P.N. Khanna, J.
(1) This judgment will dispose of three Company Appeals Nos. 8, 10 and 11 of 1971, directed against the judgment dated May 27, 1971 of the learned Company Judge, arising out of the winding up petition, which was filed by Smt. Abnash Kaur, be rein called 'the appellant', being the appellant in Company Appeal No. 11 of 1971. In her winding up petition, she had imp leaded as respondents, Lord Krishna Sugar Mills Limited, herein called 'the company' (respondent No. 1), being one of the two appellants in Company Appeals No. 8 of 1971, Anand Kumar, Sushil Kumar and S. D. Chawla, herein called 'respondents Nos. 2, 3 and 5' respectively, appellants in Company Appeal No. 10 of 1971, and Smt. Shanta Rani, herein called 'respondent No. 4', who is the first appellant (the company being the second appellant), in Ca 8 of 1971.
(2) The Company was incorporated in 1938 under the Indian Companies Act, 1913, as a public company limited by shares with a nominal capital of Rs. 34.00 lakhs and a paid up capital of Rs. 12.00 lakhs, (which to begin with was Rs. 10.00 lakhs). By article 116 of its Articles of Association, the company was required to take over the business of Lord Krishna Sugar Mills, prompted by a firm, of which Seth Shiv Prasad and his brothers, Seth Devi Chand, Seth Kundan Lal and Seth Banarsi Dass were the only partners. Seth Shiv Prasad was able, during the course of time, to acquire the entire share holding in the capital of the company and to become its virtual sole proprietor. The company runs a Sugar Mill and a Textile Mill, both situated at Saharanpur and has its registered office at present, in Chand Hotel, Chandni Chowk, Delhi.
(3) Seth Shiv Prasad had seven sons, viz., Bimal Prasad (deceased), husband of respondent No. 4, Anand Kumar, respondent No. 2, Sushil Kumar, respondent No. 3, Kuldip Chand, Ramesh Chand, Suresh Chand and Nirmal Kumar, from his first wife Sita Rani, who had died in 1951. On June 27, 1953 he married the appellant from whom he got another son, Kanwal Kishore. The appellant was appointed a director of the company in July, 1953 and remained so till March, 1960. She holds 7200 fully paid up equity shares of the company in her own name gifted to her by Seth Shiv Prasad. She also claims certain other shares standing in the names of her husband and certain benamidars. Seth Shiv Prasad was the Managing Director during his life time. After his death in May, 1957, his eldest son, Bimal Prasad became the Managing Director. The latter died in March. 1959; since when respondent No. 2. has been the Managing Director. Respondents Nos. 3, 4 and 5 are the other directors of the company. Respondent No. 5 is the father-in-law of respondent No. 2 and holds his shares rename for the latter. The total number of shareholders in the register of members, it is stated was fifteen (fourteen according to the respondents), including Seth Shiv Prasad. Five out of them hold shares benami for the late Seth Shiv Prasad.
(4) The appellant filed her petition for the winding up of the company on November 25, 1960, on the grounds, inter alia, that the company is a purely domestic or family concern in the nature of a partnership, between the members of the family of Seth Shiv Prasad, formed without an appeal to the public. Principles applicable for the dissolution of a partnership are said to be attracted for its winding up. Respondents Nos. 2, 3 and 4 are in complete control of the company and are said to be illegally diverting its funds and assets into their own pockets to the detriment of the appellant and the company. The appellant is in a minority and not in a position to have recourse to the domestic loruin. There is said to exist incompatibility between the views and methods of its various members in regard to its affairs, the blame for which is thrown entirely on the sons of Seth Shiv Prasad from his first wife, who, it is stated, harbour animosity against her and her minor son. Respondents Nos. 2 to 4 in order to get rid of her opposition to their illegal acts are said to have not re-elected her when she retired by rotation on March 23, 1960. Respondent No. 5, the father-in-law of respondent No. 2 was elected a director in her place. Respondents Nos. 2 to 5 are stated to have vacated their offices as directors because of the various contraventions of sections 294 and 314 of the Companies Act, 1956, herein called 'the Act', inasmuch as their relatives held and are holding offices and or places of profit without the previous consent of the company by special resolutions. The business of the company, is thus being carried on and contracts, commitments and obligations are being entered into by persons who have no authority to act, the directors having vacated their offices since long. It is then stated that the balance sheets do not reflect the true state of affairs, the directors and their associates have been taking loans and advances from the company against the provisions of law, large funds have been misappropriated by the management and vouchers, records and accounts have been manipulated, various irregularities have been committed by the directors in withdrawing huge amounts which would be brought to light if the accounts of the company are scrutinised in detail; and the company did not declare dividend's excepting once in the year ending May 31, 1959, when the appellant was a director. The company is said to have set up an underground pipe direct from the molasses tank, through which the molasses is taken out of the mill and sold in blackmarket unnoticed by the excise department and others, for the benefit of respondents Nos. 2, 3 and 4, who have not drawn remuneration from the company for years, the same being credited to their accounts, while they have been leading luxurious lives without having any other source of income. All their expenses are said to have been met by illegal withdrawals from the company's funds. The company's cars are said to be used for the personal use of the respondents and their relatives, although the petrol consumed is paid for by the company. Respondents Nos. 2 and 3 are said to have been selling bagasse and coal allotted to their mills in black market and misappropriating the amounts themselves without bringing the sale proceeds in the company's books. It has further been alleged, inter alia, that respondents Nos. 2 and 3 have been taking various advances from the company in the name of the appellant and others. An advance of Rs. 5,600.00 taken by them .from V. N. Kapur, accountant of the company, is alleged to have been shown in the account books against the appellant's name. The appellant and her minor son are said to have not been paid dividends, large donations had been given to political parties, income-tax dues have been accumulating and notices of the meeting of the directors and shareholders have not been issued. The petitioner is thus said to A have justifiable lack of confidence in the conduct of the management in the hands of respondents Nos. 2, 3 and 4. This is based on lack of probity of respondents Nos. 2 to 4 in the conduct of the affairs of the company and towards the interest of its shareholders. Conditions are said to exist providing prima fade justification for an investigation into the affairs of the company. Respondents Nos. 2 to 4 are alleged to have ousted the appellant from the management of the company and its affairs, in order to put pressure on her and her minor son to sell their shareholding to respondents Nos. 2 to 4 and their real brothers and immediate relatives at unconscionable low prices; and that the majority was oppressing the minority to such an extent that the appellant was left with no other option, but to seek the company's winding up. It was said to be just and equitable, under these circumstances to wind up the company.
(5) In the written statements, the respondents have traversed each and every allegation of the appellant in her petition. It was stated that the petition was mala fide and moved with an ulterior motive. The affairs of the company were said to have been conducted property and the practice and procedure prevalent from the time of Seth Shiv Prasad was said to be still being followed without there being any illegalities or anything else to the detriment of the appellant or any other shareholder. The allegations of fraud, misappropriation, diversion of funds and other irregularities were specifically denied and were said to be devoid of particulars. The petition was characterised as an abuse of the process of Court to coerce the respondents into paying to the appellant an unconscionable price for the shares belonging to her and her minor son. The company was said to be a flourishing concern and for this reason it was stated that it was neither just nor equitable to wind it up. A number of affidavits, counter-affidavits, rejoinder-affidavits and replication were filed. Number of applications for the appointment of the provisional liquidator were also filed from time to time, but without any success.
(6) After going through the voluminous evidence and the case law on the subject, the learned Company Judge found that the appellant was trying to exploit the situation and her petition was not bona fide. At the same time, he was of the view that her step sons were either ignoring her or not giving her legitimate share of profits to which she was entitled. She, thereforee, could not be blamed for asserting her rights. The learned Judge, thereforee, concluded that the petition could not be thrown out merely on the ground of mala fides. On merits, the learned Judge held that the company was a domestic company and in the nature of a partnership. Partnership principles were, thereforee, attracted to its winding up.
(7) The learned Judge also concluded that there was lack of probity in respect of the proprietory rights of the appellant and her son, as shareholders. He, thereforee, held that it was a fit case for winding up, but in view of section 443(2) of the Act, he felt that such an order could not be passed, as it was a flourishing company and considerable delay (by then more than ten years) had occurred in the disposal of the petition and,as the appellant was not taking advantage of the alternative remedy provided under section 397 and 398 of the Act. He, thereforee, ordered that the interest of the appellant and her minor son should be bought over by the group comprised of respondent No. 2 and his real brothers and Shanta Rani, respondent No. 4 and her children, after the price of the shares was determined by the Court for which purpose a Chartered Accountant was appointed to evaluate the assets and liabilities of the company to find out the value of the shares. The said group was required to make payment of the amount thus determined due, to the appellant on her own behalf and as the guardian of her son, in five equal Installments. During the period of evaluation it was considered necessary to entrust the management of the company in the hands of a neutral Board of Directors. It was, thereforee, provided that the Board of Directors would comprise of the appellant or her nominee (other than Ajit Singh), and a nominee of 'the group of Anand Kumar, respondent No. 2 (other than respondents Nos. 2 or 3). presided over by Mr. A. N. Kirpal, advocate, the court's nominee, who was also to act as the Managing Director.
