9911796707
TMI Blog1972 (5) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... eing the second appellant), in C. A. No. 8 of 1971. The company was incorporated in 1938 under the Indian Companies Act, 1913, as a public company limited by shares with a nominal capital of Rs. 34 lakhs and a paid up capital of Rs. 12 lakhs) (which to begin with was Rs. 10 lakhs). By article 116 of its articles of association, the company was required to take over the business of Lord Krishna Sugar Mills, promoted by a firm, of which Seth Shiv Prasad and his brothers, Seth Devi Chand, Seth Kundan Lal and Seth Banarsi Dass were the only partners. Seth Shiv Prasad was able, during the course of time, to acquire the entire shareholding in the capital of the company and to become its virtual sole proprietor. The company runs a sugar mill and a textile mill, both situated at Saharanpur and has its registered office at present, in Chand Hotel, Chandni Chowk, Delhi. Seth Shiv Prasad had seven sons, viz., Bimal Prasad (deceased), husband of respondent No 4, Anand Kumar, respondent No 2, Sushil Kumar, respondent No 3, Kuldip Chand, Ramesh Chand, Suresh Chand and Nirmal Kumar, from his first wife, Sita Rani, who had died in 1951 On June 27, 1953, he married the appellant from whom he got ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "the Act", inasmuch as their relatives held and are holding offices and/or places of profit without the previous consent of the company by special resolutions. The business of the company, is thus being carried on and contracts, commitments and obligations are being entered into by persons who have no authority to act, the directors having vacated their offices since long. It is then stated that the balance-sheets do not reflect the true state of affairs, the directors and their associates have been taking loans and advances from the company against the provisions of law, large funds have been misappropriated by the management and vouchers, records and accounts have been manipulated, various irregularities have been committed by the directors in withdrawing huge amounts which would be brought to light if the accounts of the company are scrutinised in detail; and the company did not declare dividends excepting once in the year ending May 31, 1959, when the appellant was a director. The company is said to have set up an underground pipe direct from the molasses tank, through which the molasses is taken out of the mill and sold in black market unnoticed by the excise department and ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de and moved with an ulterior motive. The affairs of the company were said to have been conducted properly and the practice and procedure prevalent from the time of Seth Shiv Prasad was said to be still being followed without there being any illegalities or anything else to the detriment of the appellant or any other shareholder. The allegations of fraud, misappropriation, diversion of funds and other irregularities were specifically denied and were said to be devoid of particulars. The petition was characterised as an abuse of the process of court to coerce the respondents into paying to the appellant an unconscionable price for the shares belonging to her and her minor son. The company was said to be a flourishing concern and for this reason it was stated that it was neither just nor equitable to wind it up. A number of affidavits, counter-affidavits, rejoinder-affidavits and replication were filed. A number of applications for the appointment of the provisional liquidator were also filed from time to time, but without any success. After going through the voluminous evidence and the case law on the subject, the learned company judge found that the appellant was trying to exploit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndents in their appeals (Company Appeals Nos. 8 and 10 of 1971), another Division Bench dealing with these applications, modified the orders of the learned company judge by allowing the old board of directors to continue as before with the addition of Shri A. N. Kirpal as the chairman. On another application moved before us by the appellant, we appointed a firm of chartered accountants as internal auditors to keep under observation and check the day-to-day affairs of the company. Mr. R. M. Lal, the learned counsel arguing before us, on behalf of the appellant, submitted that the learned company judge had fallen into an error in holding that the winding up order was not justified in this case, merely on account of the delay in the disposal of the petition, although he did find that the company was in the nature of a partnership and for its winding up, the partnership principles were attracted and that the affairs of the company had been conducted in a manner prejudicial and oppressive to the appellant and her son, and further that respondents Nos. 2 and 3 had been found guilty of various acts of omission and commission detailed in the judgment. The relief granted under sections 397 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to losses Towards the end of 1958, Ajit Singh fell into financial difficulties and made demands on Seth Bimal Prasad and his brothers. As nothing came about, the appellant, in order to help her brother, was obliged to raise loans in January, 1959, on the security of two mortgages of the house, 3, South End Road, New Delhi, which was purchased by her in 1956 from the money gifted to her by Seth Shiv Prasad. The amount thus raised was given over to Ajit Singh, as is apparent from the statement of the appellant's Delhi bank account, exhibit PW 5/1, bank draft, dated January 30, 1959, her Bombay bank account statement, exhibit P4, and cheque, exhibit P 7, duly endorsed at its back by Ajit Singh. Maya Dass Mehta, PW 10, a close friend of Seth Shiv Prasad, stated on oath that in December, 1958, he had approached Bimal Prasad at the instance of Ajit Singh to persuade him to invest Rs. 10 lakhs in Mehtab Films. In March, 1959, Seth Bimal Prasad died. The Central Bank of India Ltd. asked the surviving heirs of Seth Shiv Prasad, including the appellant, as. also the heirs of Bimal Prasad to execute fresh guarantees to the bank. In April, 1959, the witness (Maya Dass) again went to Saharanpu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separated (exhibit PW-11/5). She proposed to sell her and her son's shares to her step-sons, who were prepared to purchase the same, but were not keen to hurry