and, therefore, the company might escape the liability of paying monies to the directors from whom it had borrowed monies in excess of their borrowing powers. Mr. S. T. Desai for the creditors has characterised this suggestion as scandalous, and I do not think the characterisation is too severe. There is nothing before me to show that these monies have been utilised by the directors for any purpose other than the purpose of the company, and yet the Court is being asked to be a party to an attempt to deprive the directors of monies which they have lent to the company for carrying it on. If in fact the monies have been not utilised by the company, the company is not liable for them and proper proceedings can be taken ; but I am not aware of any authority which lays down that because the directors lent to the company in excess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e services of famous and reputed artists and the earning possibilities of the subjects which had been selected for films, if sufficient monies were brought in, the company would within a few years not only tide over its monetary difficulties but make good profits. After 16th April 1941, the directors and their friends brought in Rs. 7,00,000. The company spent about 1 lakh of rupees in completing the three pictures Tulsi, Vanmala and Swami. They settled the past claim of Messrs. Shaw Mehta Company, who is a secured creditor, for a smaller sum. They spent some money in the construction of the studio, and they also settled old debts which were originally about Rs. 2,25,000 for Rs. 1,49,00 and they spent a sum of Rs. 3,50,000 in the preparation of the three new pictures Apna Ghar, Bhakta Vidur and Nai Duniya. In the petition itself the only two grounds mentioned why the Court should enter upon an investigation into the mismanagement of C.M. Trivedi are, first, that a sum of Rs. 90,000 was paid to Miss Shanta Apte for working as heroine in a single film. The sum, according to the petitioner, was unreasonably high and extravagant and the film for which Shanta Apte had been pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the funds of the company, the directors or the company will not take the necessary action against him. Further the petitioner has failed to show that the misconduct of C.M. Trivedi, or other directors can only be successfully investigated in a winding-up by the Court. Mr. Daphtary made an application to me that I should allow him an opportunity to cross examine the deponents who made affidavits in these proceedings on behalf of the company on the following points: (1) the actual financial condition of the company ; (2) how far the company has proceeded with the production of the three films; (3) how much has been spent on the films and what amount has been lost; (4) what were the auditors Messrs. K.S. Aiyar Co., asked to investigate as far as the affairs of Trivedi are concerned ; and (5) dealings of C.M. Trivedi. This is nothing more or less than holding an inquisition on the directors. The petitioner has got to make out a case for winding up on the petition and he cannot be allowed to fish out a case by cross-examination of these deponents. After carefully analysing the petition and after giving full weight and consideration to the arguments of Mr. Daphtary, I find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41, to which I have already referred, unanimously passed a vote of confidence in the board of directors and in their management and expressed satisfaction with the progress of the company. I have before me Mr. Parikh who represents 1,246 shareholders who are opposing this petition. Mr. Parikh at the bar states on behalf of his clients that he has every confidence in the present management and future progress of the company. I am, therefore, really asked to override the considered opinion of the shareholders who were present at this meeting, and of the shareholders who are represented by Mr. Parikh before me as regards the future prospects of this company in favour of the petitioner who holds five shares. His attitude may be expressed in the language of Chitty, J., in In re The Nylstroom Company Ltd. [1889] 60 LT . 477 (p. 479): "Now, with regard to companies, it is right to let those who have embarked in a company manage their own affairs, and it is not right for the Court to intervene because one shareholder is dissatisfied one who appears during the progress of the argument to have found a few associates because that one and a small number of associates think that they know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petition to stand over till after the investigation by the auditors is complete, I do not see why I should keep this sword hanging on the head of the company. The petitioner must succeed or fail on the petition as it stands today on the materials he has adduced before me. If after the auditors had made their report and if the company and the directors failed to take necessary steps if any steps are called for, it would always be competent to the petitioner to present a fresh petition on such materials as he might have succeeded in gathering by that time. I therefore dismiss the petition with costs. Counsel certified. Having dismissed the petition the question arises as to what proper order I should make for costs. It is clear that when a petition for winding up a company is dismised, the company is entitled to its costs. The shareholders are entitled to one set of costs, and the creditors are also entitled to one set of costs. In this case Mr. Daphtary draws my attention to the fact that the counsel for the company Mr. Munshi and counsel for the shareholders Mr. Parikh are instructed by the same solicitors, Messsrs. Kamdar Co., and he relies on the practice prevailing in Englan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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