TMI Blog1992 (4) TMI 198X X X X Extracts X X X X X X X X Extracts X X X X ..... a partnership as the bulk of the shares are owned by members of two families who are closely related to each other. After the incorporation of the company on October 25, 1985, Mr. P. Venkatasubramaniam who was the initial subscriber and managing director of the company wrote to the petitioner at Bombay, vide letter dated November 30, 1985, and sought his participation in the business venture. By the said letter, the said P. Venkatasubramaniam proposed to have only relatives as shareholders and the share capital will be Rs. 1.10 lakhs. Pursuant to the said request, the petitioner met the said Mr. P. Venkatasubramaniam on February 3, 1986, for a discussion and, in the meeting held on the said date, the said Mr. P. Venkatasubramaniam, hereinafter called PV, agreed with the petitioner's family that the petitioner's family will invest and hold 50 per cent, shares of the company and that the petitioner will be made a working director of the company. This was also confirmed by the letter dated February 18, 1986, sent by PV stating that, for all practical purposes, the petitioner is deemed a director of the company with immediate effect. Upon this understanding, the petitioner and his fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs from May 23, 1988, but till date the petitioner has not been paid his salary at all. The petitioner states that he consistently acted only for the benefit of the company. When the said PV and the company urgently required funds, the petitioner pledged his personal National Savings Certificates and obtained a short-term loan of Rs. 18,650 on October 5, 1987, which was to be repaid within three months but PV has not paid the same till date. Besides the above amount, the petitioner also arranged for a personal loan of Rs. 23,000 and the petitioner's relatives have also advanced Rs. 36,000 to the company, which has not been repaid. The residence of the said PV and the registered office of the company are one and the same. Taking advantage of this, the wife of the said PV, Mrs. V. Subbalakshmi, who is also a director in the company, used to personally collect the mail and refused the petitioner any access to the same. This curtailed the right of the petitioner as a wholetime director to know about the day-to-day activities of the company. The petitioner's protest against this met with only further disregard shown to him. The petitioner was not apprised of the progress or problems of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nced by the petitioner and his relatives together with interest would be paid in due course. PV refused to commit this repayment in writing. PV refused to permit the petitioner to attend the factory and instructed the workers not to allow the petitioner into the factory premises. Indeed, by a letter dated February 28, 1989, the petitioner was instructed not to visit the factory without his consent. At the same time, the said PV made false and insinuatory allegations that the petitioner had instigated the workers against the company. These allegations were clearly contradicted by the statement of one R. Alagariswamy, who was also present at the time when the petitioner sought to visit the factory. The petitioner further states that, from the beginning, it has been the intention of the said PV to get money from the petitioner and his family, and that he had no intention to give due participation to the petitioner in the affairs of the company. The gross mismanagement on the part of the said PV has resulted in the company being financially crippled. The company has been unable to repay the loan/interest to the Tamil Nadu Industrial Investment Corporation nor has it been able to mainta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The respondent-company further states that, at the time when the company was floated, the petitioner was without a job and that, therefore, the company chose to utilise his services. The other allegations made in the company petition have also been denied. The allegations that the petitioner and his family members were inducted only for their money and that there was no real intention of involving the petitioner in the active participation and management of the affairs of the company are all imaginary and unsustainable. The respondent company have, therefore, prayed that this company petition may be dismissed and justice rendered to them. On behalf of the petitioner, exhibits P-l to P-19 were marked and on behalf of the respondent-company, exhibits R-l and R-2 have been marked. No oral evidence was let in by both parties in this case. Hence the matter was posted for arguments on October 3, 1991, and the arguments were heard on various dates. Mr. Arvind P. Datar, learned counsel appearing for the petitioner, submits that the respondent-company is liable to be wound up on the following five grounds: 1.There is a complete failure of substratum and there is no hope of revival of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ped set of pleadings), the petitioner has specifically stated that there is no hope of revival of the respondent-company. This has not been controverted by the respondent-company in the pleadings by way of evidence. Thus, in the present financial state of affairs, there is no hope whatsoever of the respondent-company becoming a viable unit. In addition, the respondent has not paid any interest to the financial institutions particularly the Tamilnadu Industrial Investment Corporation. ( iii ) The activities of the respondent have virtually come to a standstill. The respondent-company has a press mould with