TMI Blog1969 (12) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... istered on June 30, 1956, as a private limited company with its registered office at Kandle with the initial authorised capital of Rs. 5,00,000. The issued capital of 500 shares of Rs. 50,000 was subscribed by this minority group or the Shah group. The licence was obtained by the company to establish a plant for chemicals on March 15, 1960. On August 17, 1965, what is hereinafter referred to as "the basic agreement" was reached between the Shah group and the East African Match Company Ltd., hereinafter referred to as "the East African Company", for capital participation. The capital of the company was increased to Rs. 10,00,000 and further capital was issued allotting 4,000 shares of Rs. 100 each to the East African Co. while another 1,500 shares were issued to the Shah group. Thus, the initial capital when this financial arrangement was made was shared between the East African Co. and the Shah group in the proportion of 66 2/3% and 33 1/3%. The basic agreement also provided for the constitution of the board of directors with two permanent directors from the respective parties or their nominees and for the provision of finance to be made by the East African Company. Clause (9) also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nji Co. and/or Messrs. Premchand Brothers Ltd. so require, the shares may be transferred to the members of the said Messrs. Bhagwanji Co. Ltd. and Messrs. Premchand Brothers Ltd. in equal proportion. The proviso provided that if Messrs. Bhagwanji Co. Ltd. and/or Messrs. Premchand Brothers Ltd. fail to get the shares transferred either to themselves or their members within a period of two months from the day on which they ceased to hold controlling interest in the East African Company and after due notice was given to them by the company in this regard the Shah group would have the option to be exercised at any time of purchasing at a fair value to be determined in the manner laid down in article 68 the whole of the outstanding shares in the company's capital not held by persons exercising such option. There is no dispute that in the East African Company more than 90% holding of the shares is of these two families of the majority group, viz. , Chanderias and Khimsias, respectively. On the insertion of section 43A by the Amending Act 65 of 1960 this private company was deemed to be a public limited company as the East African Company was the shareholder as aforesaid. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge petitioner No. 1 had agreed and he was thereafter backing out while this contention was seriously disputed by petitioner No. 1. It was further the plea of the majority group that the Shah group had agreed that the two Jersey companies would step into all the rights of the East African Company and so a loan had been advanced by the two Jersey companies re-payable over a period of 10 years to the tune of Rs. 21 lakhs. This contention was vehemently denied by the Shah group. As the majority group sought to transfer this holding to these two Jersey companies, a contention was raised by the Shah group that the vacancy had arisen so far as the managing director was concerned from the other group. There were also contentions that the concerned directors had not disclosed the interest as required under section 299 and, therefore, also a vacancy had arisen. As regards the other director of the majority group there were also similar allegations in respect of the Atlas Apartment which were said to have been furnished at a huge cost and which also for the similar reason was said to result in a vacancy under the Act and the articles. The majority group, therefore, at the earlier stage, when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity group it is contended that the flat was selected as petitioner No. 1 had consented and as he backed out as per their statement at the board meeting, they had put back the amount of Rs. 2,52,000 in respect of this flat in the company on September 12, 1968. The Shah group thereafter filed a criminal complaint in the Presidency Magistrate Court at Bombay on September 30, 1968, on a charge of criminal misappropriation under section 406, Indian Penal Code, for Rs. 2,52,000 regarding this Sudhakar flat on the ground that these moneys of the company had been utilised by the majority group director to secure the flat for his personal purpose. A charge was framed in this complaint on July 16, 1969, but the trial of that complaint had been stayed on the application of the Shah group itself on August 25, 1969, on the ground that the civil suit was pending in that connection. Even in the City Civil Court, Bombay, a suit had been filed by the minority group on October 15, 1968, for a declaration that Mr. K.M. Chanderia alone was not entitled to call a board meeting and for interim relief. In that proceeding, ultimately, a solution had been offered by Patel J. in the appeal against the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the majority group are supporting the company in opposing this petition. The petitioners have relied on the following sub-heads for bringing their case under this ground of just and equitable clause : (1)That as the basic agreement constituted a joint venture between these two family groups on the analogy of partnership principles, the petitioners were entitled to have winding-up in similar circumstances in which such partnership would be dissolved especially when there was a substantial ouster of the minority group and the joint management was denied to them, both as per the basic agreement and the relevant article of the company. (2)That the minutes of February 27, 1968, were fabricated which showed a lack of probity. (3)That the funds of the company were utilised for