(8) The appellant as well as the respondents felt dissatisfied with the orders of the learned Company Judge and have filed three separate appeals, referred to earlier. On interlocutory applications filed by the respondents in their appeals (Company Appeals Nos. 8 and 10 of 1971), another Division Bench dealing with these applications, modified the orders of the learned Company Judge, by allowing the old Board of Directors to continue as before, with the addition of Shri A. N. ' Kirpal, as the Chairman. On another application moved before us by the appellant, we appointed a firm of Chartered Accountants as internal auditors to keep under observation and check the day to day affairs of the company.
(9) Mr. R. M. Lal, the learned counsel arguing before us, on behalf of the appellant, submitted that the learned Company Judge had fallen into an error in holding that winding up order was not justified in this case, merely on account of the delay in the disposal of the petition, although he did find that the company was in the nature of a partnership and for its winding up, the partnership principles were attracted and that the affairs of the company had been conducted in a manner prejudicial and oppressive to the appellant and her son, and further that respondents Nos. 2 and 3 had been found guilty of various acts of omission and commission detailed in the judgment. The relief granted under sections 397, 398 and 402 of the Act, according to him, could not meet the ends of justice. The delay in the disposal of the petition, which persuaded the learned Judge to refuse winding up, was due, according to the learned counsel, largely to the steps taken by respondents Nos. 2 to 4 themselves to defeat the appellant's just claim. Respondents Nos. 2 to 4, thereforee, could not be allowed to take advantage of their own defaults.
(10) Mr. Ved Vyas, the learned Counsel for the respondents, on the other hand, submitted that the entire approach of the learned Company Judge was erroneous, as the petition should have been dismissed outright on the ground that it was wholly mala fide. It had been filed, said the counsel, on the instigation of the appellant's brother, Ajit Singh, who had vowed to take revenge and ruin the respondents and the company because Bimal Prasad and later Anand Kumar and Sushil Kumar, respondents Nos. 2 and 3, had refused to accommodate him by investing money in his speculative business with the result that he had to face extreme financial embarrassment, resulting in his being declared insolvent. The attempts at settlement had proved of little avail because of the illegal pressure alleged to have been exerted by Ajit Singh on the respondents in order to make them purchase the shares of his sister and her son at an unconscionably high price and on other unreasonable terms.
(11) The learned counsel further submitted that the findings on which the impugned judgment is based are beyond the scope of the pleadings as contained in the petition. Vague and general allegations, which deserved to be ignored, had been given meaning, which could not be attached to them and conclusions had been reached on the basis thereof, thereby causing great prejudice and injustice to the respondents. Even so, the findings, contended the learned counsel, are far fetched and unsupported by the record.
(12) In order to appreciate the rivel contentions of the learned counsel, it is necessary first to take note of the historical background of the case. Ajit Singh, the brother of the appellant, started in 1956, a film business under the name of Mehtab Films Private Limited. Seth Shiv Prasad did not approve of this, as is apparent from his letter dated August 22, 1956, (exhibit Public Witness 2/60), to his wife, the appellant, in which he wrote that the business of producing films was not only unsocial but prone to losses. Towards the end of 1958, Ajit Singh fell into financial difficulties and made demands on Seth Bimal Prasad and his brothers. As nothing came about, the appellant, in order to help her brother, was obliged to raise loans in January, 1959 on the security of two mortgages of the house, 3 South End Road, New Delhi, which was purchased by her in 1956 from the money gifted to her by Seth Shiv Prasad. The amount thus raised was given over to Ajit Singh, as is apparent from the statement of the appellant's Delhi Bank account, exhibit Public Witness 5/1, Bank draft dated January 30, 1959, her Bombay Bank account statement exhibit P4 and cheque exhibit P7, duly endorsed at its back by Ajit Singh. Maya Dass Mehta, Public Witness 10, a close friend of Seth Shiv Prasad stated on oath that in December, 1958, he had approached Bimal Prasad at the instance of Ajit Singh to persuade him to invest Rs. 10.00 lakhs in Mehtab Films. In March, 1959 Seth Bimal Prasad died. The Central Bank of India Limited asked the surviving heirs of Seth Shiv Prasad including the appellant, as also the heirs of Bimal Prasad to execute fresh guarantees to the Bank. In April, 1959 the witness (Maya Dass) again went to Saharanpur to arrange funds for Ajit Singh from the surviving sons of Seth Shiv Prasad. The appellant, according to him, utilised this occasion as a lever to extract funds from respondents Nos. 2 and 3 by expressing readiness to sign the fresh Bank guarantees, only if the required financial aid for Ajit Singh was forthcoming. This caused considerable worry to Anand Kumar, who asked Ajit Singh according to the witness, to give him a concrete proposal, Ajit Singh then handed over to him exhibit Pi, spelling out a scheme, inter alia, for investment of Rs. 10.00 lakhs on certain terms. Ajit Singh admits exhibit Pi to have been written by him, but says that it was written during the life time of Seth Shiv Prasad in 1954 and denies having made a demand on respondents Nos. 2 or 3. The learned Company Judge rejected this contention and observed that Ajit Singh had deliberately spoken a lie. The document obviously could not have been written in 1954, as one of the sheets on which the writing appears, has a letter head of the company, with its address printed as 3, South End Road, New Delhi, which was purchased in 1956. Even D.K. Mahajan J. before whom Ajit Singh was cross-examined, had observed that Ajit Singh was a earlier. Exhibit Pi has, thus, rightly been held to be a proposal by Ajit Singh made in April, 1959 to secure the investment of Rs. 10.00 lakhs in his business from the respondents. Negotiations were apparently in progress between the parties. The other proposal proved to have been made then was to separate the interest of the appellant and her son in the company. Various letters exchanged between the Bombay office of the Central Bank of India Limited and its office in Delhi and between its Delhi office and Saharanpur branch, have been proved as exhibits Public Witness II/2 to Public Witness 11/14, showing keenness of the Bank to have the differences between the parties smoothened out, so that the guarantees and the other necessary documents required to safeguard its own advances to the company could be duly signed and executed by all the major sons of Seth Shiv Prasad, the appellant and the widow of Seth Bimal Prasad. B. N. Puri. the Controller of the Bank in Delhi was examined. This evidence proves that Ajit Singh was keen to obtain a sum of Rs. 5.00 to 10.00 lakhs for being put in his business' (exhibit Public Witness I 1/4.) The appellant had indicated to the Bank that on respondents' unwillingness to give the necessary money, she would like to be separated (exhibit Public Witness I 1/5). She proposed to sell her and her son's shares to her step sons, who were prepared to purchase the same, but were not keen to hurry through as that might make them pay a higher price. They wanted to gain time also for arranging funds to pay the. purchase price (exhibit 11/5). In about May or June, 1959, there appears to have been some rapprochement between the parties and a sum of Rs. 10,000.00 was given as loan to Ajit Singh, as evidenced by pronote dated May 21, 1959 for that amount. Exhibit Public Witness I 1/6 is a letter dated June 10, 1959 addressed by respondent No. 2 on behalf of the company to the sub-agent of the Bank at Saharanpur saying that the mutual differences have been ironed out and all members of Seth Shiv Prasad's family have signed the documents. Bank guarantees were signed by the appellant also.
