TMI Blog1980 (12) TMI 155X X X X Extracts X X X X X X X X Extracts X X X X ..... divided into two groups each group holding 50% shares in the company as would appear from para. 14 of the petition. The genealogical table of the family to which the Duttas belong is set out in para. 9 of the petition from which it appears that one Sri Bhola Nath Dutta, who had four sons and the present Dutta petitioners and respondents, are the descendants of the third and fourth sons of Sri Bhola Nath Dutta, being Sri Bireswar Dutta and Sri Bibhuti Bhusan Dutta both since deceased. The petitioners' group really constituted of the descendants of Sri Bireswar Dutta along with petitioner No. 2, a private limited company in the name of Bireswar Dutta Estate Pvt. Ltd., and they together hold half share in the capital of the respondent-company being Sri Bhola Nath Paper House Limited and the sons of Sri Bibhuti Bhusan Dutta, being respondents Nos. 2 to 5, hold the other half shares in the capital of the respondent-company. The respondent-company was incorporated on the 29th of March, 1943, as a private company limited by shares but subsequently on and from 1st of July, 1976, the said respondent-company became a public limited company under the provisions of section 43A of the Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n described as group "A" and group "B" in the petition were participating in the management and, amongst themselves, by arrangement, respondents Nos. 2, 6 and 7 used to sit and work as managing directors of the said company in the said registered office at No. 32A, Brabourne Road, Calcutta, and the petitioner No. 1 has been looking after the sales in the head office and respondent No. 4 was in charge of - the branch office at No. 64, Mahatma Gandhi Road, Calcutta, and respondent No. 5 who used to sit at the branch office had been jointly acting and respondent No. 3 was in charge of the godown and the shop room at No. 167, Old China Bazar, Calcutta. The other shop room at No. 134/135, Old China Bazar, Calcutta, was in charge and control of the head office through the employees employed therein. The company suffered a set back in 1969 and it is alleged that the same was due to the floating and formation of a new paper manufacturing company under the name and style of East India Paper Industries Ltd., out of the assets of the respondent-company and also the assets of the other shareholders of the said company who contributed by purchasing shares therein for having a controlling intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oan in respect of the cash credit account and all the acts of such mismanagement, misappropriation and acts prejudicial to the interest of the company and shareholders and prejudicial to the public interest has been set out in the petition and are summarised in para. 68 and various sub-paragraphs therein and the present petition was presented on the 21st of December, 1979, and an interim order was passed in the application and, thereafter, on the representation of the parties to keep the company going in a smooth manner, the interim order was varied appointing one from each group as the administrator but it appears that that also did not work out smoothly and from time to time variation of the said interim order was asked for and at my request the matter being a family concern and one of the oldest company in Calcutta, which is very well-known and has a goodwill, the parties tried to settle the matter and to suggest a workable order to this court so that the business of the company may be smoothly carried on by both the parties and for that purpose the matter was adjourned from time to time after being part-heard, but, ultimately, the attempt failed on some flimsy grounds and the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that there is a complete deadlock in the company and there is a huge claim of the bankers of the company for which demand has been made. There is an ejectment suit against the company by petitioner No. 2 and there is a huge arrears of rent. Further, one of the points urged was that the company became a public limited company under section 43A of the Companies Act, 1956, and the managing directors' term expired without the approval of the Central Govt. It must be held that there is no valid board of the company. Mr. Mukherjee also drew my attention to various sub-paragraphs of the affidavit-in-opposition filed on behalf of respondent No. 3, Sri Krishna Pada Dutta, representing the opposing group and also to my interim order dated 1st of December, 1979, and finally summarised his contentions that in the company it is admitted that the shareholding in the respondent-company is equally held by the two groups, and that will appear from paras. 4 and 8 of the petition. It is also admitted that out of the four managing directors, two belong to the group of the petitioner, being respondents Nos. 6 and 7, and two belong to the opposing group being respondents Nos. 2 and 3. He also submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rjee, appearing for respondents Nos. 6 and 7, adopted the contentions of Mr. Mukherjee and supported the petitioners. Mr. P. C. Sen, appearing with Mr. Hirak Mitter, for respondents Nos. 2 to 5, submitted that the application is not maintainable as the same is not for redress of genuine shareholders but for a collateral purpose and for putting pressure by petitioner No. 2 through the petitioner's group including respondents Nos. 6 and 7. He submitted that petitioner No. 2 is the owner of No. 32A, Brabourne Road, Calcutta, who has already filed a suit for ejectment against the company which is still pending and the said company being petitioner No. 2 is controlled by respondents Nos, 6 and 7. Mr. Sen submitted that no charges under sections 397-398 of the Companies Act, 1956, has been made out in the petition or it has not been substantiated against the respondents. He referred to paras. 50 and 51 of the petition and paras. 