TMI Blog1964 (12) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... ran are the sons of V.V. Krishna Iyer and hence, the family has, for business purposes, adopted the name, V.V. Krishna Iyer Sons. There are, however, a number of documents marked in the case to which V.K. Rajagopal and V.K. Ramachandran are parties which describe these persons as partners of Messrs. V.V. Krishna Iyer Sons. This I am told is a mistake born of ignorance of the difference between a joint family business and a partnership business, that in fact there is no partnership and that V.V. Krishna Iyer Sons is only a trade name of the joint family. If that be so and it is not disputed that that is so then this petition is in truth by V.K. Rajagopal in his capacity as the manager of his joint family. This, however, makes little difference to the case, and I shall proceed on the footing that the petition is, as it purports to be, one brought on behalf of the joint family in the name of V.V. Krishna Iyer Sons as if that were a firm name. The company was incorporated in January, 1946, with a nominal capital of Rs. 5,00,000 divided into 1,000 six per cent, cumulative preference shares of Rs. 100 each and 4,000 equity shares of Rs. 100 each. The paid up capital is Rs. 2,68,000. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no assets was to render decisions like In re Patent Artificial Stone Co. Ltd. [1864] 34 LJ Ch. 330 , In re Lancashire Brick and Tile Co. Ltd. [1864] 34 LJ Ch. 331, In re Rica Gold Washing Co. [1879] 11 Ch. D. 36, In re Diamond Fuel Co. [1879] 13 Ch. D. 400 and In re Vron Colliery Company [1882] 20 Ch. D. 442, which laid down that "a fully paid up shareholder who presents a petition to wind up the company must both allege in his petition and show by evidence that there are assets of the company of such an amount that in the event of a winding up he would have a tangible share or surplus to receive", more or less obsolete see Nataraja Textile Mills Ltd. v. Angidi Chettiar [1954] 24 Comp. Cas. 94 , and the decisions referred to therein. The decision of Neville J. in In re Kaslo-Slocan Mining and Financial Corporation Ltd. [1910] WN 13, dismissing a petition by a fully paid up shareholder who alleged that the company had no assets and was insolvent, was criticised on the score that it was a very short judgment of only three sentences giving no reasons for the decision and merely following the law laid down in the older decisions without noticing the change effected by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest in the result there is ordinarily good ground for thinking that the application is for an ulterior purpose and not a bona fide application" and that "the provision in law that a petition shall not be refused merely on the ground that there are no assets does not make it any the less necessary for the court to be vigilant that the court's process is not abused " ‑‑per Das Gupta J. in Davco Products Ltd. v. Rameswarlal AIR 1954 Cal. 195, 197, quoted with approval in Nataraja Textile Mills Ltd. v. Angidi Chettiar [1954] 24 Comp. Cas. 94 , to reach the conclusion that want of assets would be an element in deciding whether the petition is bona fide. As we have seen sub-section (3) of section 439 of the present Act effected no change in the law but only expressly declared what was regarded as already implicit in section 170(1) read with section 166 of the 1913 Act in the light of the well established meaning of the word "contributory" as including a holder of fully paid up shares. Sections 213, 234 and 225(1) of the English Act are the same as the corresponding provisions in sections 158, 166 and 170(1) of our 1913 Act and it should follow that, notwith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion that a fully paid up shareholder will not be entitled to an order if the sole ground for the petition is insolvency. And the criticism implied by the statement in the 16th edition that "this case is very shortly reported and it should be noted that the petition was opposed by a large body of shareholders" is no longer there. However, in his Company Law, twentieth edition, 1959, page 702, he says : "Occasionally, a contributory petitions on the ground that the company is insolvent or unable to pay its debts; but in such case the petitioner, if fully paid, should, if possible, allege and prove that there will be a substantial surplus for the shareholders ; otherwise he has no interest in the company, and in spite of section 224 of the Act there is a serious risk that a petition by a fully paid up shareholder alleging that the company has no assets will be dismissed." And he cites In re Rica Gold Washing Co. [1879] 11 Ch. D. 36 and In re Kaslo-Slocan Mining and Financial Corporation Ltd. [1910] WN 13, for authority. Halsbury (Simonds edition, volume VI, page 541) says : "A fully paid up shareholder may, as a contributory, present a winding up petition and the court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... untary liquidation, or whether the court shall be asked to make a compulsory order. Accordingly a contributory, to obtain an order, must make out a special case, and the case usually made out is that it is just and equitable that the company shall be wound up because the substratum of the company is gone, in other words, because the main object for which the company was formed has become impracticable. (Palmer's Company Law, twentieth edition, page 701). A fully paid up shareholder of an insolvent company who has really no interest in a winding up must make out a very special case indeed, and the ground of the company's inability to pay its debts is virtually unavailable to him. In this connection, it may be noted that, so far as the statute is concerned, a creditor is entitled to bring a winding up petition on any of the grounds mentioned in clauses ( a ) to ( f ) of section 433 of the Act. Supposing a creditor of a solvent company were to bring a petition under one or the other of these clauses, the court would, I take it, straightaway ask him, "What has that got to do with you ? You can take your money and go. Why should the discretion under the section be exercised in your ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be, as