through as that might make them pay a higher price. They wanted to gain time also for arranging funds to pay the purchase price (exhibit PW-11/5). In about May or June, 1959, there appears to have been some rapprochement between the parties and a sum of Rs. 10,000 was given as loan to Ajit Singh, as evidenced by pronote dated May 21, 1959, for that amount. Exhibit PW-11/6 is a letter dated June 10, 1959, addressed by respondent No. 2 on behalf of the company to the sub-agent of the bank at Saharanpur saying that the mutual differences have been ironed out and all members of Seth Shiv Prasad's family have signed the documents. Bank guarantees were signed by the appellant also. On October 20, 1959, Ajit Singh was declared insolvent by the Bombay High Court and the differences between the parties again took an ugly turn. Exhibit PW-11/7 is a letter dated November 11, 1959, addressed by, B. N. Puri to the general manager of the bank in Bombay, saying that the appellant had contacted him and informed him that differences have cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment with the learned company judge that the winding up petition was filed by the appellant at the instigation of her brother, Ajit Singh, with a view to indulge in extortion. The appellant, in fact, never wanted the company to be wound up. Her aim was merely to squeeze money out of respondent No. 2 and his real brothers, more than what they were willing to pay. This is amply borne out from her own answers to questions put to her in cross-examination, some of which are reproduced as under : "Q: In order to end the dispute, are you prepared to sell your shareholding and the shareholding of your son for a price to be settled by this court or by an arbitrator or a person to be nominated by this court ? A : I am not prepared to sell my shares in this flourishing company. Q : Are you prepared to work at Saharanpur as working director for a period of three years in the first instance on the remuneration to be fixed by this court with opportunity to file another winding up petition, in which the ground of the present petition may also be included in case of dissatisfaction ? A : I am not prepared to work with, the present directors because they have already cheated me. I will only agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter getting fed up with the appellant's delaying tactics, offered by their application, C.A. No. 151 of 1966, to serve dasti summons on her witnesses. This offer was refused. The appellant herself attached no value to the statement of her witnesses, laboriously examined over a number of years, as none was referred to before us by her learned counsel. The attitude of the appellant in obstructing the trial is not at all understood. On September 1, 1967, H. R. Khanna J (as he then was) had occasion to observe in his order that the petitioned was in the habit of moving applications at the last moment and then delay the proceedings. Her grievance that the delay inherent in the court procedure should not have influenced the "learned company judge to refuse passing the compulsory order is, thus, without any basis. Her part in deliberately causing delay, which according to Mr. Ved Vyas was a sword of Democles, kept hanging over the respondents' heads to maintain a constant pressure over them, though not conclusive proof in itself of her other than bona fide intentions, speaks against her when the question of her mala fides is taken into consideration. Mr. R. M. Lal contended that in a win ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes a further discretion in the court to order or not to order a winding up. The discretion cannot be exercised arbitrarily or according to one's own will or whim. It has to be regulated by law and the well-known rules of equity in order to assist the law, allay its rigour, advance the remedy and to relieve against abuse. The court, therefore, exercising equity jurisdiction cannot ignore the well-known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands. Another equally well-known maxim is that where both parties to the litigation are at fault, the defendant's position is stronger (see Pomeroy's Equity Jurisdiction, volume 2, page 90). Mr. Ved Vyas cited a number of English and Indian cases where the winding up order was refused on the ground that the petition was presented really for some other purpose, such as putting pressure on the company. It is, however, not necessary to refer to them, as we have a number of decisions of the Supreme Court dealing with this question. In Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp. Cas.351,375;[1965] 2 S.C.R 720 (S.C.), the Supreme Court refused to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingh started instigating her against the step-sons in order to take undue advantage of her position. It was then that she refused to sign the renewal guarantees which the bank insisted her to sign. Respondents Nos. 2 and 3, therefore, had justification to doubt the advisability of keeping her on the Board, as aided by her brother, she had started indulging in extortion and blackmail. In fact, the appellant herself does not seem to have been keen at that time to be re-elected on the Board. She had made up her mind to sell her own and her son's shareholding to her step-sons. Negotiations were already afoot for this purpose. In any case her non-election as director cannot be said to be her exclusion from the management in which, Mr. R. M. Lal says, she had been participating. According to her, she did not attend any board meeting during her tenure in office as a director from 1953 to 1970, except once, although respondents Nos. 2 and 3 assert that she attended many meetings as recorded in the minute books. Her grievance that she was excluded from management, therefore, has no basis. The petition in the present case having been filed for putting pressure on the respondents in order to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship principles, according to him, were, therefore, attracted for its winding up. On the first point reliance was placed on the raising of certain false debits against the appellant. This was said to have been done to offset the credits that were raised in her and her son's favour for dividends that became due to them. The first of these debits of Rs. 5,600 was raised on May 31, 1959. The allegation in respect of this entry was made in paragraph 3 8 of the petition in the following words : "that