(13) On October 20, 1959, Ajit Singh was declared insolvent by the Bombay High Court and the differences between the parties again took an ugly turn, Exhibit Public Witness I 1/7 is a letter dated November Ii, 1959 addressed by B. N. Pun to the General Manager of the Bank in Bombay, saving that the appellant had contacted him and informed him that, differences have cropped up between her and her step sons and that by way of settlement she was being offered Rs. 26.00 lakhs for her and her son's shares, half of which was to be paid immediately and the balance within six months. But this offer was not acceptable to her as she wanted Rs. 30 to 32 lakhs. She is also alleged to have indicated that if the settlement was not arrived at, to her liking, she would se that the operation of the Bank account was stopped, by her withdrawing the Bank Guarantee furnished by her earlier. This threat, according to Mr. Pliri was being used by her as a 'trump card'. The letter dated December 9, 1959, exhibit Public Witness I 1/9 written by Mr. Puri . to the Head Office shows that respondents Nos. 2 and 3 had made inquiries about the possibility of Bank advancing Rs. 6 to 7 lakhs to enable them to make some payment towards the price of shares of the appellant and her son, which was proposed to b& fixed through arbitration. Other documents show that. the required facility was being made available to the respondents by the Bank. Exhibits Public Witness 7/1 and PW7/2 are the two Bank drafts for Rs. l,00,000.00 and Rs. 20,000.00 obtained by respondents Nos. 2 and 3, to make initial payments for the purchase of the appellant's shares. Chaman Lal, Public Witness 12, and Dwarka Dass have confirmed this. It is, thus, established that Ajit Singh did put forth his demands on behalf of the appellant and Anand Kumar and Sushil Kumar did make serious efforts to pay to the appellant a reasonable price for the shareholdings belonging to her and her son. In spite of a temporary rapprochement between the parties the negotiations ultimately fell through, as after respondents Nos. 2 and 3 had arranged money for payment to the appellant, Ajit Siagh raised his demands once again and wanted the said respondents to recognise the appellant to be the sole and absolute owner of 3, South End Road, New Delhi, and to absolve her from her share of the liabilities of the debts of Seth Shiv Prasad. As respondents Nos. 2 and 3 did r.ot accede to this demand, the negotiations fell through, resulting in Ajit Singh threatening the company and the said respondents with ruination, by bringing up a winding up petition. The learned company Judge has rightly accepted the respondent's version in this connection. Ajit Singh was putting undue pressure on respondents Nos. 2 and 3 to make them agree to his demands. We are in agreement with the learned Company Judge that the winding up petition was filed by the appellant at the instigation of her brother, Ajit Singh, with a view to indulge in extortion. The appellant, in fact, never wanted the company to be wound up. Her aim was merely to squeeze money out of respondent No. 2 and his real brothers, more than what they were willing to pay. This is amply borne out from her own answers to questions put to her in cross-examination, some of which are reproduced as under:-
'0: In order to end the dispute, are you prepared to sell your shareholding and shareholding of your son for a price to be settled by this court or by an arbitrator or a person to be nominated by this court A: I am not prepared to sell my shares in this flourishing company. : Are you prepared to work at Saharanpur as working director for a period of three years in the first instance on the management is changed. I only want independent to file another winding up petition, in which the ground of the present petition may also be included in case of dissatisfaction A : I am not prepared to work with the present directors because they have already cheated me. I will only agree if the management is changed. I only went independent management of the company. Q : Dou you want a flourishing company to be wound up A : I do not want it to be wound up. All I want management should go in other hands.' At this stage, the Court asked the following question: A : I do not want it to be wound up. All I want is that the management should go in other hands.' 'Q: If Ajit Siagh is appointed as Working Director, would you agree to join the management A : I still maintain that no relation should go in the management and the management should remain absolutely independent.'
The appellant, it is thus clear, was not keen for the winding up of the company; nor was she prepared to participate in its management. She just wanted to have a price for her shares, which she perhaps knew was unreasonable; but she would not say so, as she felt that it would expose her mala fides. And to provide a cloak to hide her mala fides, she said instead that she would not sell her shares and wanted only a change in the management, which she knew was not possible without a mandate from the shareholders. The petition under these circumstances is a move with an oblique motive, for a collateral purpose and is mala fide. It is clearly an attempt on the part of the appellant to put pressure on the respondents to agree to her demands which are not clear even to her and obviously, thereforee, are unreasonable.
(14) We have also noticed that the appellant after filing her petition was not at all keen to pursue and expedite its disposal. According to Mr. R. M. Lal the delay was caused by respondents' application, Cm 197-D of 1961 for dismissing the petition on the ground of mala fides and Cm 198-D of 1961 for recalling the order admitting the petition. These applications took three years to be disposed of. Mr. Ved Vyas pointed out that the appellant herself had during the three years, submitted as many as 24 applications. And when the main trial started she filed a list of 99 witnesses on December 14, 1964, saying that she will file another list later and bring other witnesses on the date of hearing. Another list dated January 21, 1965 for summoning 125 other witnesses was then filed. The lists were prepared in a most irresponsible manner, as two of the witnesses were described as 'Diwali Rebates' and 'Sundries'. The leisurely manner in which the witnesses were summoned and examined is obvious from the fact that on January 20, 1967, the respondents after getting fed up with appellant's delaying tactics, offered by their application, Ca 151 of 1966 to serve dusty summons on her witnesses. This offer was refused. The appellant herself attached no value to the statements of her witnesses, laboriously examined over a number of years, as none was referred to before us by the learned counsel. The attitude of the appellant in obstructing the trial is not at all understood. On September 1, 1967, H. R. Khanna J. (as he then was) had occasion to observe in his order that the petitioner was in the habit of moving applications at the last moment and then delay the proceedings. Her grievance that the delay inherent in the Court procedure should not have influenced the learned Company Judge to refuse passing the compulsory order is, thus. without any basis. Her part in deliberately causing delay, which according to Mr. Ved Vyas was a sword of democlese, kept hanging over the respondents' heads to maintain a constant pressure over them, though not conclusive proof in itself of her other than bona fide intentions, speaks against her when the question of her male fides is taken into consideration.
(15) Mr. R. M. Lal contended that in a winding up petition, the motive was irrelevant and in support he relied on Bachharaj Factories Ltd. v. Hirjee Mills Ltd., : AIR1955Bom355 , and Harinagar Sugar Mills Ltd. v. M. W. Pradhan, : AIR1966Bom4 . In both these cases petitions for winding up had been filed by the creditors. The Bench in Harinagar ca.se(') relied on the observations of the Chief Justice Chagla in Bachhraj's case(1), where the Company was insolvent and its substratum had gone. The petitioner himself being largely responsible for bringing about the impasse in the affairs of the mill was said to be guilty of mala fides. But the petition was sup- ported by all holders of debentures of Rs. 37 lakhs and the Bank of Baroda with a loan of Rs. 50 lakhs. The labourers to whom Rs. 36 lakhs was due, strongly supported the petition. The learned Chief Justice, was of the view that if the petitioner was to stand to benefit by the order, 'undoubtedly the Court would say that a party cannot derive benefit by its own wrong.' But the winding up order in that case was considered to be, not only in the interest of the petitioner, but in the interest of the company and all its shareholders and creditors in general. It was in these circumstances that he found it difficult to understand what the motive of the petitioner had to do with the question whether an order of winding up could be made or not. A creditor's petition for payment of an undisputed debt even otherwise has always been treated differently and it has been said that the Court must ex debito justitiae make the winding up order if the petitioner brings the case within the Act. (See in re London Suburban Bank, 1971 6 Ch. A 641 in re Amalgamated Properties un Rhodesia Limited (1917) 2 Ch. 115 and in re Davis Investment (East Ham) Limited (1961) 3 All E.R. 926
(16) In the present case, it is difficult to ignore the motive of the appellant. According to section 433(f) to the Act, a company may be wound up by the court if it is of the opinion that it is just and equitable that the company be wound up. The law requires the court to form an opinion about the equitable nature of the case. Equity jurisdiction thus has been vested in the court by the statute itself; and then it is not imperative on the court to make a winding up order even if the Court forms the opinion that it was just and equitable to do so. The use to the word 'may' creates a further discretion in the court to order or not to order an vending up. The discretion cannot be exercised arbitrarily or according to one's own will or whim. It has to be regulated by law and the well known rules of equity in order to assist the law, allay its rigour, advance the remedy and to relieve against abuse. The court, thereforee, exercising equity jurisdiction, cannot ignore the well-known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands. Another equally well known maxim is that where both parties to the litigation are at fault, the defendant's position is stronger (see Pomeroy's Equity Jurisdiction, 2nd Vol. page 90).
(17) Mr. Ved Vyas cited a number of English and Indian cases, where the winding up order was refused on the ground that the petition was presented really for some other purpose, such as putting pressure on the Company. It is, however, not necessary to refer to them, as we have a number of decisions of the Supreme Court, dealing with this question.
(18) In Shanti Prasad fain v. Kalinga Tubes Ltd., 35 Cc 351 (6), the Supreme Court refused to accept the petitioner's claim, as his real aim was found to be to get control of the company. In Amalgamated Commercial Traders (P) Ltd. v. A.C.K. Krishnaswami and another, 35 Cc 456 (Supreme Court) (7), S. M. Sikri J' (as he then was), approvingly quoted Buckley on Companies Act, saying that a petition presented ostensibly for a winding up order but really to exercise pressure will be dismissed and under circumstances may be stigmatized as a scandalous abuse of the process of the court.
(19) In National Conduits Private Limited v. S. S. Arora, 37 Cc 786) (8), the petition was not bona fide. Shah J. set aside the orders of the High Court Bench, directing advertisement of the petition and speaking for the. Supreme Court, observed that if the view of the Bench was accepted, it would make the Court an instrument in possible case of harassment and even blackmail. In Madhusudan Gordhandas & Company v. Madhu Woolen Industries Private Limited. : 2SCR201 , Ray J. dismissed the appeal before the Supreme Court with costs, as the petition, inter alia, did not appear to be for any legitimate purpose.