providing personal benefit by the other group as per the following particulars : ( a )the entries were made in their favour so that benefit of de-valuation difference would be obtained by them ; ( b )the Fiat car was used and at a subsequent date plea was taken of a loan by the company which even when sought to be re-paid had been done without any interest; ( c )the entries were made in contravention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ail of this oppressive remedy causing irreparable damage to the concern. (3)That the petitioners having suppressed material facts and having not availed of the alternative remedy under section 408 of the Act, this petition must not be entertained. As regards the last ground, it should be kept in mind that when a winding-up petition is made under section 433( f ) on the cause of just and equitable ground, the petition to exercise such jurisdiction must be filed with absolute candour. Section 443(2) in terms enacts that 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. In the context of section 443(2) which is applicable when the ground for winding up is under section 433( f ) that it is just and equitable to do so, it would be the bounden duty of the petitioners to disclose the material facts as to the alternative remedies which they have availed of or which are available to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the appointment in order to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interests of the company or to public interest. When the state of affairs of the company were required to be investigated by the minority group by applying under section 408, this material fact ought to have been disclosed in the petition. The petitioners have never cared to disclose this fact in the petition. Mr. Divan vehemently argued that there was no deliberate suppression and this might have been overlooked and, for such an inadvertent omission, the extreme penalty of rejecting the petition should not be imposed on the petitioners. Mr. Divan in this connection pointed out that some reference to this application under section 408 is made by the petitioners by relying upon the admissions which have been made by the majority group in that application. Such a casual reference would hardly meet with the relevant requirement that there should be the averment that the petitioners had preferred a complaint before the Company Law Board and had availed of the alternative remedy in that connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, at page 255, that even if the allegations contained in the petition can be substantiated having regard to the existence of an alternative remedy, the petition for winding-up should not be allowed. As regards the partnership principle, it was held not to be applicable in that case as there were a number of outside shareholders and the case was not one where no other shareholders were interested except the two persons and the company had been in fact a quasi-partnership. That is why Mr. Divan vehemently argued that the right of the petitioners in the present case should, however, be examined on the partnership principles as the present company was really a quasi-partnership and a small domestic family concern, not of one Shah family but of three families of Shah, Khimsias and Chanderias. Mr. Divan in this connection vehemently relied on the decision of the Privy Council in Loch v. John Blackwood Ltd. [1924] AC 783 (PC) This was a public company formed to carry on the testator's business and to divide the profits of it between members of his family entitled under his will to share them. The managing director had a preponderating voting power. The directors had omitted to hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a company on certain conditions. The first of them is that the business in which lie invests shall be limited to certain definite objects. The second is that it shall be carried on by certain persons elected in a specified way. And the third is that the business shall be conducted in accordance with certain principles of commercial administration defined in the statute, which provide some guarantee of commercial probity and efficiency. If shareholders find that these conditions or some of them are deliberately and consistently violated and set aside by the action of a member and official of the company who weilds an overwhelming voting power, and if the result of that is that for the extrication of their rights as shareholders they are deprived of the ordinary facilities, which compliance with the Companies Act would provide them with, then there does arise a situation in which it may be just and equitable for the court to wind up the company. In addition to the partner ship principle, at page 788, their Lordships applied other rules which lay down that at the foundation of the application of the winding-up, on the just and equitable rule, there must lie a justifiable lack of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration of the statutory powers under the Act and the relevant articles, the situation of a complete deadlock might arise. It is only in such cases where there is a complete, indissoluble deadlock that these partnership principles can now apply to such a case where section 210 of the English Act or remedies under section 397 or 398 of our Act would not be applicable. Mr. Divan vehemently relied upon the decision in In re Lundie Brothers Ltd. [1965] 1 WLR. 1051; [1961] 2 All ER 692; 35 Comp. Cas. 827 (Ch. D.) , where the learned judge had applied the partnership principle even after the enactment of section 210 in the English Act. At page 697, the observation in In re Yenidje Tobacco Co. Ltd.'s case ( supra ) by Lord Cozens-Hardy M.R. were strongly relied upon. The passage of Lord Lindley in his book on Partnership, 