the respondents Nos. 2 and 3 had personally taken an advance of Rs. 5,600 from V. N. Kapur, accountant of the company. But, in the account books of the company, this advance has been shown against the name of the appellant, which is entirely incorrect and the entry is false. Respondents Nos. 2 and 3 are misappropriating the funds of the company". In the verification, this statement was said to be true, not according to the appellant's knowledge, but on information believed to be true. In the written statement filed on behalf of the company and other respondents, the allegations in paragraph 38 of the petition were denied as false. V. N. Kapur, the manager of the textile sale depot of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Sushil Kumar have stated on oath in their affidavits that they have not withdrawn this amount from the company as was alleged in the petition. No questions were asked from them in cross-examination on this aspect. Nothing has been brought on record to show that the various entries as appeared in exhibit PW-30/11 were within the knowledge of the directors. The finding, however, is that it was a false entry and not that respondents Nos. 2 and 3 had withdrawn this amount as alleged in the petition. The allegations in the petition are in respect of one kind of default, while the finding is of different default. Although the inconsistency of the stand taken up by V. N. Kapur is glaring, yet it cannot be ignored that the various amounts, which are said to have been added up to make up the said sum of Rs. 5,600 were actually disbursed on various dates from December 19, 1957, to April 22, 1959, as are found to be duly entered in exhibit PW-30/1 and exhibit PW-30/3, which are the books seized in the police raid and are held by the learned company judge to be the genuine rough books, written in regular course of business from day-to-day. Apart from a few items paid in cash, receipt of whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received the notice on January 31, 1960. She does not say that the agenda of the meeting did_ not accompany the notice, nor was any question asked from Anand Kumar or Sushil Kumar about the agenda She was, therefore, aware of this amount having been debited to her account. She did not protest. The resolution cannot be said to have been manipulated, especially as the minute book was duly signed by Mr. K. K. Jain, the appellant's learned counsel, on December 1, 1960, in pursuance of the orders of G. D. Khosla C.J. It has been stated that this item of Rs. 5,600 together with other items were falsely debited to the appellant's account in order to offset any credits that were given to her on account of dividends. This allegation is, without any basis, as no dividend was declared by the company before March 23, 1960, which became payable 42 days after its declaration. This being the first dividend ever declared, the question of raising debit entries about a year in advance in May, 1959, did not arise and in any case this one isolated instance cannot be magnified to give a verdict of lack of probity on the part of the directors towards the proprietary rights of the appellant. The above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 2 and 3. The third debit entry, which the learned company judge noticed, is of Rs. 780 56, said to be in respect of the alleged supply of barbed wire, etc., for the appellant's house, 3, South End Road, New Delhi. This material, said Mr. Ved Vyas, was required by the appellant and the company had paid for it and so the debit had to be raised against her. The learned company judge was of the view that this was a fictitious debit raised to make up a particular amount. The affixing of the barbed wire around the house is not denied. Its cost, as evidenced from the bill, was Rs. 788 56 for which a "hundi "had been drawn by the supplier and presented to the company at Saharanpur, but appears to have been dishonoured. A sum of Rs. 788 56 was subsequently paid at Delhi as is found from the relevant voucher, exhibit PW-30/4. It is not understood as to why Rs. 780 56 only were debited to the appellant. According to Mr. R. M. Lal the amount was reduced in order to make it fit in the total amount of Rs. 13,348 58, which according to the note in the balance-sheet was the "advances to the directors and their associates". This contention is entirely baseless. In the first place, this amount w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept the chairman, in paragraph 51 of the petition, it is alleged that a vital meeting in which the balance-sheet as on May 31, 1958, was approved was not attended by her. Only two directors were present, which was less than the required quorum. The accounts and the balance-sheet and the directors' report, accordingly, are said to have not been duly passed. An examination of the minutes book shows that the grievance is imaginary. The appellant's presence has not been recorded. The meeting was perfectly valid, with the presence of two directors, as the required quorum was two. Again the appellant takes credit for the declaration of dividend for the first time on March 24, 1960, in a meeting attended by her. From her letter dated November 16, 1960, exhibit PW-2/28, however, it is apparent that she had opposed the declaration of dividend which, according to her, was "declared for ulterior motive". A note in the minutes book records her dissent. Then again a general meeting of the company was held on June 10, 1959. The proceedings of this meeting are signed by her, as after her objections in or about May, 1959, her signatures used to be obtained on the minutes of the meeting attended by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt's applying for the same, which she failed to do as she did not want the shares to stand in her name and thereby incur the risk of being attached in realisation of heavy amounts due from her towards income-tax and to other creditors. The shares which had been given by Seth Shiv Prasad to the appellant and to his sons had been registered in their respective names. The shares of the face value of Rs. 3,85,360, however, still stood in the name of Seth Shiv Prasad himself and shares of the value of Rs. 1,70,050 stood in the names of benamidars. After the death of Seth Shiv Prasad, the appellant and her son were admittedly entitled to 2/9th share in the said shares. The benami shares were divided between the parties on 14th April, 1958, while those