45 and 47 of the affidavit-in-opposition. Thereafter, he dealt with the charges made out in para. 68 of the petition and submitted that the charges in clause ( a ) and ( b ) are vague and there are no particulars about the same. Regarding paras, ( c ) and ( d ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er No. 2, the landlord, against the company through the petitioners' group, and, lastly, the danger that the security of petitioner No. 2, which is controlled by the petitioners group, particularly respondents Nos. 6 and 7, furnished to the banker of the respondent company, being United Industrial Bank Ltd., is sought to be enforced due to the default on the part of the company which amounts to mismanagement and oppression. But, after hearing both the parties and the suggestions made on behalf of both the groups before me, I do not think that there can hardly be any dispute that there is complete lack of confidence in each other and both the groups cannot pull on together any longer and there is a complete deadlock in the management of the affairs of the company and it is not necessary to go into the question of mismanagement by one group as there are mutual allegations but the fact remains that it is a fit case where a case has been made out on just and equitable grounds for winding up the company and there is mismanagement which has inevitably followed due to mistrust and loss of confidence in each other between the members of the two groups, and, being the members of the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncapable of acting as directors. There was also an agreement which was executed under the seal of the company for the plaintiff to act as a managing director, passed in a resolution by the unqualified directors, stating the terms on which the plaintiff was to act as managing director of the company. The plaintiff performed the service mentioned in the agreement and brought an action for the recovery of his remuneration as set out in the agreement or alternatively for his service on quantum meruit basis. It was held that the plaintiff rendered his service not as a director but as an estate agent, and, therefore, he was entitled to recover on a quantum meruit basis. In my view, the said decision does not lay down the proposition that if one ceases to be a managing director he continues as a director, but the question was whether the plaintiff was entitled to recovery on the basis of quantum meruit for his service rendered as an estate agent to the company, although the agreement between the company and him as a managing director was held to be a nullity. The next decision cited by Mr. Sen was that of a Division Bench decision of the Allahabad High Court in Raghunath Swarup Mathur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cotton Mills Ltd. [1965] 35 Comp. Cas. 187 , 233 (Cal.), where B. C. Mitra J. observed that (the question was) whether the non-existence of a valid board of directors empowers the court to exercise the power under sections 397-98 or it amounted to an act of mismanagement or act prejudicial to the interest of the company, and it was observed that such a difficulty can easily be resolved by calling a general meeting of the company. Therefore, Mr. Sen submitted, firstly, that, there is a valid board of directors even assuming that the four managing directors have ceased to be managing directors any more and, secondly, the absence of any valid board, assuming the same to be so in this case, will not empower the court to exercise jurisdiction under sections 397-398 of the Companies Act, 1956, as that does not amount to a mismanagement or an Act prejudicial to the interest of the company within the meaning of sections 397-398 of the Companies Act, 1956. Mr. Sen also submitted that the written statement and the affidavit filed in the ejectment suit admitting the financial difficulties of the company is not sufficient for the purpose of determining whether the company has been mismanaged. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and (5) and submitted that admittedly there is no application made by the respondent-company to the Central Govt. for an approval of its reverting to a private limited company under section 43A(4) and, therefore, it is quite clear from the said provisions that until such an approval, for the reversion into a private limited company, by the Central Govt., the company must be deemed to be a public limited company under section 43A and, consequently, section 269 of the Companies Act, 1956, becomes operative and after the expiry of the period it must be held that all the managing directors are acting illegally and there is no valid board. Mr. Mukherjee distinguished the decisions cited by Mr. Sen, particularly the decisions in Raghunath Swamp Mathur v. Har Swarup Mathur [1967] 37 Comp. Cas. 802 (All.) and C. Balchand v. Devashola ( Nilgiri ) Tea Estate Co. Ltd. [1972] 42 Comp. Cas. 623 . (Mad.) at page 625, as those were cases of prosecution for committing the offence of non-compliance with the provisions of the Companies Act, and the principles laid down therein have no application to the facts of this case. He also referred to the Supreme Court decision in Ram Prashad v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law having regard to the facts and circumstances of each particular case so that the company and its shareholders and the interest of the public are well protected and no further prejudice may be caused to any of them. In this case, a question of law has been raised whether the managing directors of a public limited company after the expiry of the approval period by the Central Govt. under section 269 of the. Companies Act, can continue as mere directors on the principle that managing directors are also directors. Therefore, if the capacity and character of managing directors expire, they continue as directors. In my view that proposition seems to militate against the very spirit, object and purpose of the provisions of sections 268 and 269 of the Companies Act, 1956. The decisions cited by Mr. P.C. Sen on behalf of the respondents, in my view, do not answer the problem which has arisen in this case as those are decisions on the question of offence committed by the managing directors for non-compliance with the provisions of the Companies Act, and also, the interpretation of the agreement between the managing directors and the company as an employee of the company, as I have alre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies Act, 1956, that is, such appointment must be with the approval of the Central Govt. under section 269 of the Companies Act, 1956. Otherwise, the provisions of section 269 will become meaningless and render infructuous, as if once managing directors are appointed and approval is obtained they will continue for ever without obtaining the sanction of the Central Govt. as specifically required under section 269 of the Companies Act, 1956, and in this connection the definition of a managing director in section 2(26) of the Companies Act, includes a director occupying the position of a managing director, by whatever name he is called, who by virtue of the memorandum of association or the articles of association is entrusted with the substantial power of management which would not be exercisable by him. In this case, it is admitted