6th edition, page 657, was referred to : "...refusal to meet on matters of business, continued quarrelling, and such a state of animosity as precludes all reasonable hope of reconciliation and friendly co-operation, have been held sufficient to justify a dissolution. It is not necessary, in order to induce the court to interfere, to show personal rudeness on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip principle is that there must be a situation resulting in a complete, irresoluble deadlock, by reason of something in the constitution so that there would be no alternative remedy even under section 210 of the English Act or sections 397 and 398 of this Act by resort to which the partnership could continue as a joint venture as contemplated by persons who had entered into such a small quasi-partnership. Ray J. (as he then was) in In re Hind Overseas ( Private ) Ltd. [1971] 41 Comp. Cas. 279, 306 rightly summarised the entire legal position in this connection as to the application of the partnership principle as under : "The dissolution of partnership principle has been applied to companies either on the ground of complete deadlock or on the ground of domestic or family companies. The complete deadlock is where the board has 2 real members or the ratio of shareholding is equal. The Yenidje Tobacco Company case ( supra ) and Loch v. John Blackwood [1924] AC 783 (PC) illustrate these types. In the domestic or family companies courts have applied the dissolution of partnership principle where shareholdings are more or less equal and there is ousting not only from manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te remedy, the partnership principle must be invoked : while, in other cases, the ground of lack of probity in the conduct of the company's affairs must be established. The question of alternative remedy even when the partnership principle is invoked must assume great importance when the winding-up is sought on the just and equitable grounds. In order to do justice to the petitioner, who is invoking jurisdiction of winding-up under the just and equitable rule, the court could not do injustice to a solvent company by a public advertisement which would necessarily result in irreparable and irreversible harm. This is the most material distinction between bankruptcy proceedings and winding-up proceedings. That is why the legislature has in terms enacted in section 443(2), when such jurisdiction of winding-up is invoked on just and equitable grounds, that the court may refuse to make up an order if it is of opinion that some remedy is available to the petitioner and that they are acting unreasonably in seeking to have the company wound up instead of pursuing such other remedy. The legislature has introduced sections 397 and 398 in the Act which gave ample powers to the court, by passing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st and equitable because if it is a sound concern, such an order must operate harshly on the rights of the shareholders, but if in addition to such misconduct the circumstances exist which render it desirable in the interest of the shareholders that the company should be wound up, there was nothing in section 166( vi ) (corresponding to present section 433( f )) which bars the jurisdiction of the court to make such an order. Their Lordships, in terms, referred to Loch's case ( supra ), which was held to be a case in which the order of winding-up was asked for on the ground of mismanagement by the directors, and the law stated at page 788 in Loch's case 23 was, in terms, approved. That is why in that decision the alternative remedy under section 153( c ), corresponding to section 397 of the Act, was held to have been rightly invoked even when by the appointment of an administrator, complete interference with the internal affairs of the management of the company had been done. It was treated as a settled legal position by their Lordships that where nothing more is established than that the directors had misappropriated the funds, the order of winding-up would not be just or equi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to jeopardise the substratum of the company, a justifiable lack of confidence in the conduct and management of the company's affairs due to lack of probity on the part of those in management, where there is open mismanagement and there is no panacea to remedy the evil, such are instances, though not exhaustive, when the courts exercise their jurisdiction under the "just and equitable" rule to wind up companies. Further proceeding, at page 47 26 , the learned judge observed that jurisdiction under the just and equitable clause should not be invoked in cases where the only difficulty is the difference of view between the majority directorate and those representing the minority, if the petitioners had alternative remedies available in law to redress such grievances which are not only adequate but efficacious. In the same volume, in Lokenath Gupta v. Credits Private Ltd. [1968] 38 Comp. Cas. 599 (Cal.), Ghose J. of the Calcutta High Court took the same view that mere mismanagement or misappropriation or misconduct on the part of the directors or managing director is no ground for winding up ; so also, general allegations of oppression of minority shareholders is not a ground, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by itself would not justify a winding-up order, especially where the alternative remedy under sections 397 and 398 would be available, and it would be also necessary to show that there is justifiable lack of confidence on the ground of lack of probity in the conduct of the company's affairs. It is in the light of these settled legal principles that I must examine the first two contentions raised by Mr. Sorabji. In the present case Mr. Divan