standing in the name of Seth Shiv Prasad were divided on December 26, 1959. The share scrips and the relevant signed transfer deeds, in respect of shares allotted to her and her son, were duly handed over to the appellant. There is a letter dated December 26, 1959, signed by Anand Kumar as director of the company addressed to the appellant, undertaking on the company's behalf that the shares of the face value of Rs. 86,000 which had been ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness whatsoever, thus can be transacted at a board meeting, while the shareholders are required to be informed in advance of the agenda in the case of a general meeting. A grievance had been made before S. B. Capoor J. also that 7,500 benami shares which fell to her and her minor son's share in the family arrangement had not been registered by the company. On June 6, 1966, the learned judge passed an order in accordance with the respondents' offer that if the transfer forms and other relevant documents were submitted to the company, it will after notice to the income-tax authorities and subject to any objections made by them duly register the transfers. The appellant in spite of this order has not taken any steps so far to present the share scrips to the company for registering and endorsing thereon the transfers. The non-registration of transfers in the names of the appellant and her son, or the registration in favour of Shanta Rani, therefore, cannot be said to show that the respondents Nos. 2 and 3 did what they liked when they liked as far as their own interests were concerned; or that they deliberately did nothing for the appellant and her son; or that they tried to keep them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to these attachment orders. Any dividends which 'are lying unpaid with the company for the previous years on the shares registered in the name of Abnash Kaur and her minor son are also to be similarly deposited in court". The grievance before S. B. Capoor J. was obviously in respect of the payment of dividends due not only to the appellant but also to her minor son. The respondents, therefore, cannot be blamed if they took the order as authorising adjustment against the dividends due to both. In the cover ing letters of the company to the Deputy Registrar of this court every month enclosing the draft for monthly payments in puruance of the said orders, it is always mentioned that "this amount will be adjusted from the dividends of Smt. Abnash Kaur and Kanwal Kishore". Letters were also addressed every year direct, both to the appellant and her minor son through her, specifically mentioning that the amounts had been adjusted towards the dividends payable to the appellant and her minor son, Kanwal Kishore No protest or objection was ever raised by the appellant to this interpretation of the order. Another order dated September 2, 1966, passed by A. N. Grover J. (as he then was) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the company and should have been available for computation of profits for distribution among the shareholders. Mr. Ved Vyas, however, urged that no specific plea about fictitious deposits having been raised in the petition, it would not be appropriate to examine this contention. He raised strong objection to the contentions of Mr. R. M. Lal in this regard, more so as the respondents never had the opportunity to lead evidence in respect of such vague and wild allegations. Mr. R. M. Lal read out paragraph 18 of the petition where it was pleaded that respondents Nos. 2, 3 and 4 were in complete control over the affairs of the company and were in a position and were in fact alleged to be illegally diverting the funds and assets of the company to their own pockets to the disadvantage and detriment of the appellant. In paragraph 19(2)(a) there was a similar bald allegation about the respond-dents misappropriating the funds and monies of the company. In paragraph 24, it was stated that large funds of the company had been misappropriated by the management and vouchers, etc., had been manipulated. According to Mr. R. M. Lal, the appellant was required to plead facts and not the evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the evidence already produced by some other evidence if the precise charge had been made known to him. To state material facts in the pleadings, it would be mentioned that monies belonging to the company were shown in the books as deposited in favour of various names. This would, then, be said to be fictitious. While giving the particulars, the actual names in which these deposits stand in the books, the amounts and the dates on which they were entered in the books, will all be mentioned. There may be variations here and there; but this will be the basic approach. There may be numerous deposits in hundreds of names; and the respondent cannot be expected to keep on explaining each and every one of them without being called upon to explain any one. Material facts will thus indicate the precise grounds of the allegation and the complete cause of action; and the particulars will give the necessary information to present a full picture of the cause of action. These facts, if proved, will enable the court to come to the conclusion that the accounts of the company have been manipulated. Merely stating the conclusions at which the court is expected to arrive without giving the material f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication were allowed by S. N. Andley J., which were then filed on March 20, 1970, alleging that the respondents are guilty of acts of fraud, misrepresentation, oppression, mismanagement, defalcations, removal, tampering with and substitution of the original records. No particulars or details were attempted. Five letters all dated March 15, 1963, said to be written by the company to the income-tax department relating to the assessment years 1946-47, 1949-50, 1951-52, 1952-53 and 1953-54, for which penalty proceedings were proposed to be initiated, were, however, enclosed. The actual accounting period covered by these letters is from the years 1945-46 to 1952-53. The appellant did not file her own affidavit in support, nor did she herself sign the particulars. Nothing was said even then about fictitious deposits which are now sought to be spelt out from these letters. The appellant was married to Seth Shiv Prasad in June, 1953. The period covered by these letters, therefore, was long before the appellant