(20) Motive, it is thus settled, assumes great importance in deciding whether or not to entertain the winding up petition.
(21) Mr. R. M. Lal submitted that the appellant had genuine grievances. which could not be ignored. The step sons, according to him, had never reconciled themselves to accept the appellant as the wife of their father. They were helpless so long as Seth Shiv Prasad was alive. They lost no time in throwing her out, after their father died. This contention is contrary to facts proved on record. The step sons. as was contended by Mr. Ved Vyas, had been treating the appellant as their mother and their relations continued to be cordial till the death of Bimal Prasad. This is apparent from the fact that when Seth Bimal Prasad was seriously ill, it was the appellant, who made all arrangements to herself take Bimal Prasad to Europe for treatment. Seth Shiv Prasad had died in 1957, but the appellant continued not only to be on the Board till May, 1960, but also to enjoy all her amenities including the use of a car. It is, thereforee, wrong for Mr. R. M. Lal to say that the relations between them were strained from the very beginning. On the other hand, they appear to have remained very cordial till Ajit Singh started instigating her against the step sons in order to take undue advantage of her position. It was then that she refused to sign the renewal guarantees which the Bank insisted her to sign. Respondents Nos. 2 and 3, thereforee, had justification to doubt the advisability of keeping her on the Board, as aided by her brother, she had started indulging in extortion and blackmail. In fact, the appellant herself does not seem to have been keen at that time to be re-elected on the Board. She had made up her mind to sell her own and her son's shareholding to her step sons. Negotiations were already afoot for this purpose. In any case her non-election as director cannot be said to be her exclusion from the management in which, Mr. R. M. Lal says. she had been participating. According to her, she did not attend any Board meeting during her tenure in office as a director from 1953 to 1970, except once: : although respondents Nos. 2 and 3 assert that she attended many meetings as recorded in the minute books. Her grievance that she was excluded from management, thereforee, has no basis.
(22) The petition in the present case having been filed for putting pressure on the respondents in order to make them agree to invest ill the speculative business of the appellant's brother or to pay fancy price for the shareholding of the appellant and her son, was obviously lor an ulterior purpose with an oblique motive and was mala fide. It, thereforee, deserved to be dismissed. But as the merits of the case have been discussed at length by the learned Company Judge and the case has been pending in the Court for nearly twelve long years during which a bulky record running into eighteen volumes of the paper book has been constructed, it would be appropriate to consider the merits as well.
(23) The trial Court has confined its attention to the period between June 1, 1957, i.e. after the death of Seth Shiv Prasad on May 24, 1957 and May 31, 1962, when an application for appointment of a provisional liquidator and a receiver was made. During his life time, [he Seth admittedly was all in all, and no one else interfered with the working of the company. It was, thereforee, no use going into the period before his death. That is why the starting point was rightly taken by the trial Court to be June 1, 1957.
(24) The winding up order relates back to the date of the petition and the proceedings being of quasi-criminal nature, it would be refused if sufficient case is not laid in the petition. The case has to be decided on the facts as on the date of the filing of the petition. Subsequent events are not taken into consideration (see Rajamandri Electric Supply Corporation Ltd. v. A. Nagashwara Rao & others, 1955 Scr 1066:1' Shanti Prasad Jain v. Kalinga Tubes Ltd., 35 Cc 315;11 Seth Mohanlal v. Grain Chamber and others, 38 Cc 543) (12). The petition was filed on November 25, 1960. Events after that date, thereforee, cannot be taken into account. The period to be reviewed, thereforee, is from June 1. 1957 to November 25, 1960.
(25) Two considerations influenced the learned single Judge, to come to the conclusion that it was a fit case for winding up. In the first place, he was of the opinion that there was lack of probity in respect of the proprietary rights of the appellant and her son, which he found from some of the instances discussed in his judgment. This was coupled with the absence of a domestic forum to which the appellant could hope to appeal. Secondly, he found that the company was, in substance, a partnership in the guise of a company. The partnership principles, according to him, were, thereforee, attracted for its winding up. On the first point, reliance was placed on the raising of certain false debits against the appellant. This was said to have been done to off set the credits that were raised in her and her son's favor for dividends that became due to them.
(26) The first of these debits of Rs. 5600 was raised on May 31, 1959. The allegation in respect of this entry was made in paragraph 38 of the petition, in the following words : 'that the respondents Nos. 2 and 3 had personally taken an advance of Rs. 5600 from V. N. Kapur, accountant of the company. But, in the account books of the company, this advance has been shown against the name of the appellant, which is entirely incorrect and the entry is false. Respondents Nos. 2 and 3 are misappropriating the funds of the company.' In the verification, this statement was said to be true, not according to the appellant's knowledge, but on information believed to be true. In the written statement filed on behalf of the company and other respondents, the allegations in para 38 of the petition were denied as false.
(27) V. N. Kapur, the manager of the Textile Sale Depot of the company in Delhi, had asserted that this sum had been paid in cash. Receipt was not obtained as the money was expected to be paid back the next day. His Explanationn was demanded by other directors, when they learnt about it; and a resolution was passed warning him not to repeat this in future and directing him to take steps to recover the amount. The amount was then debited to the appellant's account, a copy of which was sent to her on June 17, 1960. The appellant after five months in her letter dated November 16, 1960 denied the receipt of this payment. It was then that V. N. Kapur wrote exhibit PW30/13 to the appellant saying, inter alia, that he was surprised to find 'that a person of your position should stoop to this level and deny the payment received in cash from me.' V. N. Kapur, appearing as Public Witness 13, however, stated that this amount had not been paid in cash. On the other hand, a sum of Rs. 5596.12 had been spent on the appellant's behalf, not in one lumpsum but over a period of time. On May, 31, 1959, Rs. 5600 were debited to her account in round figures. The difference of Rs. 3.88 was paid in cash. V. N. Kapur was directed by D. K. Mahajan J. to prepare the details of this amount (Rs. 5600), which he did (vide exhibit Public Witness 30/11). These details do not find mention in the Delhi office books, where the entry of Rs. 5600 appears in lumpsum.
(28) The learned Company Judge was not impressed by the Explanationn given by V. N. Kapur in the witness box, which was totally different from his version in his letter and the Explanationn he had given to the director. He was of the view that the entry of Rs. 5600 having been falsely made, some of the expenses are now being collected and added up to justify the same. He was not satisfied with the Explanationn of Anand Kumar and Sushil Kumar that they could not be held responsible for this. It was under these circumstances that he held this entry in the books of the company to be incorrect.
(29) The appellant, it is noticed, filed her replication on August 21, 1964 to the written statement dated July 10, 1964, after she had the opportunity of inspecting the records. No attempt was made to amend her allegations about respondents Nos. 2 and 3 having withdrawn this amount. Simple denial of para 38 of the written statement was made and the corresponding para in the plaint was reiterated. Anand Kumar and Sushil Kumar have stated on oath in their affidavits that they have not withdrawn this amount from the company as was alleged in the petition. No questions were asked from them in cross- examination on this aspect. Nothing has been brought on record to show that the various entries as appeared in exhibit Public Witness 30/11 were within the knowledge of the directors. The finding, however, is that it was a false entry and not that respondents Nos. 2 and 3 had withdrawn this amount as 'alleged in the petition. The allegations in the petition are in respect of one kind of default, while the finding is of a different default.
(30) Although the inconsistency of the stand taken up by V. N. Kapur is glaring, yet it cannot be ignored that the various amounts, which are said to have been added up to make up the said sum of Rs. 5600 were actually disbursed on various dates from December 19, 1957 to April 22, 1959, as are found to be duly entered in exhibit Public Witness 30/1 and exhibit Public Witness 30/3, which are the books seized in the police raid and are held by the learned Company Judge to be the genuine rough books, written in regular course of business from day to day. Apart from a few items paid in cash, receipt of which is not denied, the remaining items are miscellaneous household expenses towards salaries of servants and for supplies of milk, meat, etc. spread over a period of a year and half. These details had not been carried into the fair book of the Delhi Office, where the entry was made in one lumpsum.
(31) Abnash Kaur had become a director in 1953 and continued to be so till March, 1960. She was the wife of the managing director; and had cordial relations with her step-sons till Bimal Prasad's death in March, 1959. The entries in the rough books relate to the years 1957-58. There was no opportunity to tamper with these books. V. N. Kapur was just an employee of the company. The possibility of his acting according to the appellant's instructions from time to time cannot be ruled out. V. N. Kapur could not have dared to defy her instructions during this period. Although the entry may be in- correct, inasmuch as Rs. 5600 was admittedly not paid in lumpsum in cash on May 31, 1959, yet the entry is not bogus and its genuineness cannot be doubted. In cross-examination V. N. Kapur was asked on the appellant's behalf that except two items from these details, of Rs. 500.00 and Rs. 63.00, the rest had nothing to do with the appellant. The answer was that all items related to the appellant. The trend of the question showed that at least two items from the said details were admitted. In fact, in none of the various affidavits filed by the appellant, the details in exhibit Public Witness 30/11 were disputed. Even Mr. R. M. Lal accepted at the Bar the genuineness of the rough books seized in the police raid. He contended that there were many similar items in the rough books, which had not been debited to the appellant. The one's that were said to constitute the break-up had been picked up merely because when added up, they totalled up to Rs. 5600. But the learned counsel was unable to point out any such other item. His contention, thereforee, cannot be accepted. The individual items in exhibit Public Witness 30/11 have to be accepted as correct. None of these items is said to have been paid back or otherwise adjusted.
