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Ramesh Premchand Shah and Anr. Vs. Engineers' Enterprises Pvt. Ltd. and Ors. (22.12.1971 - BOMHC) - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai High Court
Decided On
Case NumberCompany Petition No. 42 of 1968
Judge
Reported in[1977]47CompCas294(Bom)
ActsCompanies Act, 1956 - Sections 397, 398 and 433
AppellantRamesh Premchand Shah and Anr.
RespondentEngineers' Enterprises Pvt. Ltd. and Ors.
Appellant AdvocateG.A. Thakkar, Adv.
Respondent AdvocateMahendra Shah, Adv.
Excerpt:
.....debts and loss of confidence in management of company - losses carried forward for relevant period sufficient to wipe out substantially whole of share capital and amount of reserves - business had to be run on borrowed money - company may be wound up by court if company unable to pay its debts under section 433 - petition admitted in interest of company and its creditors. - - the company has borrowed large amounts by way of secured loans as well as unsecured loans. 5,09,014. even this balance-sheet, therefore, clearly shows that the intention of the company is to carry on the business of the company at the risk only of the creditors who have advanced loans to the company as the accumulated losses which are carried forward are sufficient to eat away practically the whole of the..........of the occasions, for one reason or the other, by consent of the parties, it was adjourned from time to time. to-day it has come up finally for admission so far as it relates to prayers for winding up. 4. it is unnecessary at this stage to refer in detail to the various allegations that are made in the petition and in the affidavits filed in reply. it is sufficient, for the present purposes, if two grounds are referred to at the present stage, in order to consider whether the court should admit the petition and issue consequential directions. one of the grounds pleaded in the petition is that the company is unable to pay its debts and, therefore, it should be wound up. secondly, it is submitted that it is just and equitable to wind up the company because the petitioners have entirely.....
Judgment:

Kantawala, J.

1. Petitioners have filed this petition under sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as 'the Act'), with an alternative prayer that the company may be ordered to be wound up by the under the directions of this court.

2. Respondent No. 1, Engineers' Enterprises Pvt. Ltd. (hereinafter referred to as 'the company'), is a private limited company and its issued, subscribed and paid-up capital consists of Rs. 2,04,000 divided into 2,040 ordinary (equity) fully paid-up shares of Rs. 100 each. The petitioners held 1,000 ordinary shares of Rs. 100 each, i.e., about 49.02% of the total paid-up shares capital of the company. Respondents Nos. 2 to 5 are the other shareholders of the company holding in all 1,040 ordinary shares of Rs. 100 each. Their holding comes to a little over 50% of the total paid up share capital of the company.

3. On March 20, 1969, this petition was admitted in respect of prayers except those relating to winding up, namely, prayers (g) and (j). At that state, the counsel for the petitioners stated that for the time being he was not pressing the petition in so far as it related to winding up and that the petition was kept pending for winding-up order. On August 10, 1970, counsel for the petitioners stated in the court that the petitioners did not press for reliefs under sections 397 and 398 of the Act and have decided to proceed with the petition as if it was a petition for winding up only. After that date, this petition came up on board for admission for almost nearly a dozen occasions but on most of the occasions, for one reason or the other, by consent of the parties, it was adjourned from time to time. To-day it has come up finally for admission so far as it relates to prayers for winding up.

4. It is unnecessary at this stage to refer in detail to the various allegations that are made in the petition and in the affidavits filed in reply. It is sufficient, for the present purposes, if two grounds are referred to at the present stage, in order to consider whether the court should admit the petition and issue consequential directions. One of the grounds pleaded in the petition is that the company is unable to pay its debts and, therefore, it should be wound up. Secondly, it is submitted that it is just and equitable to wind up the company because the petitioners have entirely lost confidence in the management of the company by respondents Nos. 2 to 5 and it is impossible for them to carry on the business of the company with respondents Nos. 2 to 5.

5. So far as the first ground is concerned, under section 433 of the Act, a company may be wound up by the court, inter alia, if the company is unable to pay its debts. May attention has been drawn not only to the last audited balance-sheet of the company for the year ending June 30, 1970, which has been duly passed by the company, but also to the trial balance-sheet of the company duly audited by the chartered accountants of the company for the period ending June 30, 1971.