I have already said, all that section 439(3) does is to declare that a fully paid shareholder is entitled to bring a petition notwithstanding that there are no surplus assets with the result that such a petition is not demurrable, and, although that means that there must be cases in which a winding up order can be made on such a petition, that provision in no way affects the exercise of the discretion vested in the court by section 433). The petitioners' claim to be creditors of the company is thus relevant and I shall proceed to consider that claim before going to the merits of the grounds on which they seek a winding up. The petitioners were the managing agents of the company on a remuneration of Rs. 400 per mensem and ten per cent, of the net profits until August 15, 1960, when their agency terminated by the operation of section 330 of the Act. A firm called the United India Distributors of which the petitioners were partners were the sole selling agents of the company until March 26, 1961, when their contract expired. In this connection the firm had made a deposit of Rs. 1,50,000 with the company on which they were to get interest at 6 per cent, per annum in addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the petitioners. In exhibit P-2 there appears the unequivocal statement that the petitioners had transferred their 59/150 shares in the agency deposit of Rs. 1,50,000 to M.V. Narasimhan; and that notice called upon the company to pay the overdue interest on this 59/150 share either to M.V. Narasimhan, or to the petitioners within a week, failing which it warned the company that legal steps would be taken against it by the petitioners along with M. V. Narasimhan. In exhibit P-3 the petitioners claimed that, out of the agency deposit of Rs. 1,50,000, Rs. 59,000 belonged to them and they called upon the company to pay them this sum of Rs. 59,000 within 21 days. They said nothing about the transfer to M.V. Narasimhan but they referred to the notice dated October 9, 1963, demanding payment of the interest accrued and did not withdraw, or, in any way, qualify that notice. Even now the petitioners have no case that the statement in exhibit P-2 regarding the transfer to M.V. Narasimhan was a mistake, and they have made no attempt to explain away that statement. There is thus an unequivocal and unexplained admission by the petitioners that the debt of Rs. 59,000 due to them in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners that they had assigned their interest in the United India Distributors to M.V. Narasimhan and that it was he and not they that had drawn the commission. The company denied that there had been any such assignment and averred that the assignment, if any, was at best only a benami transaction, M. V. Narasimhan being only a benamidar for the petitioners. This contention of the petitioners, in which they were supported by M. V. Narasimhan, was rejected by the court which decreed the suit, and it is said that the decision conclusively establishes that the debt of Rs. 59,000 due by the company belongs to the petitioners and not to M.V. Narasimhan, that, in fact, it operates as res judicata. Exhibit P-8 is a copy of the judgment in the suit. Issues Nos. (1) and (2) of the issues settled therein, which are the issues relevant for the present purpose, run thus : "(1) Have defendants Nos. 1 and 2 (the present petitioners) ceased to be partners of the selling agency firm ? If so, from what date ? (2) Is third defendant (M.V. Narasimhan) a benamidar for defendants Nos. x and 2 ? Is plaintiff estopped from setting up this plea of benami ?" In paragraph 24 of the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible to reach some understanding, but, as the events proved, the time thus obtained was utilised by the parties not for negotiation but for bolstering up their respective cases. In 1960, the petitioners along with their brother-in-law brought a suit (O.S. No. 548 of 1960 of the Munsif's Court, Palghat), for a declaration that V.K. R.V. Vaidyanatha Iyer's appointment as director was invalid and for an injunction restraining him from functioning as a director. In this suit they succeeded. Vaidyanatha Iyer, however, secured a fresh appointment as director and attempts were made to appoint him in turn as director-in-charge, managing agent and managing director, all of which were opposed by the petitioners and failed by reason of the Central Government withholding approval. The main complaint of the petitioners is that, in spite of all this, Vaidyanatha Iyer, whose fresh appointment as director is according to them invalid, continues to function as a director and is practically carrying on the business of the company. By the lawyer's notice, exhibit P-4, dated March 26, 1962, the petitioners called upon the company to file a suit against Vaidyanatha Iyer and another director, Lakshminar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the existing and probable assets would be insufficient to meet the existing liabilities", language which seems to be the origin of the phrase, "commercially insolvent", as of clause ( c ) of sub-section (1) of section 434 of the Companies Act, 1956. This sub-section, I might observe, now covers the whole range of inability to pay debts, clauses ( a ) and ( b ) covering inability to meet current demands, and clause ( c ) covering what formerly used to be brought under the "just and equitable" clause (clause (f) of section 433) under the name, "commercial insolvency", so that every kind of inability to pay debts falls within clause ( e ) of section 433 and resort to clause ( f ) is unnecessary. (See Buckley, thirteenth edition page 458, under the head "insolvency" and page 460 under the head, "other insolvency" and Palmer's Company Precedents, part 2, seventeenth edition, page 26, under the head "As to para. ( d ) of section 223"). For bringing the case within clause (a) of section 434(1), the petitioners depend on the notices, exhibits P-2 and P-3, they sent to the company for the return of their share of the agency deposit which, it is their case, on the termination of the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... q. 9 , where a supporting creditor