(32) The item of Rs. 5600 was noticed by the directors in their meeting dated January 28, 1960 when a resolution in respect thereof was passed as is apparent from the minute book. Notice of this meeting was duly served on the appellant, although she in her cross-examination has stated that she received the notice on January 31, 1960. She does not say that the agenda of the meeting did not accompany the notice, nor was any question asked from Anand Kumar or Sushil Kumar about the agenda. She was, thereforee, aware of this amount having been debited to her account. She did not protest. The resolution cannot be said to have been manipulated, especially as the minute book was duly signed, by Mr. K. K. Jain, the appellant's learned counsel on December 1, 1960 in pursuance of the orders of G. D. Khosla, C.J.
(33) It has been stated that this item of Rs. 5600 together with other items were falsely debited to the appellant's account in order to off set any credits that were given to her on account of dividends. This allegation is without any basis, as no dividend was declared by the company before March 23, 1960, which became payable 42 days after its declaration. This, being the first dividend, ever declared, the question of raising debit entries about a year in advance in May, 1959 did not arise and in any case this one isolated instance cannot be magnified to give a verdict of lack of probity on the part of the directors towards the proprietary rights of the appellant. The above aspect of the case obviously was not brought to the notice of the learned Company Judge and we must say with respect, that we are unable to agree with his conclusion to the effect that this item of Rs. 5600 was falsely debited to the appellant's account. In any case. this entry does not in any way affect the appellant's proprietary rights as a shareholder.
(34) The second debit against the petitioner was of a sum of Rs. 3000 on March 15, 1961, by way of a transfer entry from the name of one Sardar Jasmer Singh, a brother-in-law of the appellant. According to the appellant, this was another advance taken by the respondents. But it is not in dispute that Rs. 3000 were actually paid some years earlier to Jasmer Singh, under appellant's instructions towards the repair charges of a car belonging to the company. Jasmer Singh was asked to submit a bill as the auditors were raising objections. In reply he wrote that he had submitted the bill to the appellant. The appellant, when approached, did not care to reply. The amount was. thereforee, debited to her account by means of a transfer entry made after the winding up petition was filed. This subsequent event, thereforee, should not have been taken note of. And, in any case, we have not been able to appreciate the contention of Mr. R. M. Lal, that this amount should have been kept debited to Jasmer Singh. His contention that this debit was raised against the appellant merely to harass her is without any basis.
(35) The item of Rs. 3000 together with the item of Rs. 5600 forms part of the total debit balance of Rs. 13,348.58, which was shown in the balance sheet for the year ending March 31, 1959 as advances to directors or their associates, Jasmer Singh having been treated as an associate of the appellant, being her brother-in-law. Mr. R. M. Lal contended that the note in the balance sheet could not be read to mean advance to the appellant. It could be an advance to some other director. The contention, however, is without any substance. The entry regarding this advance is repeated in the balance sheet for the year ending may 31, 1960, where it is shown as due from 'ex-directors and associates'. The appellant was the only 'ex-director' during this year, all other directors continuing to be directors as before. This entry, thereforee, does not advance the appellant's plea of lack of probity on the part of respondents Nos. 2 and 3.
(36) The third debit entry, which the learned Company Judge noticed, is of Rs. 780.56, said to be in respect of the alleged supply of barbed wire, etc. for the appellant's house. 3, South End Road, New Delhi. This material, said Mr. Ved Vyas, was required by the appellant and the company had paid for it and so the debit had to be raised against her. The learned company Judge was of the view that this was a fictitious debit raised to make up a particular amount. The affixing of the barbed wire around the house is not denied. Its cost, as evidenced from the bill, was Rs. 788.56 for which a 'hundi' had been drawn by the supplier and presented to the company at Saharanpur, but appears to have been dishonoured. A sum of Rs. 788.56 was subsequently paid at Delhi as is found from the relevant voucher, exhibit Public Witness 30/4. It is not understood as to why Rs. 780.56 only were debited to the appellant. According to Mr. R. M. Lal the amount was reduced in order to make it fit in the total amount of Rs. 13,348.58, which according to the note in the balance sheet was the 'advances to the directors and their associates'. This contention is entirely baseless. In the first place, this amount was not included in the total of Rs. 13,348.58. Secondly, the statement of account given to the appellant in June, 1966 (.vide letter exhibit RW6/43), mentions Rs. 780.56 as 'cost of barbed wire at kothi'. No objection was raised by her for five months. Even in the winding up petition filed on November 25, 1960, this item was not included in her objections. although an objection had been raised to Rs. 5600. There was no challenge to it even in the affidavit of the appellant,, which she filed in evidence. There was, thus, no opportunity to cross-examine Abnash Kaur on this item, nor was there any occasion for the respondents to lead evidence on this question. Lal Chand, Sushil Kumar and Anand Kumar were not asked when being cross-examined, to n explain this discrepancy, although the hundi was put to Anand Kumar for getting it exhibited. The respondents were not allowed to reexamine Anand Kumar to elicit an Explanationn from him about the discrespancy. Mr. R. M. Lal referred to better particulars filed in Court on March 20, 1970, where a reference is made' to this item. These particulars were filed not in connection with the main winding up petition, but to elaborate an application for the appointment of the provisional liquidator, long after the respondents had cross-examined the appellant's witnesses and had led their entire evidence so far as the examination-in-chief was concerned. Only three witnesses of the respondents including Anand Kumar and Sushil Kumar were left to be cross-examined and Anand Kumar, as stated above, was not allowed to be re-examined. It would not be fair under these circumstances to entertain doubts about this entry and make it a basis for charging lack of probity on the part of the respondents.
(37) There is a credit entry of Rs. 910.00 in favor of the appellant for fees for board meetings attended by her. This was challenged before us, although not before the learned Company Judge. This entry was expressly shown in favor of the appellant in the statement of account,, exhibit RW6/42; and was disputed by her after about five months. According to her, it was an attempt to create evidence to show her attendance at certain Board meetings. She alleged in her petition that she always signed the minutes of the meetings attended by her. This is, however, contrary to the practice as it is found that none of the minutes were ever signed by any director except the chairman. In para 51 of the petition, it is alleged that a vital meeting in which the balance sheet as on May 31, 1958 was approved, was not attended by her. Only two directors were present, which was less than the required quorum. The accounts and the balance sheet and the director's report, accordingly, are said to have not been duly passed. An examination of the minute book shows, that the grievance is imaginary. The appellant's presence has not been recorded. The meeting was perfectly valid, with the presence of two directors, as the required quorum was two. Again the appellant takes credit for the declaration of dividend for the first time on March 24, 1960 in a meeting attended by her. From her letter dated November 16, 1960, exhibit Public Witness 2/28, however,, it is apparent that she had opposed the declaration of dividend, which according to her, was 'declared for ulterior motive. A note in the minute book records her dissent. Then again a general meeting of the company was held on June 10, 1959. The proceedings of this meeting are signed by her, as after her objections in or about May, 1959, her signatures used to be obtained on the minutes of the meeting attended by her. In her affidavit dated June 14, 1956 she has stated in para 21 that she was present in that meeting and had raised certain objections to certain resolutions. In her cross-examination on March 3, 1965, she however, said, 'the proceedings of the general meeting dated June 10, 1959 do not bear my signatures. . . . . .1 did not attend the meeting held on June 10, 1959'. Ajit Singh, her brother has identified and proved her signatures on the minutes of this meeting. Even Mr. Justice D. K. Mahajan did not find her to be a trustworthy witness. The minutes up to September 15, 1957 had been signed either by Seth Shiv Prasad or Seth Bimal Prasad, as Chairman, both of whom are now dead. No other director ever signed the minutes. All proceedings before October, 1959 are in the handwriting of one Piare Lal Sood, who died on October Ii, 1959. When the petition for winding up came up for admission before G. D. Khosla, C.J. on November 30, 1960, he, at the instance of the appellant, ordered the company's books to be signed by Mr. K. K. Jain, the appellant's counsel. This was done on December 1, 1960. There is, thereforee, no possibility of subsequent tampering with the minute books; and the entries therein have to be taken as correct. According to the minute book, the appellant had attended 18 meetings in all. The meeting fee was Rs. 50. g The sum of Rs. 10 sent by her to cover the cost of registration of notices meant for her was also credited to her. Thus, a credit of Rs. 910.00 was perfectly justified and the objection of Mr. R. M. Lal to this credit entry has no justification.