vehemently argued that this was a small family concern, of course of three families, Shahs, Chanderias and Khimasias. The whole contention of Mr. Divan is misconceived as even the alleged basic agreement has been entered into not by Chanderias or Khimasias but by the public limited company, i.e. , East African Company, on August 17, 1960, for capital participation. It is true that before that, when the concern was a private limited concern of the Shah family with a small subscribed capital of Rs. 50,000, it was of course a small, domestic family concern. When, however, this Shah family sought capital participation by the East African Company, a public limited company, by entering into the basic agreement with that company, even though the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Divan was one of a complete ouster. That is why the company in its affidavit pointed out various acts which were being done by the managing director of the minority group, petitioner No. 1 himself, by taking part in putting orders, giving instructions as to the execution of the orders or the works and in issuing even cheques right from January, 1969, till September 25, 1969, to the tune of lakhs of rupees. The only reply of the petitioners in rejoinder is that these few instances would not show that the minority group is not excluded from management. The vague denial itself makes the entire case hollow. Huge correspondence which is produced in this connection, carried on admittedly by the petitioner No. 1 himself, including cases where even pay of the. employee has been raised substantially to Rs. 1,475 as late as August 26, 1969, would show that the situation is not one of a complete irresoluble deadlock which would ever justify invoking of the partnership principle. Even apart from these, the alternative remedy under sections 397 and 398 would completely solve all the grievances of the petitioners. Therefore, there is no substance in the first contention raised by Mr. Divan that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been remedied. For the so-called oppression and deprivation of their minority rights or mismanagement, if any, they have effective remedy under section 397 or section 398 which they have not invoked. They also availed of their remedy of the investigation under section 408 on the identical ground that the affairs of the company were conducted in a manner which was oppressive to the members of the company or in a manner which was prejudicial to the interests of the company or to public interest. They failed in getting any relief and even that fact was not pointed out in the petition. Mr. Divan, however, vehemently argued that the petitioners have a right to choose their remedy by invoking the principle of dominus litus. Mr. Divan ignores the fact that this is not a remedy of action available to any individual. This is a representative proceeding and the remedy under section 433( f ) is available only on a just and equitable ground. That is why section 443(2) has made it mandatory for the court to consider this question as to the existence of alternative remedy available to the petitioners. Mr. Divan also argued that the matter is at an admission stage and when an arguable case is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principle of dominus litus. Even in Loch's case ( supra ), the Privy Council invoked the winding-up jurisdiction on just and equitable clause because there was no other remedy available to the petitioner. The existence of an alternative remedy itself makes it unjust and inequitable to invoke this extraordinary jurisdiction which in its very process spells such irreparable injury to a solvent company, because the winding-up petition could never be heard and decided, unless it is first advertised, as rule 24 makes no exception in this connection. Mr. Divan further argued that, in any event, the petitioners could not be said to be acting unreasonably in seeking to pursue this remedy in preference to the other remedies under sections 397 and 398 where they would have to discharge a higher burden by proving the oppression or mismanagement. Once the partnership principle is out of the question, the petitioners have to prove almost the same grounds even for succeeding in this petition and, therefore, sections 397 and/or 398 must be treated as an effective alternative remedy. Mr. Divan in this connection also argued that section 397 would be applicable if the oppression of the minorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he alternative remedy at least under sections 397 and 398. The remedy under section 408 they have availed of and they have failed. It is true that no reasons have been given in that it might be that that application under section 408 might have been rejected on the ground that other proceedings were pending without going into the merits. Mr. Divan cannot ignore the fact that the Company Law Board have gone into all the materials by making a requisite investigation after giving an opportunity to the petitioners to convince them of the grievances made under section 408 and have thereafter refused the relief. The order does not show that the application was thrown off as incompetent or that it was not entertained because of the pending proceedings. If that was so, no such elaborate investigation could ever have been done. In any event, the petitioners not having availed of the remedies under sections 397 and 398, there is no justification whatever for this petition at this stage. Therefore, on all these grounds this petition must fail and it cannot be admitted as on doubtful assertions the petitioners are presenting the petition in a manner productive of such irreparable damage to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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