TMI Blog1975 (10) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... or winding up and the appellant's stay application relating to the Hind Overseas Private Ltd., a private limited company (briefly "the company"). The question that is raised in this appeal relates to the scope of section 433( f ) of the Companies Act, 1956 (briefly "the Act"), and in particular whether the principles applicable in the case of dissolution of partnership could be invoked in the case of the company. The allegations in the winding-up petition before the High Court are as follows: The company was incorporated under the Act in August, 1956. The nominal capital of the company is Rs. 5,00,000 divided into 2,500 equity shares of Rs. 100 each and 2,500 unclassified shares of Rs. 100 each, the entire nominal capital has been issued and fully paid up. The petitioners (respondents herein), Raghunath Prasad Jhunjhunwalla and his son, Phoolchand Jhunjhunwalla (hereinafter to be described as R.P.J. and P. C. J., respectively), and the members of their family hold 1,875 shares in the company and the remaining 3,125 shares are held by one V. D. Jhunjhunwalla and the members of his family. Following a family partition between V.D.J. and M.P.J. about the year 1958, the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s called with a view to oust the R. P. J. group completely from the control and management of the affairs of the company. V. D. J. group did not pay any heed to the solicitors' letter and passed various resolutions in the board's meeting held on May 27, 1966, whereby the previous resolutions of the board were countermanded and cancelled and R. P. J. was deprived of all his lawful authority and powers as a director including the right to operate the banking account of the company. R. P. J. was purported to be removed from the office of the director-in-charge of the company. V. D. J. group caused an advertisement to be published in the Vishwamitra on or about May 29, 1966, intimating the cancellation of powers in favour of R. P. J. V. D. J. taking advantage of the majority holding of shares by himself and the members of his group, caused to be issued through certain shareholders belonging to his group a requisition dated May 28, 1966, for calling an extraordinary general meeting with a view to remove R.P.J. and P. C. J. as directors of the company and to appoint other persons belonging to their group in their places instead. The explanatory statement to that notice alleged that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e court under section 44( g ) of the Partnership Act. A case for winding up has been, therefore, prima facie , made out by the respondents on these allegations. It is submitted that the learned company judge Raghunath Prasad Jhunjhunwala v . Hind overseas (P.) Ltd. [1971] 41 Comp. Cas. 279, 307 (Cal.) committed an error of law in dismissing the winding-up petition without admitting it and in allowing the stay-petition of the company (appellant herein) and that the Division Bench in the Letters Patent Appeal was right in setting aside the order of the company judge. According to the learned company judge the principle of dissolution of partnership applies to companies either on the ground of complete deadlock or on the ground of domestic or family companies. A complete deadlock, according to the learned judge, is where the board has two rival members or the ratio of shareholding is equal. In the domestic or family companies, says the learned judge, courts have applied the dissolution of partnership principle where shareholdings are more or less equal and there is ousting not only from management but from benefits as shareholders. Lack of probity has to result in prejudice to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the other partners find it impossible to carry on business in partnership with him ; (3) if some partners are in effect excluded from the concern ; (4) if the misconduct of one or more partners is such that the mutual confidence which must subsist in a partnership is destroyed ; (5) if there is a state of animosity which precludes all reasonable hope of reconciliation and friendly co-operation ; (6) if it is impossible for the partners to place that confidence in each other which each has a right to expect, provided that the impossibility has not been caused by the persons seeking to take advantage of it. Having noted the above, the appellate court held that conditions (2), (3) and (4), were unquestionably fulfilled in this case and, therefore, allowed the application and rejected the stay application. Before we proceed further we may refer to a recent decision of the House of Lords in Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360, 379 (HL) (briefly Ebrahimi's case ( supra ), wherein after reviewing all the earlier cases it was held as follows: "The foundation of it all lies in the words ' just and equitable ' and, if there is any respect in which som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing one of the three. Lord Wilberforce, delivering his reasoned speech, has himself noted that: "It is a fact of cardinal importance that since about 1945, the business had been carried on by the appellant and Mr. Nazar as partners, equally sharing the management and the profits". It was also noticed that in Ebrahimi's case ( supra ), "The company made good profits, all of which were distributed as directors' remuneration. No dividends have ever been paid, before or after the petition was presented". In Ebrahimi's case ( supra ), the company which was first formed by the two erstwhile partners, Ebrahimi and Nazar, was joined by Nazar's son, George Nazar, as the third director and each of the two original shareholders transferred to him 100 shares so that at all material times Ebrahimi held 400 shares, Nazar 400 shares and George Nazar 200 shares. The Nazars, father and son, thus had a majority of the votes in general meeting. Until the dispute all the three remained directors. Later on, an ordinary resolution was passed by the company in general meeting by the votes of Nazar and George Nazar removing Ebrahimi from the office of director. That led to the petition for wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... colour have been sought to be given from time to time in England appropriate to occasions and to facts and circumstances of cases coming before the courts. It is not necessary for us to go over the labyrinth of cases wherein the Yenidje principle was applied and it will be sufficient to gather the ratio from the words of Lord Cozens-Hardy M. R. expressed in the decision itself. The learned Master of the Rolls posed the question thus in that case: "I think it right to consider what is the precise position of a private company such as this and in what respects it can be fairly called a partnership in the guise of a private company". This was a company of two shareholders and two directors who had earlier traded separately but amalgamated their businesses and formed a private limited company. The constitution of the company was such that under its articles of association for any case of difference or dispute between the directors there was a provision for arbitration. In fact in one of such disputes a