came on the scene. There can be no question of lack of probity shown by these letters towards the appellant or her minor son. Some of these letters show that certain credits in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allegations. The contentions of Mr. R. M. Lal on this question are even otherwise without any merit. One of the names in whose favour the deposit standing in the books of the company is said to be fictitious is Maya Dass, who appeared as a witness on behalf of the respondents. No question was asked from him on this subject. Another name about which Mr. R. M. Lal tried vehemently to build a case was Uggar Sen. According to Mr. R. M. Lal, he was a man of no means and it was not possible for him to have this deposit of Rs. 30,000 in his name. This name had never been mentioned before and the respondents had no opportunity either to produce Uggar Sen in the witness box to demonstrate the hollowness of the appellant's contention. Our attention was drawn to letter dated March 15, 1963, written by the company to the Income-tax Officer, Special Investigation Circle "A", Meerut, asserting that the deposit in favour of Uggar Sen had since been proved to be genuine and had been accepted by the directorate. The company had said that penalty as proposed could not be attracted. Mr. Ved Vyas raised strong objections to questions about these deposits and advances being asked in cross-examination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 had not been withdrawing their salaries which were credited to their account without earning any interest. It is otherwise found that there always existed huge credit balances in favour of Anand Kumar and Sushil Kumar. The withdrawals by Anand Kumar and Sushil Kumar cannot correctly be said to be advances by the company. They were withdrawing from out of their own monies lying with the company; and this cannot be stigmatised as unauthorised or illegal use of the company's funds. Mr. R. M. Lal contended that it was not understood as to how respondents Nos. 2 and 3 have been living luxuriously when they have not withdrawn their salaries. But he himself admitted that large withdrawals had been made by them. He failed to explain what he meant by "luxuriously". The observations of the learned company judge that a full investigation be made in regard to manipulation of accounts, we say with respect, do not appear to be justified as the investigation cannot be made on hypothetical and unsubstantiated allegations. If the appellant really considered that she could make out a case for investigation, the appropriate remedy should have been under section 235 or 237 of the Act and not a windi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ousting of the appellant, the business was still being run profitably. The misconduct of the respondents, however, was such that mutual confidence which must subsist in a partnership was destroyed, and a state of animosity, which precluded all reasonable hope of reconciliation and friendly co-operation, prevailed. It was, therefore, impossible for the appellant and her step-sons to place confidence in each other which each has a right to expect. The company was not a losing concern. On the other hand, it was prosperous, but the appellant was not getting her fair share. He, therefore, was of the view that it was a case where the company could be wound up under the just and equitable clause. Mr. Ved Vyas strongly criticised these findings and urged that neither the company in the present case was in the nature of a partnership nor are the principles applicable to the dissolution of a partnership attracted to this company. A number of cases were discussed by the learned company judge and also cited before us at the Bar. It is, therefore, necessary to examine them in brief. The earliest case on the subject is In re Furrier's Alliance Ltd [1907] 51 Sol Jo.172, where the just a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plete deadlock. Circumstances which would justify the winding up of the partnership between the two are the circumstances which should induce the court to exercise its jurisdiction under the just and equitable clause to wind up the company. The learned Master of the Rolls proceeded [1916] 2 Ch.426,432,434,435,430 (C.A.): "If ever there was a case of deadlock, I think it exists here; but, whether it exists or not, I think the circumstances are such that we ought to apply, if necessary, the analogy of the partnership law and to say that this company is now in a state which could not have been contemplated by the parties when the company was formed and which ought to be terminated as soon as possible". The circumstances in that case, in the words of Warrington L.J., who wrote the supporting judgment, treating it as a case of deadlock, were : "The company does not appear as such because there was no means by which instructions can be given to anybody to appear on its own behalf. In substance, therefore, it seems to me these two people are really partners...I am prepared to say that in a case like the present, where there are only two persons interested, where there are no shareholde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or determination was whether the principles of dissolution of partnership ought to operate only where there was a deadlock. In In re Davis and Collett Ltd. [1935] Ch.693;5 Comp Cas 467 (Ch. D ), the petitioner and the respondent held equal shares. The respondent who was the chairman was able, by the use of his casting vote, to appoint two of his nominees as new directors, although they were not qualified to be directors. He acquired complete control and then excluded the petitioner from management. Crossman J. did not decide this case on the question of deadlock, as there was none, in view of the casting vote of the chairman. His Lordship in deciding whether it was just and equitable to wind up the company, considered in the widest possible terms, what justice and equity required. The company was ordered to be wound up, as, on the authority of Yenidje's case (supra), the position was considered in the same way, as it would have been considered if the question arose as to the right of one of the partners to have the partnership dissolved. In In re Lundie Brothers Ltd. [1965] 1 W.I.R.1051; 35 Comp Cas 827 (Ch. D), two brothers, Cyril Lundie and Reginald Lundie, on the one hand, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ongly decided on the question of