(38) The next grievance against respondents Nos. 2 and 3 is said to be their failure to register the transfer of shares to which the appellant and her son were entitled, thereby depriving them of the dividends in respect thereof. Mr. R. M. Lal drew our attention to the findings of the learned Company Judge to the effect that the respondents did what they liked, when they liked, so far as their own interest were concerned, as is apparent from their registering the transfer of shares in the name of Shanta Rani, but deliberately not doing any thing for the petitioner and her minor, son, and their registering the shares to which they were entitled in their names. The respondents, on the other hand, according to Mr. Ved Vyas. were at all times ready and willing to register the shares on the appellant's applying for the same, which she failed to do as she did not want the shares to stand in earlier name and thereby incur the risk of being attached in realisation of heavy amounts due from her towards income-tax and to other creditors The shares which had been given by Seth Shiv Prasad to the appellant and to his sons had been registered in their respective names. The shares of the face value of ' Rs. 3,85.360/, however, still stood in the name of Seth Shiv Prasad himself and shares of the value of Rs. l,70,050.00 stood in the names of benamidars. After the death of Seth Shiv Prasad, the appellant and her son were admittedly entitled to 2/9th share in the said shares. The benami shares were divided between the parties on 14th April, 1958, while those standing in the name of Shanti Prasad were divided on December 26, 1959. The share scrips and the relevant signed transfer deeds, in respect of shares allotted to her and her son were duly handed over to the appellant. There is a letter dated December 26. 1959 signed by Anand Kumar as director of the company addressed to the appellant, undertaking on company's behalf that the shares of the face value of Rs. 86,000.00 which had been handed over to her as part of her inheritance along with her son, will be readily transferred by the company in her name on her asking and submitting the share certificates. In her cross-examination she admitted that she did not submit the shares for transfer. In fact, she never protested nor was any notice served on the company, nor any grievance ever made about the non-transfer of shares. The present objection, is without any justification and cannot provide a ground for the winding up of the company. On the death of Bimal Prasad, the Central Bank of India Limited, insisted that his widow, Shanta Rani, should sign the guarantees to the Bank and for this, the directors were asked to get the shares registered in her name as early as possible (vide exhibit Public Witness . 11/3 ' dated March 30, 1959). Exhibits R-6 to R-22 are the duly executed transfer deeds dated October 15, 1959, which were presented to the company and on the basis of which the transfers were made in favor of Shanta Rani and her children. This is also corroborated by a regular entry in the register of transfers. There is also an application, exhibit R-31, for the transfer to Shanta Rani and her children, shares which previously stood in Bimal Prasad's name. The shares allocated to the appellant's step-sons and Shanta Rani were thus duly registered in their names on November 7, 1959 as per resolution passed in the director's meeting of that date. The transfer of shares was not an item of the agenda for that meeting, the last item being: 'any other businesses with the permission of the chair'. The grievance is that in the absence of the agenda and without an application for transfer, the registration of transfer was passed in favor of Shanta Rani under the last item of the agenda, which was said to be irregular. But, as noticed above the transfer applications were there and the law does not. require an agenda for the meeting of the directors. In this connection, a comparison of section 172 of the Act, dealing with general meetings with section 286 dealing with board meetings is useful. According to section 172(1) every notice of a meeting of a company is required to specify the place and the day and hour of the meeting and to contain a statement of business to be transacted thereat. Under section 286, notice of the meeting of the board is required to be given in writing to every director. Any business whatsoever, thus can be transacted at a board meeting, while the shareholders are required to be informed in advance of the agenda in the case of a general meeting.
(39) A grievance had been made before S. B. Capoor J. also that 7500 benami shares which fell to her and her minor son's share in the family arrangement had not been registered by the company. On June 6. 1966 the learned Judge passed an order in accordance with the respondents' offer, that if the transfer forms and other relevant documents were submitted to the company it will after notice to the Income-tax authorities and subject to any objections made by them duty register the transfers. The appellant in spite of this order has not taken any steps so far to present the share scrips to the company for registering and endorsing thereon, the transfers. The non-registration of transfers in the name of the appellant and her son, or the registration in favor of Shanta Rani, thereforee, can not be said to show that the respondents Nos. 2 and 3 did what they liked as far as their own interests were concerned; or that they deliberately did nothing for the appellant and her son or that they tried to keep them financially handicapped.
(40) The contention that the withholding of the dividends due to Kanwal Kishore who is a minor was out of spite in order to deny the availability of funds to the appellant is likewise without any justication. The appellant had moved an application, Ca 17-D of 1965, for the appointment of a provisional liquidator on the ground, inter aha. that dividends due to her and her son were being withheld by the respondents and not being paid to her. S. B. Capoor J. then passed an order directing the company to pay Rs. 3000.00 per month to the appellant on account. This amount is admitted to have been paid regularly by the appellant. The objection is that adjustment has been given for these payments against the dividends not only due to the appellant, but also due to her son, Kanwal Kishore. The adjustment against the dividends due to Kanwal Kishore is said to be unauthorised as according to the appellant, S. B. Capoor J. authorised adjustment against the dues of the appellant alone. The relevant extracts from the order of the learned Judge are as follows :-
'THE first grievance is that for one reason or the other, the dividends due to the petitioner and her minor son has not been regularly and fully paid. It appears the proceedings of guardianship of Kanwal Kishore are going on in the Court at Saharanpur and dividend occurring in the name of Kanwal Kishore are being deposited in the Court, most of which, it is stated, have been withdrawn by the petitioner. However, so far as the dividends due to the petitioner since 1959 are concerned, it would appear from the statement annexure 'A' filed along with the supplementary affidavit of Anand Kumar that very little cash is actually given in her hands. It seems that the petitioner possibly because of this litigation has become indebted and there are number of decrees outstanding against her in respect of which attachment orders have been issued and these attachment orders are being adjusted out of the amounts of dividend. Mr. Sen has proposed that a sum of Rs, 3000.00 per month be deposited in this court by the company in the account of the petitioner, which may be adjusted towards future dividends. Mr. Ved Vyas has no serious objection to this, but submits that there are still attachment orders subsisting. These may be passed on to this court and withdrawal by Abnash Kaur would, of course, be subject to these attachment orders. Any dividend which are lying unpaid with the company for the previous years on the shares registered in the name of Abnash Kaur and her minor son are also to be similarly deposited in ourt.'
(41) The grievance before S. B. Capoor J. was, obviously in respect of the payment of dividends due not only to the appellant, but also to her minor son. The respondents, thereforee, cannot be blamed if they took the order as authorising adjustment against the dividends due to both. In the covering letter of the company to the Deputy Registrar of this Court every month, enclosing the draft for the monthly payments in pursuance of the said orders, it is always mentioned that 'this amount will be adjusted from the dividends of Smt. Abnash Kaur and Kanwal Kishore'. Letters were also addressed every year direct, both to the appellant and her honor son through her, specifically mentioning that the amounts had been adjusted towards the dividends payable to the appellant and her minor son, Kanwal Kishore. No protest or objection was ever raised by the appellant to this interpretation of the order.
(42) Another order dated September 2, 1966 passed by A. N. Grover C J. (as he then was), also supports the contention of the respondents. It appears that in execution of certain decrees against the appellant. the monthly sums so deposited were sought to be attached. The company raised an objection that calculating dividends at the rate of 20 per cent less tax, the net amount of dividend payable to Abnash Kaur and her minor son, will work out to Rs. 37,520.00 per annum. out of which the shares of the appellant will be Rs. 1300.00 and odd per month. The company asserted that the amount that was deposited did not belong in its entirety to the appellant because the son also had a share in it. The learned Judge- ordered that there could be no doubt that in the circumstances mentioned, the respondent company will not be liable or responsible in any manner, as was admitted by the appellant herself, for any dispute which may be raised by the minor son in that behalf and that the responsibility will be of Abnash Kaur Even otherwise, there is no substance in the allegation that dividends have been withheld from the appellant or her minor son. Under section 206 of the Act, no dividend can be paid by a company in respect of any share therein except to the registered holder of such share or to his order or to his banker. The appellant and her minor son, thereforee, could not claim dividends in respect of the shares which were not registered in their names. The statement of dividends paid, exhibit RW. 21/14, however, shows that all the dividends have been paid to the appellant and her minor son, even in respect of the shares which have not yet been registered in their names. In any case. the dividends about which grievance was sought to be made out, were payable after the institution of the winding up petition. This was, thereforee, a subsequent event which should not have been taken into consideration. We must. thereforee, sav with respect that we are unable to agree with the observation of the learned Company Judge, to the effect that the respondents had injured not only Kanwal Kishore but also the appellant in this manner and that this amounted to lack of probity , the part of the respondents towards the appellant and her son in respect of their proprietary rights as shareholders.
