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TMI Blog2008 (9) TMI 567X X X X Extracts X X X X X X X X Extracts X X X X ..... able, that the company may be wound up (see World Wide Agencies (P.) Ltd. v. Mrs. Margaret T. Desor [1990] 67 Comp. Cas. 607 ; [1990] 1 SCC 536). The "just and equitable" clause is not to be read ejusdem generis with the preceding five clauses in section 433. While the five earlier clauses prescribe definite conditions to be fulfilled for the one or the other to be attracted in a given case, the just and equitable clause leaves the entire matter to the wide and wise judicial discretion of the court. The only limitations are the force and content of the words themselves, "just and equitable" (see Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp. Cas. 91 ; [1976] 3 SCC 259 ; Jaldu Anantha Raghurama Arya alias Rama Rao v. East Coast Transport and Shipping Co. (P.) Ltd. [1958] 28 Comp. Cas. 20 ; AIR 1958 AP 259 ; Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao [1956] 26 Comp. Cas. 91 (SC) ; [1956] ALT 279 and K. Mohan Babu v. Heritage Foods India Ltd. (No. 2) [2001] 5 ALD 800 ; [2002] 108 Comp. Cas. 793 (AP)). The court is required to form an opinion about the equitable nature of the case. The equity jurisdiction, thus, has been vested in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is a small one, or a private company, is not enough. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements : (i) an association formed, or continued, on the basis of a personal relationship involving mutual confidence-this element will often be found where a pre-existing partnership has been converted into a limited company ; (ii) an agreement, or understanding, that all, or some, of the shareholders shall participate in the conduct of the business ; and (iii) restriction upon the transfer of the members' interest in the company-so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere. It is these, and analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves. It is through the just and equitable clause that obligations, common to partnership relations, may come in (see Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 (HL)). Gower, in his "Principles of Modern Company Law" (fourth edition, page 662), states that the just and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed to carry on its business thereafter. The petitioner filed several documents in support of the averments in the company petition. The respondents, however, chose not to file any document along with their counter affidavit. The petitioner has also filed her affidavit in reply to the said counter affidavit. The company petition, despite six long years having elapsed after it was instituted in the year 2002, has not yet been admitted, and the submissions now made by counsel on either side are limited only to the enquiry whether or not the company petition should be admitted. In an application for winding up, 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 company if, ultimately, the application were to be dismissed (see Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp. Cas. 91 ; [1976] 3 SCC 259). While a detailed inquiry at the preliminary stage of admission should be avoided, courts should, nonetheless, consider the dispute rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company on just and equitable grounds. According to the learned counsel, no useful purpose would be served in relegating the petitioner to approach the Company Law Board as neither the petitioner nor the second respondent were prepared to leave the management of the company to the other. Learned counsel would place reliance on S. Sundaresan v. Plast-O-Fibre Industries (P.) Ltd. [1993] 76 Comp. Cas. 38 (Mad.), World Wide Agencies (P.) Ltd. v. Mrs. Margaret T. Desor [19901 67 Comp. Cas. 607 ; [1990] 1 SCC 536 and Hanuman Prasad Bagri v. Bagress Cereals (P.) Ltd. [2001] 105 Comp. Cas. 493 (SC) ; [2001] 2 Comp. LJ 392. Sri R. Raghunandan, learned counsel for the respondents, would fairly state that the respondents had not filed any documents in support of the averments in the counter-affidavit. He would contend that two additional directors had been inducted into the board, that 100 shares each had been issued to them and that the petitioner had been removed from the office of director. Learned counsel would further submit that Rs. 9.41 lakhs was received as share application money from associates of the second respondent for which shares were required to be allotted, that the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mohan Babu v. Heritage Foods India Ltd. (No. 2) [2001] 5 ALD 800 ; [2002] 108 Comp. Cas. 793 (AP), to contend that section 443(2) is a bar for exercise of jurisdiction under section 433(f), it is necessary to note the observations made by the Division Bench in this regard (page 808) : "The legal principles enunciated by the Supreme Court in Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp. Cas. 91 ; [1976] 3 SCC 259, to the effect that company cannot be wound up merely because there are differences between the shareholders and particularly when the company is running on sound lines, that if any misunderstandings or problems arise between the shareholders, the same have to be sorted out by alternative methods, that winding up petition cannot be entertained unless alternative remedies are exhausted and that winding up of a company is a harshest remedy and should be entertained as a last resort, are fully applicable to the facts of this case! The effect of section 443(2) of the Act has also been considered by the Supreme Court in the above case. A contrast between the provisions under clauses ( a) to (e) of section 433 of the Act on the one hand and clause if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp. Cas. 91 ; [1976] 3 SCC 259, did not hold section 443(2) to bar the exercise of discretion under section 433(f), a stray word, in the judgment of the Division Bench in K. Mohan Babu v. Heritage Foods India Ltd. (No. 2) [2001] 5 ALD 800 ; [2002] 108 Comp. Cas. 793 (AP), cannot be read out of context to infer a deviation by the Division Bench and a conflict in its opinion with that of the Supreme Court. It is, thus, evident that section 443(2) does not bar exercise of jurisdiction but further limits exercise of discretion under section 433(f) of the Act. It is only if the other available remedy is not efficacious can the discretionary jurisdiction of the court under section 433(f) be invoked. The Division Bench in K. Mohan Babu v. Heritage Foods India Ltd. ( No. 2) [2001] 5 ALD 800 ; [2002] 108 Comp. Cas. 793 (AP), also observed (page 809) : "Further, there is no explanation forthcoming from the appellant as to why he did not or cannot pursue the alternative remedies and he did not make out a case of lack of probity. He did not make out any case of prejudice to company's business or affecting his righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o take over the company on an as-is-where-is basis. He also stated that, in case the second respondent was willing to pay Rs. 3.5 crores to the petitioner, she was willing to leave the company on her being paid the said amount. Sri