6. The financial position of the company as disclosed by the balance-sheet for the period ending June 30, 1970, is as under : The issued, subscribed and paid-up capital of the company is Rs. 2,04,000; in additional thereto, at the time when the petitioners were allotted shares they have paid a premium, of Rs. 20 per share and this amount of Rs. 20,000 is shown under the heading 'reserves and surplus' for share premium account. About Rs. 18,700 is the amount set apart for development rebate reserves. The company has borrowed large amounts by way of secured loans as well as unsecured loans. The aggregate liability in respect of the secured loans is about Rs. 4,96,375 while the aggregate liability in respect of unsecured loans including the current liability come to about Rs. 5,83,000. Thus, on the liabilities side, the total amount aggregates to Rs. 13,32,115, out of which Rs. 2,04,000 represents the amount of paid-up capital and the sum of Rs. 36,693 represents the amounts of reserves and surplus including the amount of share premium. The assets side in the balance-sheet of the company shows that the company owns fixed assets of the value of about Rs. 2,23,228. The current assets, loans and advances total up to about Rs. 8,71,005.18. Thus, even if the picture presented by the balance-sheet is taken at its face value, it is quite clear that the entire amount of share capital subscribed by the shareholders has been eaten away by accumulated losses. Thus, the balance-sheet shows that the company is carrying on the business only on borrowed loans by reason of carried forward losses. If, hereafter further losses are incurred, the persons to suffer as a result of these losses will be the creditors of the company. The position will be worse if any of the assets shown on the assets side are either over-valued or unrealisable. One thing, however, is clear, that the aggregate carried forward losses for the period ending 30th June, 1970, are sufficient to wipe out substantially the whole of the capital subscribed and paid up by the shareholders and the amounts of reserves.

7. As the entire share capital is eaten away by the accumulated losses, the risk in further carrying on the business is only on those who advanced loans to the company.

8. My attention has also been drawn by Mr. Shah on behalf of the company to the trial balance-sheet of the company for the period ending June 30, 1971, which has been duly audited by the chartered accountants, but which has not been put before the shareholders. The financial position disclosed even by this trial balance-sheet does not present a different picture. The accumulated losses as shown by this balance-sheet comes to about Rs. 2,23,240. This figure primarily shows that the entire capital subscribed by the shareholders and the reserves are substantially eaten away by these carried forward losses. A comparison of the balance-sheet for the period ending June 30, 1970, and June 30, 1971, shows that some of the secured and unsecured creditors are asking for repayment of the amount. Under the balance-sheet for the period ending June 30, 1970, the secured loans due by the company aggregated to about Rs. 4,96,375 while under the trial balance-sheet for the period ending June 30, 1970, they aggregate to about Rs. 2,41,207. Even so far as unsecured loans are concerned, under the balance-sheet for the period ending June 30, 1970, they aggregate the about Rs. 5,83,000 while under the balance-sheet for the period ending June 30, 1971, they aggregate to about Rs. 5,09,014. Even this balance-sheet, therefore, clearly shows that the intention of the company is to carry on the business of the company at the risk only of the creditors who have advanced loans to the company as the accumulated losses which are carried forward are sufficient to eat away practically the whole of the subscribed and paid-up capital and the amount of reserves and surplus. This position will become worse if upon an investigation it is found that the assets shown in the balance-sheet if upon an investigation it is found that the assets shown in the balance-sheet are over-valued or are unrealisable or any of the debts could not be recovered. Thus, a prima facie analysis of the balance-sheet for the period ending June 30, 1970, and the balance-sheet for the period ending June 30, 1971, is sufficient to come to a conclusion that this is a case for enquiry with a view to consider whether the company is unable to pay the debts.

9. The company is a private limited company and for consideration of a petition for winding up of a private limited company, principles normally applied to the dissolution of partnership-firms are not overlooked. It is well settled that under the just and equitable clause a winding-up order has been made when the petitioner has been excluded from all participation in the business or that in the case of a small private company, the company was in substance a partnership and the facts would justify the dissolution of a partnership. See Palmer's Company Law, 21st edition, page 739.

10. It is one of the contentions of the petitioners in this petition that the petitioners have entirely lost confidence in the management of the company by respondents Nos. 2 to 5 and that it is impossible for them to carry on the business of the company with them. Prior to October 15, 1966, this company comprised of shareholders who belonged to the family of respondent No. 2. In or about October, 1966, an arrangement has been arrived at between the petitioners and respondent No. 2 and the members of his group under which each of the petitioners agreed to subscribe for 500 shares of the company at a premium of Rs. 20. There was also an understanding that petitioner No. 1 will be appointed as electrical engineer with a salary of about Rs. 1,100 and that petitioner No. 2 will be appointed as electrical engineer upon a salary of Rs. 9000 per month. Besides this, each of the two petitioners also agreed to deposit a sum of Rs. 40,000 in the company which they have done. Within a short time, after the petitioners subscribed for the shares, differences and disputes have arisen between the two groups, namely, the petitioners' group and the group of respondents Nos. 2 to 5. It is alleged that at the meeting of the board of directors held on August 11, 1967, a resolution was passed by which the remuneration payable to respondent No. 3 was increased by Rs. 100. Even though respondent No. 3 was vitally interested in this resolution he himself voted in favour of the said resolution. Respondent No. 2, who is the father of respondent No. 3 also voted in favour of it and ultimately got the resolution passed by casting his vote as a chairman. It is further alleged that Miss Naina, daughter of respondent No. 2 and sister of respondent No. 3, who was working originally as receptionist-cum-operator was promoted to act as an accountant of the company, resigned (sic). On or about October 5, 1967, a notice is given to petitioner No. 1 by the attorneys of the company terminating his employment as an engineer. On the same day, a notice is also addressed for convening a meeting of the board of directors of the company on October 7, 1967, with a view to purchase the shares held by petitioner No. 1 in view of the powers conferred by article 20 of the articles of association of the company. Apart from this, several other allegations are made, which it is unnecessary to refer to at the present stage. These facts prima facie disclose that there are serious disputes and differences between the two groups, namely, the group of the petitioners and the group of respondents Nos. 2 to 5, and whether, in view of such difference and disputes, it will be possible to carry on the business of the company smoothly; that is the thing which is to be inquired into. Thus, a prima facie case whether it is just and equitable to wind up respondent No. 1-company, which is a private limited company, has been made out and the matter requires investigation and scrutiny by the court.