winding up. Thus, rejecting the views of Plowman J., in this case, the Yenidje case's (supra) doctrine has been considered to be applicable to deadlock cases. Applicability of partnership principles to winding up of closely-held companies has come up for consideration in a number of other English cases. The trend has been to apply these principles to deadlock cases. If the deadlock is found to be resolvable by resort to the articles of association, then the applicability of the said principles has been ruled out. The articles have thus been given great importance. We, therefore, turn to examine the other cases. In In re Bleriot Manufacturing Aircraft Company [1916] 32 T.L.R.253,225, Neville J. considered the alleged misconduct of directors, which in itself was not a sufficient ground for winding up, and observed : "The words 'just and equitable' are words of the widest significance and do not limit the jurisdiction of the court to any case. It is a question of fact, and each case must depend on its own circumstances". The company was so constituted that it was found to be deprived of its usual remedies and this was held sufficient for a winding u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect [1924] A.C.783,793 (P.C) : "But then this is not a company that is formed by appeal to the public. It is what, for want of a better name, I may call a domestic company. The only real partners are the three brothers of family, the other shareholders having only a nominal interest for the purpose of complying with the provisions of the Act. In such a case it is quite obvious that all the reasons that apply to the dissolution of private companies on the grounds of incompatibility between the views or methods of the partners, would be applicable in terms to the division amongst the shareholders of this company, and I agree with your Lordship that this is a case in which it would be just and equitable that this company should be wound up, and the partners allowed to take out their money and trade separately if they please". The following words of Lord Clyde, Lord President of the Court of Sessions, in Baird v. Lees [1924] S.C.83,92 were also quoted with approval2: "A shareholder puts his money into a company on certain conditions. The first of them is that the business in which he invests shall be limited to certain definite objects. The second is that it shall be carried on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the younger brothers to whom the shares had been bequeathed by their father but had not been registered by the directors. The learned company judge noticed the above views of Danckwerts L.J. in Swaledale Cleaner's case (supra), and on the basis thereof ignored the decisions in Cuthbert Cooper's case (supra) as being an extreme view. But Cuthbert Cooper's case (supra) was considered by the Court of Appeal in two other cases. The first case was Charles Forte Investments Ltd. v. Amanda [1964] Ch.240;[1963] 3 W.L.R.662;[1963] 2 All E.R.940;[1964] 34 Comp.Cas 233 (C.A). Danckwerts L.J. had been a party to the judgment in this case. The defendant threatened to present a winding up petition contending that the directors' refusal to register transfer was against the company's interest and constituted an abuse of power. The company sought an injunction restraining the defendant from presenting the petition on the ground that it was an abuse of the process of the court. The trial court refused to continue the interim injunction obtained ex parte. On appeal, it was found to be an attempt of the defendant to put pressure on the board. Willmer L.J. considered Cuthbert Cooper's case' s (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dies were available. The winding up petition was dismissed. In In re Expanded Plugs Ltd. [1966] 1 W.L.R. 514; [1966] 1 All E.R.877;36 Comp.Cas.497,505,506 the petitioner and another held between them the whole capital and were held in substance to be partners. The petitioner sought winding up. Speaking of deadlock, Plowman J. held that there was none, owing to the existence of the chairman's casting vote. According to the learned judge, this was a company and not a partnership and while the partnership analogy may be of assistance in certain circumstances, it could not be pressed too far and in particular it could not be invoked for the purpose of giving a locus standi to a petitioner who, by company law, was denied one. The analogy seemed to him to break down in at least two important respects : "In the first place, the liability of an ordinary partner is unlimited so that he has a financial interest in bringing the partnership to an end, whereas in the case of a limited company a fully paid member's liability cannot be increased by further trading. Secondly, an insolvent partnership cannot be dissolved at the instance of creditors, whereas they have the right to petition for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that of an ordinary minority shareholder. There never was a quasi-partnership between the trustee in bankruptcy on the one hand, and the other two directors on the other. In In re Fildes Bros. Ltd [1970] 1 W.L.R.592;[1970] 1 All E.R.923;40 Comp.Cas.938 (Ch. D).J Megarry J. was of the opinion that the words "just and equitable "were very wide in their scope. In the Cuthbert Cooper's case (supra) a and K\9 Meat Supplies's case (supra) the principles of quasi-partner-ship, according to the learned judge, had been extended so as to have regard to the contract between the parties as shown by the articles of association. But, as it was a contract between the parties which was important, the learned judge regarded not merely what the articles said, but also what the parties were shown to have agreed in any other manner. The settled and accepted course of conduct between the parties, whether or not cast into the mould of a contract, was considered to be important. Coming to Indian cases, the first one that attracts attention is B. Cowasji v. Nath Singh Oil Co. Ltd. [1921] 59 I.C.524 (Lower Burma), decided by the Lower Burma Chief Court. It was held that it would only be in extreme cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in a spirit of amity among the shareholders, laying the blame on the petitioner and the second respondent, who, according to them, were trying to squeeze them out of the company by means of the winding up order. They themselves had filed applications for the appointment of an inspector for investigation and