R. Raghunandhan, learned counsel for the second respondent, submitted that he had been instructed to inform that the second respondent was willing to pay Rs. 2 crores to take over the company on an as-is-where-is basis and that he would put the higher offer made by the petitioner to the second respondent and obtain instructions in the matter. This court observed that the controversy could be resolved only if the petitioner and the second respondent were present in court and, accordingly, directed them to be present on July 25, 2008. On July 25, 2008, both the petitioner and the second respondent were present in court. While the second respondent offered an increased bid of Rs. 4 crores, the petitioner increased her bid from Rs. 3.5 crores quoted earlier to Rs. 5 crores. The second respondent agreed to give up all his rights on payment of Rs. 5 crores. A joint memo was filed by both the parties, and attested by their counsel, wherein they stated that, af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... second respondent by the Tirupati West Police Station, that the complaint is being investigated, that as a counterblast the second respondent had fabricated certain documents, notices, resolutions, etc., to the effect that Smt. Dr. V. Geeta, d/o. V. Ramana Reddy and Smt. C.N. Krishna Veni, w/o. C.N. Bheema Reddy were appointed as directors of the company, that 100 shares each were issued in their favour and that the petitioner had been removed from the board of directors. It is not even the case of the second respondent that the petitioner submitted her resignation as a director. His case, on the other hand, is that, soon after incorporation, Smt. V. Geetha and Smt. C.N. Krishnaveni were inducted as directors of the first respondent on September 15, 2000, that the said fact was intimated to the Registrar of Companies by filing Form No. 32, that State Bank of India, Tilak Road branch, Tirupati, was intimated of such induction on September 23, 2000, while opening an account on behalf of the first respondent and that State Bank of India had acknowledged the intimation in its letter dated March 5, 2002. While admitting that the petitioner was also a subscriber to the memorandum of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issued, subscribed and paid-up capital of the first respondent was Rs. 4,000 divided into 400 equity shares of Rs. 10 each, the petitioner would deny the allegation and submit that neither was a meeting ever held for issuance of additional shares apart from the 200 equity shares subscribed by the petitioner and the second respondent in the first respondent-company nor was a return of allotment filed with the Registrar of Companies in respect of the alleged issue. If, indeed, 100 shares each were allotted to Smt. V. Geetha and Smt. C.N. Krishnaveni, then this fact ought to have been intimated to the Registrar of Companies either by way of a return of allotment in Form No. 2 as required under section 75(1), or in the return under section 159(1). It is only on shares being allotted to the applicants would the share application money, said to be for Rs. 9.41 lakhs, become share capital. Issue/allotment of shares can only be by way of a resolution passed either in the board or in the general body meeting of the shareholders which, obviously, could not have been done without the petitioner's concurrence. Even if a resolution, inducting two additional directors or allotting 100 share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be void. It is, therefore, difficult to accept the submission that the petitioner was either removed from, or that she had vacated, the office of director. prima facie, the petitioner and the second respondent continue to be the only two directors, appointed for life under the articles of association, and the only two shareholders of the first respondent-company each holding 50 per cent. of its subscribed capital. Two well accepted principles for invoking the "just and equitable" rule are (1) analogy of partnership principle to dissolve a small, domestic, quasi- partnership concern ; and (2) when there is justifiable lack of confidence on the ground of lack of probity. The first principle of dissolution on partnership lines would apply in the case of irreconcilable deadlock by reason of the very constitution of that concern (see Loch v. John Blackwood Ltd. [1924] AC 783 (PC) and K. Mohan Babu v. Heritage Foods India Ltd. (No. 2) [2001] 5 ALD 800 ; [2002] 108 Comp. Cas. 793 (AP)). Such a situation would arise in the case of equally divided holdings of partners in a quasi-partnership, when by reason of only acting as per the constitution a deadlock would be created without any oppr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uitable provision would come into play where the obligations, underlying the constitution of a company, are broken necessitating the company being dissolved and the principles, which courts have applied in partnership cases where there has been exclusion from management, being applied in such cases also (see Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 (HL)). While the first respondent has valuable assets in the form of unencumbered landed property exceeding 10 acres, the complete lack of trust among these two has resulted in cessation of all business activity of the first respondent ever since 2002. As noted hereinabove, the quorum for a valid meeting of either the board of directors or a general meeting is "two" and, where the petitioner and the second respondent do not see eye to eye with each other on any matter, it is evident that such deadlock is difficult to resolve. All that is necessary to induce the court to interfere 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 (see Lundie Brothers Ltd., In re [1965] 35 Comp. Cas. 827 (Ch. D)). There is irreconcilable deadlock in the ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly or through other persons. He would deny having collected any money from others much less the alleged sum of Rs. 97,69,900 or to have registered plots specifically earmarked for others. He would deny that he had forged the signature of the petitioner or that he had withdrawn amounts from the company's account. He would contend that it was the petitioner and her husband who had hatched a conspiracy to cheat the first respondent-company and misappropriate its funds and, by misrepresenting herself as a managing director, she had collected lakhs of rupees from persons who had booked plots and had issued receipts forging the signature of the second respondent, that when an explanation was sought for, the petitioner and her husband had, as a counter-blast, foisted a false case alleging that he had forged the petitioner's signature and had withdrawn monies belonging to the first respondent. He would contend that whatever monies were received by the company from its customers was purely on the basis of his efforts and reputation and not because of the petitioner. While the allegations and the counter allegations, with regards misappropriation and misutilisation of funds and asset ..... X X X X Extracts X X X X X X X X Extracts X X X X
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