installed capacity of 30,000 kgs. per annum and hand mould of 4,800 kgs per annum. The actual capacity utilisation is as follows : Press mould Hand mould 89 90 91 89 90 91 Production 168 10 Nil 1420 643 784 kg. kg. kg. kg. kg. kg. Capacity utilisation 0.56% 0.03% 0.00% 29.58% 13.39% 16.33% This shows that the press mould machinery is lying unutilised w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the profit is very good. The business grounded to a halt immediately after the inception due to paucity of funds. The bank refused to extend facilities as the winding up petition was pending. If a business can go on and grow, winding up should not be resorted to. Referring to the decision in Kumarapuram Gopalkrishnan Ananthakrishnan v. Burdwan Cutwa Railway Company Ltd. [1978] 48 Comp Cas 211 (Cal), Mrs. Hema Sampath submits that the petition merely states that the substratum has disappeared without any basis and with mala fide intentions. The balance-sheets filed are subsequent to the filing of the above petition and the company can be restarted at any time if the Damocles sword of the petition is removed. The decision in Kumarapuram Gopalakrishnan Ananthakrishnan's case [1978] 48 Comp Cas 211 (Cal), deals exhaustively with the meaning of "substratum" of business. The petitioner must prove the three things mentioned above. The petitioner has failed to prove the same as alleged. According to the respondent, the company has enough assets and the project is very good and the business can go on and grow and winding up could not be resorted to and the company can be restarted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strongly denies that the petitioner was making any complaint to the bank or to the dealers or instigating the workers. The respondent has not let in any oral or documentary evidence to substantiate the serious allegations. The petitioner further submits that he and his family have invested almost Rs. 2 lakhs by way of shares/loans and that they would not indulge in any activity which would harm the interest of the company and that it is only the unreasonable conduct of PV the managing director of the company, his financial irregularities with the banks, and expulsion of the petitioner that has led to the filing of the present winding up petition. Copies of the orders of the courts below referred to by the respondents have also been marked as documents, exhibits R-l and R-2, before this court. Further, Mr. Arvind P. Datar says that a civil revision petition was filed before this court against an order in C.M.A. No. 58 of 1989, but the same could not be pursued as the matter had become infructuous and that the petitioner decided to return to Bombay. Hence, it is false on the part of the respondent to state that the petitioner filed the winding up petition only after these orders were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra show that the press mould machinery is lying unutilised whereas the same has been purchased for Rs. 12.32 lakhs by taking term loan from the Tamilnadu Industrial Investment Corporation. The figures mentioned above have been taken from exhibits P-18 and P-19, namely, the balance-sheet filed by the respondent-company itself. For the foregoing reasons, I am of the view that the substratum of the respondent company had failed and that there is absolutely no scope or hope of revival of the respondent-company and hence the respondent-company is liable to be wound up on the first ground alone. Ground No. 2: If the shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case of winding up on the just and equitable ground: The Supreme Court in the decision in Hind Overseas P. Ltd. v. Raghunath Prasad jhunjhunwalla [1976] 46 Comp Cas 91 , 104 has laid down the above principles which have been made as ground No. 2. As mentioned above, ground No. 2 woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o hope of revival of the company. Mrs. Hema Sampath submits that in a petition filed under section 433( f ), the allegations therein are all of primary importance and that a prima facie case has got to be made out. According to learned counsel, the allegations mentioned in the petition reveal purely personal animosities and that too only because the petitioner was constantly complaining to the banks about the running of the company and, due to his feeding false information to the banks, the company had to face financial constraints. When personal animosities cropped up, the managing director of the company showed his bona fides by offering to quit the company, vide exhibits P-8 and P-9, but the petitioner did not take up the offer for obvious reasons. Referring to exhibits P-7, P-9 and P-10 to P-12, Mrs Hema Sampath submits that these exhibits clearly reveal the subversive activities of the petitioner. He was constantly in touch with the banks and the dealers and was spreading tales about the running of the company and he also tried to turn the workers against the company and due to these, the company could not function smoothly. An extraordinary meeting was to be called to remo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the private limited company, which is in the nature of a partnership, is based on an understanding that a certain person would be a director, his expulsion from office would be a ground for winding up. The House of Lords in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492, has laid down the following guidelines and guiding principles for winding up of private companies which are in the nature of a partnership under the just and equitable clause : ( i )The company should be formed on the basis of personal relationship and mutual