also for the appointment of an administrator for administering the company's affairs. It was considered, under these circumstances, that if the petitioner and respondents Nos. 2 to 5 had been carrying on their business as a partnership, there would have been every justification for directing a dissolution of the partnership. The fact that they conducted the business by means of the machinery of a limited company was not considered to make any difference. The compulsory order was, therefore, made on the just and equitable ground. In Veeramachineni Seethiah v. Bode Venkata Subbiah [1949] 19 Comp. Cas 107 ;A.I.R.1949 Mad.675 it was held that the just and equitable clause should not be invoked in cases where the only difficulty was the difference of view between the majority and the minority. The mere incompatibility of good relations between the rival factions in the directora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partner, it was, observed, stood on a different footing from the position of shareholders qua shareholders of a company. The doctrine of agency prevailed in the case of a partnership and each partner represented the other partner and had a right to participate in the conduct of the affairs of the firm. That was not the case so far as the position of the shareholders of a company was concerned. The management of the affairs of a company was vested in a small body of directors. It was only when a situation analogous to deadlock arose amongst the directors inter se that the principles relating to the dissolution of partnership could be extended to the winding up of a company. No shareholder was considered to have a right to participate in the governance of the affairs of the company. In Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. [1962] 32 Comp.Cas.207;A.I.R.1962 Cal.127 it was held that denial of access to or inspection of the books of account of the company to the shareholder is not an act of oppression because a shareholder has no such right recognised by the Act. Similarly, the board of directors has a discretion to declare dividend and the rate of such d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or on the ground of domestic or family companies. The complete deadlock was where the board has two real members or the ratio of shareholding was equal. In the domestic or family companies, courts applied the dissolution of partnership principle where shareholdings were more or less equal and there was ousting not only from, management, but also from benefits as shareholders. Lack of probity has to result in prejudice to company's business affecting rights of complaining parties as shareholders and not as directors. If the deadlock could be resolved by the articles there was no deadlock to bring a winding-up and if there were alternative remedies the company should not be wound up. The learned judge, therefore, found that this was not a case where the partnership principles could be applied; there was no evidence to establish continuous and persistent mismanagement and further that the substratum of the company was not gone. The application for winding up was, therefore, dismissed. This case went up in appeal before the Division Bench of the Calcutta High Court, which set aside the judgment of the learned single judge (see Raghunath Prasad Jhunjhunwala's case (supra)). The appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the judgment in Yenidje Tobacco Company's case (supra), to mean that unless there was a deadlock the partnership principle did not apply, the Bench was of the view that, according to the said ratio, if a private company could be fairly called a partnership in the guise of a private company then the things which might be a ground for dissolution of a partnership will apply also in the case of a private company. Deadlock was not material. It was under these circumstances that the judgment of the learned single judge was set aside; and it was considered just and equitable to wind up the company. With utmost respect for the learned judges of the Calcutta Bench, in Raghunath Prasad's case (supra), we do not find ourselves in agreement with them. For a company, after all, on incorporation, becomes an entity different from a partnership. And the rules for dissolving a partnership on just and equitable grounds cannot easily be imported in a case for dissolving a company on similar grounds. There may be cases where the partnership principles may be applicable, such as deadlock cases; but, apart from other things, the provision in the articles, whereby the deadlock, if any, can be resol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... native remedies under sections 397 and 398. They had availed of the remedy of investigation under section 408. The petition for winding up, therefore, was not admitted. It may be useful here to notice two other decisions. In Kalinga Tubes Ltd. v. Shanti Prasad Jain A.I.R 1963 Orisa.189, the case was under section 397 of the Act. The company consisted of three groups, who amongst themselves had entered into an agreement to share in the management of the company. They were like partners so long as the company continued to be a private company. Later on, the company was converted into a public company. The contractual obligations worked out with reference to the theory of partnership were held to be no longer continuing, as the articles constituted the contractual obligations amongst the shareholders. This case went up in appeal to the Supreme Court (Shanti Prasad Jain's case (supra)). The judgment of the Orissa High Court was affirmed. The Supreme Court observed: "As has already been indicated, it is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of section 397. It must further be sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, showing their intention as to how they agreed to transact the business of the company; and which must, therefore, govern the relationship amongst them inter se. Another important principle that has emerged from the aforesaid decisions is that winding up of a domestic or family company on just and equitable rule is permissible if there is a justifiable lack of confidence in the conduct and management of the company's affairs, grounded on the conduct of directors in regard to the company's business. This lack of confidence must not arise from mere dissatisfaction at being outvoted on the business affairs or the domestic policy of the company. It must rest, on the other