(43) Mr. R. M. Lal then laid great stress on certain deposits said to be fictitious, which stand in the name of various persons. According to him, these monies really belonged to the company and should have been available for computation of profits for distribution among the shareholders. Mr. Ved Vyas however, urged that no specific plea about fictitious deposits having been raised in the petition it would not be appropriate to examine this contention. He raised strong' objection to the contentions of Mr. R. M. Lal in this regard, more so, as the respondents never had the opportunity to lead evidence in respect of such vague and wild ahegations. Mr. R. M. Lal read out paragraph 18 of the petition where it was pleaded that respondents Nos. 2, 3 and 4 were in complete control over the affairs of the company and were in a position and were in fact alleged to be illegally diverting the funds and assets of the company to their own pockets to the disadvantage and detriment of the appellant. In paragraph 19(2 ) ( a) there was a similar bald allegation about the respondents misappropriating the funds and monies of the company. In paragraph 24, it was stated, that large funds of the company had been misappropriated by the management and vouchers, etc. had. been manipulated. According to Mr. R. M. Lal, the appellant was required to plead facts and not the evidence in support thereof. The existence of the fictitious deposits, according to him, was the evidence of the illegal diversion of funds and misappropriation, which he said had been amply alleged in the said paras of the petition. The contention of the learned counsel is not sound. According to order 6 Rule 2 of the Code of Civil Procedure, every pleading is required to contain a statement of the material facts on which the party pleading relies for his claim or defense as the case may be and not the evidence by which they are to be proved. Rule 4 requires that in all cases in which the party pleading relies on any misrepresentation, fraud, breach of trust, etc. and in all other cases in which particulars may be necessary beyond such, as arc exemplified in the forms aforesaid, particulars with the date and items if necessary, are required to be stated in the pleadings. Mere statement that respondents Nos. 2 and 3 have been illegally diverting the funds and assets of the company into their own pockets or have misappropriated funds and vouchers have been manipulated cannot be said to be a statement of material facts and particulars. The provisions of Rules 2 and 4 arc mandatory. The word 'material' in the words of Hidayatullah, C.J. in S. N. Balakrishna v. J. Fernandis : 3SCR603 , (^) 'shows that the facts necessary to form a complete cause of action must be stated. Omission of a single material fact leads to an incomplete cause of action and the statement of claim becomes bad. Function of particulars is to present as full a picture of the cause of action with such fuller information in detail as to make the opposite party understand the case. There may be some overlapping of material facts and particulars, but the two are quite distinct.' The allegations of diversion of funds and misappropriation are vague as there may be hundred and one ways of diverting or misappropriating funds. The respondent cannot be left guessing as to which particular way the appellant has in mind. To be fair to him. he must know what precisely he is required to explain. And then when the respondent has led evidence the appellant cannot pick and choose and say that the respondent's own evidence shows misappropriation, for the respondents may have led evidence for some other objective and not with a view to' meet this charge; and he may explain the evidence already produced, by some other evidence if the precise charge had been made known to him. To state material facts in the pleadings, it would be mentioned that monies belonging to the company were shown in the books as deposited in favor of various names. This would, then, be said to be fictitious. While giving, the particulars, the actual names in which these deposits stand in the books, the amounts and the dates on which they were entered in the books, will all be mentioned. There may be variations here and there; but this will be the basic approach. There may be numerous deposits in hundreds of names; and the respondent cannot be expected to keep on explaining each and very one of them without being called upon to explain any one. Material facts will thus indicate the precise grounds of the allegation and the complete cause of actions; and the particulars will give the necessary information to present a full picture of the cause of action. These facts, if proved will enable the Court to come to the conclusion that the accounts of the company have been manipulated. Merely stating the conclusions at which the Court is expected to arrive without giving the material facts on which such conclusions can be based is not what the law requires. The statement of material facts must appear and the particulars must be full as to enable the opposite party to know the case he is required to meet. The absence of the particulars and the material facts from the pleadings would mean that the plea has not been raised at all and, thereforee. it cannot be looked into by the Court. A party cannot be allowed to prove that which he has not pleaded.
(44) In this case, the winding up petition was filed on November 25, I960. Extensive inspection of the records of the company was made in 1963 and 1964. Certain records were seized in searches from , residence of V. N. Kapur, and the premises of the company. The written statements and affidavits in opposition were filed on July 10, and 15, 1964. Replications and rejoinder affidavits were filed by the appellant on August 21, 1964 and October 26 and 30, 1964. No mention of any fictitious deposits was made anywhere; nor were any facts disclosed from which it could be gathered that there were fictitious deposits. On November 13, 1964, S. B. Capoor J. passed an order with the consent of the parties to the effect that evidence would be recorded on affidavits with liberty to either party to' cross-examine the deponents. On behalf of the appellant, affidavit of Ajit Singh was filed on January 2, 1965 and of the appellant was filed on January 14, 1965. Still there was no indication that any fictitious deposits were being alleged. Affidavit in evidence of Anand Kumar was filed on February 5, 1965 in opposition to Abnash Kaur's and on February 8, 1965 in opposition to Ajit Singh's affidavit. Affidavit of Sushil Kumar, Lal Chand, Chaman Lal and Atma Ram were filed on February 10, 1965. Some further affidavits in connection with certain applications were filed by Anand Kumar, Sushil Kumar and Lal Chand on July 14, 1967. No one said a word about fictitious deposits as no one was called upon to say anything about it. After the respondents had thus led their evidence and had completed even the cross-examination of the appellant and all her witnesses and the deponents, who had deposed on behalf of the respondents, were left to be cross-examined only, application, Ca 51 of 1970, (already referred to) was moved on January 27, 1970, for the appointment of a provisional liquidator. Better particulars of this application were allowed by S, N. Andley J., which were then filed on March 20, 1970, alleging that the respondents are guilty of acts of fraud, misrepresentation, oppression mis- management, defalcations, removal, tampering with and substitution* of the original records. No particulars or details were attempted. Five letters all dated March 15, 1963, said to be written by the company to the Income-tax department relating to the assessment years, 1946- 47, 1949-50, 1951-52, 1952-53 and 1953-54 for which penalty proceedings were proposed to be initiated, were, however, enclosed. The actual accounting period covered by these letters is from the year 1945-46 to 1952-53. The appellant did not file her own affidavit in support, nor did she herself sign the particulars. Nothing was said even then about fictitious deposits which are now sought to be spelt out from these letters. The appellant was married to Seth Shiv Prasad in June, 1953. The period covered by these letters, thereforee, was long before the appellant came on the scene. There can be no question of Jack of probity shown by these letters towards the appellant or her minor son. Some of these letters show that certain credits in the books of the company were in respect of deposits alleged to have been shown fictitiously in favor of certain persons. These deposits had been surrendered to the Income-tax department by Seth Shiv Prasad himself during his life time; and now it was proposed to levy penalties, as the said monies had been treated as belonging to the company. It is not understood how the respondents can be held responsible for the same. Anand Kumar became director somewhere in 1948 when he was about 20 years of age. There is, thereforee, nothing to cast any doubt on his statement, that he did not know anything about these deposits till 1958; especially as he was quite young and raw in business, when he joined. If, on the other hand, Anand Kumar can be said to be in the know of these deposits merely because he was a director, then the appellant herself was aware of these deposits, as she had joined as a director in 1953 and continued to be so till 1960. Some of the amounts had continued to exist in the account books during her tenure of office as a director. She did not make any mention of these deposits in her petition. She did not apply for amendment of the petition even after she had inspected the records of the company; nor did she make any mention thereof in her replication or rejoinder-affidavit, or affidavits sworn by her in evidence. She in fact never placed her reliance on, any such deposit for the purpose of a compulsory order, which she sought. In any case, the mere statement of Anand Kumar that he did not know about these deposits, cannot be made a ground for winding up of the company on the plea that his statement cannot be believed.
(45) Mr. R. M. Lal placed strong reliance on the better particulars, dated March 20, 1970 but he failed to explain as to why these could not be filed earlier; and not in 1963 or 1964 when the appellant had had inspection of the company's books. The appellant could have amended her petition, if she really was serious to rely on these allegations and wanted to broaden her attack. This not having been done, it would not be proper to allow the appellant to travel outside the allegations in the petition and ask for a finding, the foundation for which was never laid in the petition, especially when the respondents had already closed their case and had completed the cross-examination of the appellant and her witnesses: and had no opportunity to rebut such allegations.
