TMI Blog1974 (5) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... ari Sons Ltd.", which was incorporated as a company limited by shares, and ultimately converted into a private limited company styled as "M/s. Nandlal Bhandari Sons (Pvt.) Ltd." (hereinafter referred to as "the company") and incorporated as such under the Companies Act, 1956. By a division of the capital account, which included shares, the 5,836 shares and 1 scrip of the Mills Ltd., which had by then increased to 11,772 shares and 1 scrip by reason of issue of bonus shares, were transferred to the company. Subsequently, in the year 1969, the company purchased 6,327 shares of the Mills Ltd. from one Shrikishan Chandmal at Rs. 325 per share. Thus, the company held 17,099 shares and 1 scrip, i.e. , 85 per cent. of the share capital of the Mills Ltd. By virtue of the company being the holding company, it is the sole selling agents of the Mills Ltd. Under an indenture dated November 10, 1970 (R-14) the selling agency is to continue till December 31, 1975. The company has three sources of income : ( i ) the selling agency commission ; ( ii ) guarantee commission; and ( iii ) rental income. The sole selling agency is the main source and yielded by way of commission Rs. 2,67,993, Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t had already defaulted in payment of instalments in respect of both the loans. The Madhya Pradesh Financial Corporation in its statement has disclosed that it has already obtained a decree for Rs. 9,11,648.91 against the company and applied for its execution, and the executing court has issued a notice under O. 21, r. 66, of the Code of Civil Procedure, on the company. The directors' report shows that during the year in question, the company incurred a net loss of Rs. 6,63,182. Its income-tax assessment for the assessment year 1970.71, the corresponding accounting year of which is the year 1969, had been completed ; but the assessments for the subsequent years were still pending. So also, the assessments under the Madhya Pradesh General Sales Tax Act and the Central Sales Tax Act from the accounting year 1968 onwards were still pending. It further divulges that there was an outstanding demand of Rs. 24,10,817 from the Rajasthan sales-tax authorities and recovery proceedings were pending. The company's factory and house properties have been attached for the realisation of this demand. The balance-sheet also shows that the company had sundry creditors to the extent of Rs. 12,14,75 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount together with interest had also to be debited to the cash-credit account. ( v )Bills aggregating Rs. 8,00,000 drawn by the company on various parties and discounted by the State Bank of Indore, Prince Yeshwant Road Branch, from time to time on behalf of the company's two units were received back unpaid. Inquiries revealed that the relative consignments were never delivered to, or carried by the transporters, or that the amounts were received directly by the company and utilized for purposes other than for adjustment of its account. The board of directors, at a meeting held on July 24, 1971, accordingly, resolved that 4,000 shares of the Mills Ltd. be pledged with the State Bank of Indore as collateral security for the enjoyment of the credit facilities which the two units at Dewas were having (R-6, p. 1). On the same day, the chairman called an extraordinary general meeting of the shareholders (vide notice R-6, p. 7). along with an explanatory statement (R-6, p. 8). The shareholders were given notice that it was proposed to pass the following three resolutions : (1)To execute an equitable mortgage for a. sum not exceeding Rs. 53,00,000 and create a second charge (fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfers. On August 21, 1971 the company transferred 8,299 shares to G.R. Oil Mills at the rate of Rs. 250 per share for a sum of Rs. 20,74,750. To complete the transaction, the directors controlling the majority shares had a sum of Rs. 20,74,764.02 belonging to the members of their respective families, lying in deposit with the company, withdrawn and had the same deposited with the G.R. Oil Mills. The G.R. Oil Mills, with a paid up capital of Rs. 2,00,000 could not have purchased the shares except by borrowing capital from the depositors. The company has placed on record the statement of account of the G.R. Mills with the Bank of Baroda showing the deposit of Rs. 2,07,464.02 and the payment of Rs. 20,74,750 by cheques. On August 27, 1971, the company sold Nandanvan Kothi for a sum of Rs. 11,00,000 to Gajendrasingh and Rajen-drasingh, sons of Suganmal Nandlal Bhandari, and Surendrasingh and Mahendrasingh, brothers of the petitioner, Virendrasingh Bhandari. On the same day, the Rampurawala Building was sold to Randhirsingh, Tej-singh and Ajitsingh, sons of Bhanwarsingh Bhandari, for a sum of Rs. 6,86,000. These sales were by adjustment of deposits lying to their credits in the books o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the sale of 8,299 shares of the Mills Ltd. by the company to the G.R. Oil Mills, the sale of NandanVan Kothi and Rampurawala Building including the transfer of management of the Central Hotel, was fraudulent, illegal and void, and for grant of perpetual injunctions to restrain the transferees from dealing with the properties. ( ii )For a declaration that the notice calling the annual general meeting of the company on June 27, 1972, was not legal, and for a perpetual injunction to restrain the company from conducting the meeting. ( iii )For a perpetual injunction to restrain the company from effecting any change in the constitution of the board of directors and from transferring any of the properties. ( iv )For a declaration that the resolution passed at the meeting of the board of directors on January 25, 1972, was illegal, void and inoperative and for a perpetual injunction to restrain the company from giving effect to it. ( v )For a declaration that the meeting of the board of directors held on April 28, 1972, was illegal and, therefore, the minutes recorded, including the resolutions passed, were void and of no effect and for a perpetual injunction to restrain the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the majority of shares have used their power to defraud or oppress them, i.e. , the minority shareholders, with a view to obtain improper advantage to themselves and the members of their respective families. They further alleged that they are guilty of fraudulent conduct and machinations, and have made bogus entries with a view to transfer the assets of the company to themselves or to the members of their families. This is, therefore, according to them, a