that the said four directors, being respondents Nos. 2, 3, 5 and 6, acted as managing directors initially with the approval of the Central Govt. as required under section 269 of the Companies Act, 1956, (the company) being a public limited company under section 43A of the Companies Act, 1956, and which continues to be so even after the expiry. Further, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the respondent-company is without any valid board as admittedly no meeting of the respondent-company has been held to elect the directors of the company and constitute a valid board. This is an illegality which is on the face of it is being continued and, in the facts and circumstances of this case, will amount to mismanagement and prejudicial to public interest and, therefore, comes within the purview of sections 397-398 of the Companies Act, 1956. Regarding the question of deadlock it is admitted that the two groups who hold equal shares in the company are not in a position to carry on the business of the respondent-company any longer and there is a complete deadlock and, therefore, there is a just and equitable ground for winding-up the company, which is a pre-requisite for exercising the power under sections 397-398 of the Companies Act, 1956, and on the material placed before me in the pleadings and the annexures in the main application and the interim application and from the conduct of the parties it is quite clear that there are sufficient grounds for granting relief under sections 397-398 of the Companies Act, 1956, as both the cases for mismanagement and oppression h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and the shares of the petitioners will be surrendered to the company and thereby the capital of the company will be reduced to that extent and, thereafter, each group will be entitled to carry on business of the respondent-company, but the name of the company for the respective groups should be suitably changed. When 1 indicated this aspect of the matter, Mr. S.B. Mukherjee, appearing for the petitioners, and Mr. P. C. Sen, appearing for the respondents, submitted a draft form of order for equitable division of the assets and business of the company amongst the two groups so that the matter complained of may be put to an end and the business can be carried on smoothly by the two groups independently. The said suggestions are very helpful and I appreciate the reasonable attitude taken by both the parties and after considering all the facts and also the proposal given by both the parties, in my view, the proper order to be made in this application are as follows : Mr. Trilokesh Goswamy, attorney-at-law and advocate, is hereby appointed Special Officer and administrator of the respondent-company who will discharge all the functions of the board of the respondent-company, Bhola Nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Private Limited after ascertaining the same from the books of account of the company and holding meeting or meetings of the ex-managing directors and other employees concerned of the respondent-company. The said dues include the arrears of rent, loan with interest thereon, guarantee commission and also the repayment of the loan to Bibuti Bhusan Dutta Estate P. Ltd., out of the assets of the company for the purpose of payment of the liabilities of the company as aforesaid. The Special Officer, after consulting the said joint managing directors and responsible employees of the respondent-company, would be authorised to repay the said liabilities in a phased manneror in a manner conducive to the smooth running of the business of the respondent-company without hampering in any way the same, particularly out of the credit balances of current accounts maintained by the respondent-company with Chartered Bank at No. 54, Netaji Subhas Road, Calcutta, United Bank of India, College Street Branch, Calcutta, and Grindlay's Bank Ltd., 19, Netaji Subhas Road, Calcutta. The banking accounts of the company with the: 5aid banker-; or any other banker or any new banking. account if thought fit to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Special Officer. If the parties do not agree to the valuation, the same may be done by a competent valuer to be appointed by the Special Officer for that purpose and the remuneration of such valuer will be settled and fixed by the Special Officer in consultation with the parties and to be paid out of the funds of the respondent-company. The Special Officer will take immediate steps by appointing an income-tax lawyer to get the refund of about Rs. 28,000 from the I.T. authorities due and payable to the respondent-company as expeditiously as possible. The employees posted at the premises allotted to the respective groups will be retained by the respective groups in their employment if the said employees are so agreeable and their service conditions including provident fund, gratuity, etc ., will be continued and there will be no break of service in respect of such employees with the respective groups. The shares held by the defendant company being East India Paper Industries Ltd. and India Paper Pulp Company Ltd. shall be divided equally between the two groups by the said Officer and all the necessary documents, that is, transfer deeds, etc ., will be executed by the Special Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of not more than Rs. 100 per month and he will carry out the said directions and orders as aforesaid and carry on the business of the respondent-company, Bhola Nath Paper House Ltd., until the above directions are complied with in full and the change of the name of the respondent-company after surrender of the shares of group 'A' and the capital of the respondent company is reduced as aforesaid. He will try to expedite the allotment and division and collection of the debts due to the said company and payment of the liabilities of the respondent-company as aforesaid and the parties particularly the said ex-managing directors are directed to co-operate and assist the Special Officer to give effect to the said order and comply with the same, if possible, within a period of three months. The Special Officer, the said respondents Nos. 2, 3, 6 and 7, the bankers of the company, United Industrial Bank Ltd. at No. 7, Red Cross Place, Calcutta, Chartered Bank at No. 54, Netaji Subhas Road, Calcutta, United Bank of India, College Street Branch, Calcutta, and Grindlays Bank Ltd. at No. 19, Netaji Subhas Road, Calcutta, and the said paper suppliers, Titagur Paper Mills Co. Ltd., India Pape ..... X X X X Extracts X X X X X X X X Extracts X X X X
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