reference was made to arbitration which resulted in an award to which one of the two shareholders declined to give effect. It was proved in that case that the two directors were no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wind up the company. The House of Lords in Ebrahimi's case ( supra ) approved the decision in Yenidje's case ( supra ) . We may also point out that the House of Lords did not approve of the undue emphasis put on the contractual rights arising from the articles over the equitable principles, derived from partnership law in In re Cuthbert Cooper Sons Ltd. Case ( supra ) We may also refer to the Privy Council decision in Loch v. John Blackwood Ltd. [1924] AC 783, 793 (PC) wherein section 127 of the Companies Act, 1910, of Barbados, identical with section 433( f ) of the Act was considered. Lord Shaw of Dunfermline quoted in the judgment a passage from the case of Baird v. Lees [1924] SC 83 which is as follows : "I have no intention of attempting a definition of the circumstances which amount to a 'just and equitable' cause. But I think I may say this. 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 by certain persons elected in a specified way. And the third is that the business shall be conducted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must lie a justifiable lack of confidence in the conduct and management of the company's affairs. But this lack of confidence must be grounded on conduct of the directors, not in regard to their private life or affairs, but in regard to the company's business. Furthermore, the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, whenever the lack of confidence is rested on a lack of probity in the conduct of the company's affairs, then the former is justified by the latter, and it is under the statute just and equitable that the company be wound up". Again, in Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp. Cas. 543 , 557 (SC) this court had held that: "Primarily, the circumstances existing as at the date of the petition must be taken into consideration for determining whether a case is made out for holding that it is just and equitable that the company should be wound up". (See also Rajahmundry Electric Supply Corporation's case ( supra ) and Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp. Cas. 351 (SC)) Keeping the ratio of E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd efficient continuance of the company as a commercial concern, there may arise a case for winding up on the just and equitable ground. In a given case the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership. On the allegations and submissions in the present case, we are not prepared to extend these principles to the present company. The principle of "just and equitable" clause baffles a precise definition. It must rest with the judicial discretion of the court depending upon the facts and circumstances of each case. These are necessarily equitable considerations and may, in a given case, be superimposed on law. Whether it would be so done in a particular case cannot be put in the strait-jacket of an inflexible formula. In an application of this type allegations in the petition are of primary importance. A prima facie case has to be made out before the court can take any action in the matter. Even admission of a petition which will lead to advertisement of the winding-up proceedings is likely to cause immense injury to the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up instead of pursuing that other remedy. Again, under sections 397 and 398 of the Act there are preventive provisions in the Act as a safeguard against oppression in management. These provisions also indicate that relief under section 433( f ) based on the just and equitable clause is in the nature of a last resort when other remedies are not efficacious enough to protect the general interests of the company. Coming to the present case we find that the company was formed first with R.P.J. and Anil Chandra Dutta. Anil Chandra Dutta was admittedly an employee of the V.D.J. and it is also claimed that even R.P.J. was an employee of a company in which V.D.J. was a managing partner. Although the entire finance was to be arranged by V.D.J., it appears the company was started by the above two persons with V.D.J. remaining in the background. Anil Chandra Datta soon resigned and other people came in and in 1965-66, there were 19 shareholders, nine headed by R.P.J. and ten headed by V.D.J., clearly showing two family groups R.P.J. group had 1,875 shares and V.D.J. group had 3,125 shares. V.D.J. stood guarantee for bank overdraft to the tune of Rs. 47 lakhs and as the learned company ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of a large stake by V.D.J. carefully sought to be protected against erosion of his interests by constant vigil on the day-to-day working does not fit in with the concept of a partnership. All the above features do not enable us to accept the submission of the respondents that the company in this case is in substance a partnership. In the present case there is yet another important feature against the respondents. Serious trouble apparently arose on or about May 23, 1966, when a board meeting was notified. Prior to that even though something-might, perhaps, be brewing inside, but nothing came to the surface although the respondents alleged that V.D.J.'s son, Vinode Kumar Jhun-jhunwalla, had been sent to the States at the company's expense and was later on, after completion of education, appointed as technical director and that all these were illegal actions. It is significant that R.P.J. group was present in the meeting when these resolutions were passed and they made no grievance at the time about the same. The petition for winding up was filed on June 7, 1966, and the foundation for it was laid in the solicitor's letter to the appellants on May 27, 1966. That may be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which our client could hold shares to the extent of 6 annas and Shri V.D. Jhunjhunwalla and Shri Mahabir Prasad Jhunjhunwalla to the extent of annas 10 and that our client would manage the business of such company as and when it was formed and that the requisite finance for the working of the company would be made by Shri V.D. Jhunjhunwalla and Shri Mahabir Prasad Jhunjhunwalla". There is nothing in the above paragraph which is the cornerstone of the plea of partnership in substance that there was any active contemplation about forming of a partnership. Reference to "some type of business of partnership" is very casual in the above extract. On the other hand, it is more reasonable to conclude that although there might have been discussion about the advantages and disadvantages of partnership vis-a-vis a private limited company, no time was lost in deciding to form a company. If this is the only basis of agreement between the parties to sustain the claim, we are unable to accept the same. Regarding the second reason, the Sir Khata account which has been heavily relied upon to found an agreement or understanding is wholly misconceived. It merely shows that a joint account was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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