blatant case of both fraud and oppression. During the pendency of the petition on February 8, 1973, the G. R. Oil Mills sold the 8,299 shares of the Mills Ltd., to the 21 depositors at the rate of Rs. 251 per share and cleared off the debt borrowed from them. In their turn, the 21 depositors, on October 12, 1973, sold the shares to M/s. Sabari Textiles (Pvt.) Ltd., i.e ., a concern of the Potdars of Calcutta, at the rate of Rs. 350 per share. The result of this was that the 21 depositors, i.e. , the members of the families of the directors controlling the majority shares, made a clear profit of Rs. 8,00,000 in this deal. Meanwhile, on October 9, 1973, the State Bank of Indore as pledgee of 7,350 shares of the Mills Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the company. They are entitled to have the company's business properly managed according to law. The directors controlling the majority of shares are guilty of fraud and oppression. They camouflaged the deal with the Potdars in respect of the 8,299 shares in such manner, i.e ., making use of the G.R. Oil Mills, and have thereby enabled the 21 depositors, i.e ., the members of their respective families, not only to withdraw their deposits totalling Rs. 20,74,764.02, but have also helped these relations of theirs to derive profits of Rs. 8,00,000. Furthermore, the sales of Nandanvan Kothi and Rampura-wala Building by the directors controlling the majority of shares, to their own near relations at gross undervalue shows complete lack of probity and want of fair dealing. Third, the petitioners fear that unless a provisional liquidator is appointed to take possession of and protect the assets of the company, i.e ., take charge of the income and disburse the moneys under the directions of the court, it would be impossible to liquidate the liabilities of the company. Attention was also drawn to the list of creditors repaid (R-22, p. 1). It is pointed out that Ajaykumar S. Dhakad, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tum of Lord Romilly has stood the test of time and is taken to be the law on the subject ( Penninglon's Company Law, 3rd edn., pp. 682-83, Buckley on the Companies Acts, 13th edn , p. 505, Dattd on the Company Law, p. 598, People's Bank of India Ltd. v. Narain Das, AIR 1916 Lah. 117, Punjab Pictures Ltd. v. Jhabbar Mal Chokhani [1948] 18 Comp. Cas. 274 (East Punj.), In re Northern Airways Ltd. [1947] 17 Comp. Cas. 210 (Lah.), In re Gaya Sugar Mills Ltd. [1950] 20 Comp. Cas. 151 (Pat.). Both, on authority and principle, a provisional liquidator is not, in general, appointed before the hearing of the petition for winding up unless the company is shown to be insolvent or unless the petition is presented by the company itself or shown to be unopposed. In In re Gaya Sugar Mills Ltd. [1950] 20 Comp. Cas. 151 (Pat.), Shearer J. observed (p. 154): "..........................it may be that that would justify the making of a winding-up order even if a majority of the shareholders are opposed to it. But a finding of fraud cannot be come to on the basis of affidavits. Moreover, what I am now concerned with is not the making of a winding-up order but the application for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The term "just and equitable" has undergone a change in connection with the radical change in the socio-economic conditions in the country. The term has lost its technical meaning and has acquired a more meaningful and pragmatic one. Unless the court is compelled by circumstances, an order directing winding up of a company should not be made. That being so, the court should be extremely vigilant in appointing a provisional liquidator. It is not a proper approach to look at the balance-sheet or profit and loss account of the year ending December 31, 1972, and say that fixed and other assets, i.e ., land and buildings, particularly, Nandanvan Kothi and Rampurawala building, and 15,649 shares of the Mills Ltd., having been sold, the company was unable to pay its debts and, therefore, a winding-up was inevitable. A company may have liabilities more than its assets, but still may have, in particular circumstances, the capacity to meet demands from its creditors : A. C. K. Krishnaswami v. Stressed Concrete Constructions P. Ltd. [1964] 34 Comp. Cas. 6 (Mad.), S. Krishnamurthy v. Rohtak Hissar Transport Company (P.) Ltd. [1966] 36 Comp. Cas. 9 (Punj.). The test laid down in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the position ? I think it is quite clear under the law of partnership, as has been asserted in this court for many years and is now laid down by the Partnership Act, that that state of things might be a ground for dissolution of the partnership for the reasons which are stated by Lord Lindley in his book on Partnership at p. 657 in the passage which I will read, and which, I think, is quite justified by the authorities to which he refers : '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 part of one partner to the other, or even any gross misconduct as a partner. All that is necessary is to satisfy the court that it is impossible for the partners to place that confidence in each other which each has a right to expect, and that such impossibility has not been caused by the person seeking to take advantage of it'." That is the leading case on the subject and the subsequent decisions are a mere application of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order dissolution merely because the partnership is in a state of hostility rendering mutual confidence impossible. In such circumstances, the court would not interfere in a suit by a partner who is himself guilty of misconduct. In Harrison v. Tennant [1856] 52 ER 945, Lord Romilly said : "No party is entitled to act improperly and then to say that the conduct of the partners and their feelings towards each other are such that the partnership can no longer be continued, and certainly this court would not allow any person so as to act and thus to take advantage of his own wrong." The directors controlling the majority of shares have squarely placed the entire blame on the petitioner, Virendrasingh Bhandari, for the present state of affairs. They have placed on record a statement (R-2) specifying various acts of malfeasance, misfeasance, misappropriation and breach of trust on his part. The truth or otherwise of the allegations must, necessarily form the subject-matter of an inquiry. In the result, the application filed by the petitioners for appointment of a provisional liquidatior under section 450 of the Companies Act, 1956, is rejected, with costs. - - TaxTMI - TMIT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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