confidence. ( ii )There should be an agreement or understanding that some of the shareholders would participate in the conduct of the business as in the case of a partnership. ( iii )The exclusion of a director/member from management would justify the winding up even if removal of the director is in exercise of the powers of the majority shareholders. A similar view has been taken in Lundie Bros. Ltd., In re [1965] 35 Comp Cas 827 (Ch D). The House of Lords' judgment has been followed by the Court of Appeal in Topps Chewing Gum Ltd., In re [1975] 1 All ER 1017, 1028. In this case, the relevant passage from the, decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itter animosity between the two persons which has resulted in a complete deadlock in the affairs of the company. Gower, in his Principles of Modern Company Law (IV Edition page 662), states that the just and equitable clause can be invoked on the following four grounds: ( a )expulsion from office, ( b )justifiable loss of confidence, ( c )deadlock, ( d )failure of substratum. It is stated by Mr. Arvind P. Datar that all the above four conditions are satisfied in the present case and that the facts would, therefore, justify the winding up of the respondent-company. I see much force in the contention of learned counsel for the petitioner. Mrs. Hema Sampath, in reply to the above contentions, submits that the principles of dissolution of partnership cannot be liberally invoked in a winding up petition. Learned counsel invited my attention to the judgment in Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla, [1976] 46 Comp Cas 91, 104 ; AIR 1976 SC 565. In the said decision, at page 574 in paragraph 13, the Supreme Court held as under: "When more than one family or several friends and relatives together form a company and there is no right as such agreed upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the statute. Companies Act (1956) Section 433 Winding up petition by contributory Petitioner not to be allowed to take advantage of his own wrong. Companies Act (1956) sections 433, 439 Winding up petition presented not for bona fide object of obtaining winding up order but for an ulterior purpose --Petition held to be ill-advised". 2. G. Kasturi v. Murali [1990] 2 LW 177 ; [1992] 74 Comp Cas 661 (Mad). These two decisions were cited for this court to refer to them for a detailed analysis of the principles of winding up a company under section 433( f ) of the Act. I am unable to agree with the contentions raised by Mrs. Hema Sampath on this point. The principles of dissolution of a partnership can be invoked if the company is in the nature of a partnership. The petitioner has specifically alleged that the present company is in the nature of a partnership and liable to be dissolved as could be seen from paragraph 21 of the petition. This averment has not been denied in the counter-affidavit. I have carefully analysed the reasons mentioned in the arguments of Mr. Arvind Datar on ground No. 3 mentioned above. I am of the view that the principles of dissolution of a partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r submits that he has no remedy except to wind up the company. He has invested monies in the share capital and he and his relatives have advanced monies by way of loans. In view of the hopeless financial position of the respondent-company, expulsion of the petitioner from the office of the director and for other reasons mentioned above, the petitioner would have no other effective remedy either under sections 397 and 398 or other provisions of the Act, or by filing a suit for recovery of the amount advanced. The company was started on the basis of mutual confidence for a particular business objective, viz ., manufacturing of light fittings and that the same has completely failed. There is no hope or scope of reviving the company. Hence, there is no alternative remedy except to wind up the company. In such a situation, it has been held that the affairs of the company should be terminated as soon as possible. Reliance was placed on the decision in Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch. 426, wherein it was observed by Lord Cozens-Hardy M.R. as under (at page 432) : "If ever there was a case of deadlock I think it exists here ; but whether it exists or not, I think the circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition. In any event, there is no pleading on behalf of the respondent that any alternative remedy is available. This issue is answered accordingly. Ground No. 5: Majority of creditors/shareholders have supported the winding up. Learned counsel for the petitioner has submitted that the supporting affidavits of three shareholders, three creditors and two shareholders-cum-creditors have been filed and that these are the majority of the shareholders/creditors and that they have filed affidavits to support the winding up of the company and that there is no affidavit opposing the winding up. I have given my deep and anxious consideration to the grounds raised by both parties and the arguments advanced by both parties. The financial position of the company is beyond redemption as the sales are only Rs. 90,000 per annum as against the outstanding loans of Rs. 15.3 lakhs and accumulated carry forward loss of Rs. 8.8 lakhs. The expensive machinery of Rs. 12 lakhs was not utilised during the year 1991 and the affairs of the respondent-company have virtually come to a standstill. There is evidence to establish that banks have refused credit facilities because of the present position. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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