was not allowed to rely upon his cause of action, which was not a cause of action on which the petition was founded, to obtain a winding up, and the argument of counsel for the company that, although a creditor is allowed to come in and support a petition for winding up a company, he must support the petition as it stands and cannot be allowed to make a fresh case of his own, was accepted). I might perhaps add that the company claims to have enough cash on hand to pay both the Narasimhans and that would appear to be so and that it is stated on its behalf that it is only the pendency of this winding up petition and certain restrictions placed upon the company by an order made in an application for the appointment of a provisional liquidator that has stood in the way of its making the payments. Whether that is so or not, it will be time enough to consider if a petition is brought on the basis of the failure to pay these debts. For making out a case under clause ( c ) of section 434(1), reliance is placed by the petitioners on exhibit P-I, the balance-sheet of the company for the year ending March 31, 1963. That balance-sheet does not disclose t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sured, and that binds me to serious examination) that the paid up share capital which figures among the liabilities in the balance-sheet should be taken into account in determining the company's solvency and that, if that is done, it will be found that the company's liabilities are in excess of its assets. But, athough for balance-sheet purposes, share capital is shown among the liabilities, it is no more a liability of the company than losses, which in a balance-sheet are shown among the assets, is an asset of the company. A company does not owe its members the share money paid by them, and, except when there has been a reduction of share capital (whereupon the excess ceases to be share capital) the members have no right to ask for the return of the money paid by them. Even in a winding up, what the members get, if they get anything at all, is not a return of their share money, but their rateable share of any surplus left after satisfying the creditors, and this share may be less or more than the share money paid. It is true that ordinarily the court does not go behind the company's balance-sheet to ascertain its financial position, but this does not mean that the mere fact that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd odd) it has been consistently making losses from 1956 onwards. Exhibit P-1, the balance-sheet for the year ending March 31, 1963, discloses that the losses have accumulated to the sum of Rs. 1,32,692.25 which amounts to nearly half the paid up capital. It is said that these consistent losses are sufficient to show that it is impossible to carry on the business of the company except at a loss and that there is no reasonable hope that the object of trading at a profit with a view to which the company was formed would be obtained: Davis v. Brunswick ( Australia ) Ltd. [1936] 1 All. ER 299. But the fact that the company has made losses over a number of years is by itself insufficient to show that it will never be able to achieve its object of trading at a profit, and the balance-sheets for 1960 onwards reveal that, after the board took over the management from the petitioners, there has been a considerable diminution in the losses. Thus, during the year ending March 31, 1961, there was a loss of Rs. 29,000 and odd, during the 7 months of the petitioners' management whereas the loss for the remaining 4 months of the present management was only Rs. 8, 100 and odd. The loss f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... choosing between conflicting views in order to settle what is really of the nature of a business problem: (see Davis v . Brunswick ( Australia ) Ltd. ) [1936] 1 All. ER 299. In the present case the majority of the shareholders, both in number and in value, have entered appearance and filed affidavits opposing the winding up, and they say that they are satisfied that the winding up of the company would be injurious to their interests, that they understand that the company is working satisfactorily at present and that there is reasonable hope of the company showing good results in the near future. And so have the majority of the creditors. It is said that these members and creditors have been misled by the incorrect report made by the commissioner. But there is nothing to show that that is so. As to deadlock and mismanagement what is alleged in the petition is that the members of the board have not been lawfully appointed to their office, that one of the directors, V.K. R.V. Vaidyanatha Iyer, is virtually in sole charge and is conducting the affairs of the company in a manner prejudicial to its interests and in furtherance of his own, and oppressive to the minority shareholde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound of suspension of business, it may be that it can satisfy the court that it would be able to continue its business hereafter and that the court should not, in its discretion, order a winding up. And, it should not be forgotten that it is asserted on behalf of the company that the moment the restrictions that have been placed upon it by the order made on the application for the appointment of a provisional liquidator are removed, it will be in a position to satisfy both the Narasimhans and to raise the lock-out. Whether that confidence is well founded or not, of course, remains to be seen, but it is not a matter for consideration) now. Quite apart from that the majority of the creditors and members are opposed to a winding up, that the petitioners are fully paid up shareholders who have alleged that the company is insolvent, and that, to put it at the lowest, their motives are open to suspicion, I do not think that a case has been made out and I am considering, as I must, the cumulative effect of all that has been made out for ordering a winding up. I dismiss the petition. The petitioners will pay the company its costs and also bear their own. - - TaxTMI - TMITax - Corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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