hand, on a lack of probity in the conduct of the company's affairs; and provided that an appeal to the domestic forum is not possible; and further that the lack of probity results in injury to the petitioner in his character as member. Mr. R. M. Lal submitted that the company in this case was a domestic company. It was a partnership to begin with, which had later on been converted into a limited company. The essential features of partnership, according to him, did not disappear on its assuming the guise of a limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to inspect the accounts or other books or documents of the company except such as were allowed to be inspected. The company was registered as a public company and not a private company, showing that the intention was not to limit the membership to only a few. On account of certain disputes, winding-up petitions were filed on two occasions but were compromised. Ultimately, Seth Shiv Prasad gave up his family's l/6th share in the Bijnore Mill and purchased the entire shareholding in the company by July 16, 1948, thereby becoming its virtual sole proprietor. Mr. R. M. Lal contended that Shiv Prasad's shareholding was his personal asset and not the asset of the Hindu undivided family. It is, however, not necessary to decide this controversy in view of Seth Shiv Prasad having become the virtual sole proprietor. On May 3, 1953, Seth Shiv Prasad transferred shares of the face value of Rs. 71,750 to his eldest son, Bimal Prasad, and of the face value of Rs. 71,640 each separately to each of his other six sons. He also gifted shares of the face value of Rs. 72,000 to the appellant and shares of the value of Rs. 71,000 to Kanwal Kishore, his minor son, from the appellant. According to Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the appellant herself, conflicts with that of respondents Nos. 2 to 4. Their interests 'are not shown to be identical inter se. It cannot, therefore, be said that the company consists of two individuals or two or more groups equally or more or less equally balanced, having rights analogous to those enjoyed by partners. The company has not the remotest resemblance with a partnership. It would be dangerous to think that any one of them in such a set up has the right to send the company into winding up on the analogy of a partnership. Many shareholders, who may be vitally affected, are not even parties to these proceedings. The law of partnership in England differs from that in India, inasmuch as agreement, as such, is not a necessary condition precedent for the formation of a partnership under the English law. Section 1 of the U. K. Partnership Act, 1890, reads as follows: "(1) Partnership is the relation which subsists between persons carrying on a business in common with a view of profit. (2) But the relation between members of any company or association which is- (a)Registered as a company.... or (b)Formed or incorporated....; or (c)A company engaged in working mines.. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included in the English Companies Act, 1948, to provide an alternative remedy so that winding up could be avoided. A similar provision was introduced in the Indian Companies Act, 1913, in the shape of section 153(3), which now has been incorporated in the 1956 Act as sections 397 and 398. These sections provide an alternative remedy where, inter alia, the affairs of the company are found to be conducted in a manner oppressive to any member or prejudicial to the public interest or the interest of the company. A further safeguard has been introduced by section 443(2) reading as follows : "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". The basic idea is to maintain the continuity and permanence of the entity of the company as far as is possible and to avoid an easy approach to the court for a compulsory order. In the present case, the appellant has failed to establish any de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lling to give him a suitable assignment. If, on the other hand, the appellant insisted on separating her interest, it may not be possible for the sons of Seth Shiv Prasad from his first wife or the children of Seth Bimal Prasad, to purchase her shares, more especially as some of them were not parties to these proceedings and others are minors. Respondents Nos. 2 to 4 would find it extremely difficult to pay the price of the shares of the appellant. In this situation, he suggested that the company would be prepared to accept the surrender of the shares of the appellant and her minor son at a fair price to be fixed by the court. In view of the extreme stringency in the money market and the practical impossibility of raising loans on the security of shares of the company, which are not quoted on the stock exchange, it was not possible, said the learned counsel, even to accept the surrender of the appellant's interest, unless instalments spread over five years were provided. It was further contended by him that so far as the shares of Kanwal Kishore are concerned, he was not a party to these proceedings. His shares should be left out of consideration. If, however, the appellant insiste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such an offer regarding the interest of Kanwal Kishore, the company shall take over the shares to which the appellant may be found to be entitled, whether they actually stand registered in her name or not. The appellant must exercise the above option both in respect of her own shares as also in respect of the shares of her son, within six months from the date of this judgment. If the option is exercised, the order in this appeal would be a direction to the company to take over and to the appellant to surrender to the company, her shares, as well as that of her son, if surrendered on the above terms, and the appeal would stand disposed of accordingly. If the option is not exercised by the appellant within six months from the date of this judgment, her appeal, C.A. No. 11 of 1971, shall stand dismissed. In appeals, CAs. Nos. 8 and 10 of 1971, the respondents have prayed for the dismissal of the appellant's winding-up petition. In case the appellant exercises her aforesaid option within six months the said two appeals shall stand disposed of in accordance with the aforesaid order. If the appellant does not exercise her said option, these two appeals shall stand accepted; and the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