11. It has, however, been strenuously urged by Mr. Shah on behalf of the company that this petition should not be admitted as considerable time has elapsed between the date of presentation of this petition and the date on which it is being heard for admission. Mr. Shah is right that considerable time has elapsed between these two dates. Unfortunately, an undesirable practice has cropped up in the proceedings of this court where matters relating to adjudication of persons as insolvents and petitions for winding up of limited companies are indefinitely postponed from time to time before they are even admitted or before even they are heard and finally disposed of. Undoubtedly, there was some delay on the part of the petitioners. This petition was accepted by this court in the month of April, 1968. However, it was only in the month of March, 1969, that it was admitted in so far as it related to the prayers germane to sections 397 and 398 of the Act, while it was kept pending in respect of prayers (g) and (j), which related to proceedings for winding up of the company. In the month of August, 1970, the petitioner made it very clear that they did not want to proceed with the petition in so far as it related to reliefs under sections 397 and 398 of the Act and they have decided to proceed with the petition as if it is a petition only for winding up of respondent No. 1-company. It is unfortunate that even though such a decision was taken as early as August, 1970, parties got this petition adjourned from time to time on numerous occasions and on most of the occasions it was adjourned by consent of the parties. The petitioners are, therefore, not solely to be blamed for the delay that has taken place before this petition is finally considered for admission. In my opinion, the practice of adjourning that winding-up petition from time to time before it comes up for admission is not to be encouraged as, under the law relating to winding-up of the limited companies, if, ultimately, a petition is allowed and the company is ordered to be wound up, the ordered for winding up will relate back to an earlier date. The delay in the present case is not by itself sufficient to dismiss this petition in limine.

12. It was then urged by Mr. Shah on behalf of respondent No. 1-company that if this petition is advertised after admission, it will cause considerable hardship to the interests of respondent No. 1-company. Reliance was placed by Mr. Shah on the decision of the Supreme Court in National Conduits (P.) Ltd. v. S. S. Arora [1967] 37 Comp Cas 786 (SC). The Supreme Court has therein laid down that once a petition for the compulsory winding up of a company is admitted, the court is not bound forthwith to advertise the petition. In an appropriate case the court has the power to suspend advertisement of a petition for winding up, pending disposal of an application for revoking the order of admission of the petition. If the petition is admitted it is still open to the company to move the court that in the interest of justice or to Prevent abuse of the process of the court, the petition be not advertised. It cannot be disputed that such a power exists in this court not to issue an advertisement of the petition for winding up even though a petition for winding up is admitted. For exercise of such power it is obligatory upon the court to take into account all the facts. So far as respondent No. 1-company is concerned, the balance-sheet for the period ending June 30, 1971, show that the accumulated losses are such that the entire subscribed and paid-up capital of the shareholders is eaten away thereby. Further, during the last few years, the company has incurred losses from year to year. For the year 1965-66 carried-forward losses incurred during that year were about Rs. 69,493. For the year 1966-67 the company has made a further loss of Rs. 25,970. In the year 1967-68 the company has made a profit of about Rs. 28,583. For the year 1968-69 the company has made a loss of about Rs. 93,763. During the year 1969-70 the company has incurred a loss of about Rs. 48,667. Thus, the carried-forward losses as at June 30, 1970, come to about Rs. 2,27,682, while the carried-forward losses as shown by the trial balance-sheet as at June 30, 1971, come to about Rs. 2,23,240. The subscribed and paid-up capital of the shareholders consists only of Rs. 2,04,000. The reserves and surplus including the share premium amount and the development rebate is about Rs. 38,693. These figures, therefore, prima facie show that by reason of the carried-forward losses, the entire capital subscribed by the shareholders had been eaten away and the business of the company has to be carried on from the borrowed money. When such is the financial position disclosed by the balance-sheet of the company it is eminently desirable in the interests of the company and more so of the creditors of the company that they should know the real position qua their dealings with the company. In considering whether the petition should be directed to be advertised it is not only the interests of the company that have to be looked at. The interests of all the person, who are vitally interested in the assets of the company, has not to be ignored. When creditors of the company are likely to suffer if future losses are incurred, then they are the fit persons who would be entitled to appear before the court and make their submission in relation to proceedings for winding up of the company.

13. In my opinion, a prima facie case is made out of admission of this petition. I, therefore, direct that the petition be admitted and it should be advertised in the Indian Express, Bombay Samachar and the Maharashtra Government Gazette. Such advertisements should appear on or before 20th January, 1972, and the petition should be placed for hearing on board on second Monday in February, 1972.


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