(46) The contentions of Mr. R. M, Lal on this question are even otherwise without any merit. One of the names in whose favor the deposit standing in the books of the company is said to be fictitious is Maya Dass, who appeared as a witness on behalf of the respondents. No question was asked from him on this subject. Another name about which Mr. R. M. Lal tried vehemently to build a case was Uggar Sen. According to Mr. R. M. Lal, he was a man of no means and it was not possible for him to have this deposit of Rs. 30,000.00 in his name. This name had never been mentioned before and the respondents had no opportunity either to produce Uggar Sen in the witness box to demonstrate the hollowness of the appellant's contention. Our attention was drawn to letter dated March 15, 1963, written by the company to the Income-tax Officer, Special Investigation Circle 'A', Meerut, asserting that the deposit in favor of Uggar Sen had since been proved to be genuine and had been accepted by the directorate. The company had said that penalty as proposed could not be attracted.
(47) Mr. Ved Vyas raised strong objections to questions about these deposits and advances, being asked in cross-examination of Lal Chand and others as no allegations about them had been made in the petition. The learned Company Judge by his order dated November 26, 1970 observed that the appellant has to succeed on the grounds taken by her in the petition. The evidence on other matters was allowed only to throw light on the allegations already made. It cannot, thereforee, be said that questions were asked from the witness in cross-examination without protest from the respondents. In fact, it cannot be denied that the respondents got no opportunity to lead any evidence on these questions. These allegations have, thereforee, to be ignored. The effort of the appellant in raking up her imaginary grievances from the long past, when she was not on the scene herself, cannot help her in her prayer for the winding up of the company. The observation of the court of appeal in re H. R. Harmar Limited, (1958) 3 All E. R. 689, quoted with approval by Tek Chand J. in Thaker Hotel (Simla) Company Private Limited, 33 Cc 1029,(') can be appropriately repeated here thus: 'the purpose of this section (section 210. corresponding to section 397 of the Act), is not so much to rake up the past as to redeem the future.'
(48) Another allegation of the appellant is that respondents Nos. 2 and 3 and persons connected with them had been taking huge advances from the company and had been manipulating records to hide the same. Some of these advances are said to have been palmed off to the appellant. All these allegations are vague and without any material facts or particulars. It is not necessary to deal with the lengthy arguments of Mr. R. M. Lal about the remarks of the auditors on the balance sheet of the company, about the advances to the directors and their associates, as we have already held that the said advances were in fact made to the appellant herself. Nor is it necessary to deal with the various entries in the books of the Delhi office as most of them tallied with the entries in the seized books, which even Mr. R. M. Lal says are genuine books. Although amounts were advanced to respondent No. 2 from time to time, they were debited to the advance account of Anand Kumar by a consolidated entry after a time lag. There was nothing wrong in it; nor did any question of avoiding interest on these amounts arose, as respondents Nos. 2 and 3 had not been withdrawing their salaries, which were credited to their account. without earning any interest. It is otherwise found that there always existed huge credit balances in favor of Anand Kumar and Sushil Kumar. The withdrawals by Anand Kumar and Sushil Kumar cannot correctly be said to be advances by the company. They were withdrawing from out of their own monies lying with the company; and this cannot be stigmatised as unauthorised or illegal use of the company's funds. Mr. R. M. Lal contended that it was not understood as to how respondents Nos. 2 and 3 have been living luxuriously when they have not withdrawn their salaries. But, he himself admitted that large withdrawals had been made by them. He failed to explain what he meant by 'luxuriously'. The observations of the learned Company judge that a full investigation be made in regard to manipulation of accounts, we say with respect, do not appear to be justified as the investigation cannot be made on hypothetical and unsubstantiated allegations. If the appellant really considered that she could make out a case for investigation, the appropriate remedy should have been under sections 235 or 237 of the Act and not a winding up petition. But. according to the counsel, she is not prepared to pursue that remedy.
(49) Mr. R, M. Lal then contended that respondents Nos. 2 and 3 have been selling coal and biogases in the black-market and have been misappropriating huge amounts without bringing the sale proceeds in the company's books. Para 33 of the petition relies on company's records to show the total quantity of coal allotted and consumed, the consuming capacity of the boilers and number of hours worked. Calculations from these records, would have revealed, said the appellant, that the quantity allotted was much more than consumed. Biogases was also consumed instead of coal, thereby effecting saving in coal. All this coal was alleged to have been sold in the black- market. Para 33 of the petition was verified on the appellant's information and not on knowledge. No particulars of the serious charge were given nor any attempted at any stage. Coal register of the company was minutely inspected by the appellant for several weeks, as far back as in 1963. Nothing concrete has been noticed. The allegations have been allowed to remain vague, reckless and inconclusive and must, thereforee, be rejected as worthless.
(50) Mr. R. M. Lal then came to, what he called, his main contention, to the fact that the winding up in this case was to be on the principles of dissolution of partnership. According to the learned Company Judge, partnership principles may be applied in the case of small private and domestic companies, if there was a deadlock or lack of probity on the part of directors in the conduct of its affairs or in their dealing with the shareholders: and there was either unjustified exclusion of a member or a group or there was gross mismanagement or exploitation by those in the control of its affairs and real and effective appeal to the domestic forum was not available: and the minority had no alternative remedy.
(51) In the present case, the learned Judge found that business of the company. was being conducted by one family, which held the entire shareholding. The principles of partnership were, thereforee, attracted, The appellant, being in a minority could not appeal to the domestic forum. She could well be regarded as a partner, who had been excluded, though not unjustifiably. There was no deadlock by virtue of which the company could be said to have ceased to do business. In spite of the ousting of the appellant, the business was. still being run profitably. The misconduct of the respondents, however, was such that mutual confidence which must subsist in a partnership was destroyed, and a state of animosity, which precluded all reasonable hope of reconciliation and friendly cooperation, prevailed. It was, thereforee, impossible for the appellant and her step-sons to place confidence in each other which each has a right to expect. The company was not a losing concern. On the other hand, it was prosperous, but the appellant was not getting her fair share. He, thereforee, was of the view that it was a case where the company could be wound up under the just and equitable clause.
(52) Mr. Ved Vyas strongly criticised these findings and urged that neither the company in the present case was in the nature of a partnership. nor are the principles applicable to the dissolution of a partnership attracted to this company. A number of cases were discussed ^ by the learned Company Judge and also cited before us at the bar. It is, thereforee, necessary to examine them in brief.
(53) The earliest case on the subject is In. re Furrier's Alliance Ltd.. (1907) 51 Sd. J. 172, where the just and equitable clause for winding up was invoked by a shareholder. He and one Mr. F. being the only directors, held 6000 shares each, out of 12,005. The remaining five shares were held by certain persons, one share each. Two of them supported the petitioner. Each share carried one vote. The two directors were unwilling to get together to manage the company satisfactorily. Warrington J. said that it was not reasonably practicable for the business to be carried on upon the terms on which it was intended to be carried on just as in cases under a similar clause in the Partnership Act. when it was not reasonably practicable for the business of a partnership to be carried on in accordance with the terms on which the partnership was constituted, the partnership might be dissolved. But, in this case, the authority of the majority, which might only be one vote was available and could be invoked. There was. thereforee, no deadlock as under the articles an additional director could be appointed and the business of the company could go on. It was under these circumstances that he dismissed the petition.
(54) Warrington L.J. was a party to the celebrated judgment of the Court of Appeal in re Yenidje Tobacco Company Limited, (1916) 2Ch. 426 which has been oft-quoted in all such cases of winding up. W, and one R. carrying separate businesses amalgamated and formed a private limited company. They were the only two directors having equal rights of management and voting. One director was to form quorum. Differences or disputes were to be referred lo arbitration. As differences h.ad arisen reference was nri.ide to arbitration. and an award was made. But, R. declined to give elect to the award and instead brought an action against W. So this was not considered a satisfactory method of solving disputes and at any rate not one for solving day to day differences. Ultimately, neither would speak to the other. Communications had to be conveyed between them through a third person. inspire of this, the company transacted its business and large profits were made. W. presented a petition for winding up under the just and equitable clause alleging complete deadlock and the disappearance of substratum. Lord Cozens-Hardy, M.R. was of the opinion that just and equitable clause could not be strictly limited to cases where the substratum was gone or where there was a complete deadlock. Circumstances which would justify the winding up of the partnership between the two, are the circumstances which should induce the Court to exercise its jurisdiction under the just and equitable clause to wind up the company. The learned Master of the Rolls proceeded: 'If ever there was a case of deadlock, I think it exists here; but, whether it exists or not, I think the circumstances are such that we ought to apply, if necessary the analogy of the partnership law and to say that thus company is now in a state which could not have been contemplated by the parties when the company was formed and which ought to be terminated as soon as possible.'
(55) The circumstances in that case, in the words of Warrington L. J.. who wrote the supporting judgment, treating it as a case of deadlock, were : 'The company does not appear as such because there was no means by which instructions can be given to anybody to appear on its, own behalf. In substance, thereforee, it seems to me these two people are really partners. ......I am prepared to say that in a case like the present, where there are only two persons interested, where there are no shareholders other than these two, where there are no means of overruling by the action of a general meeting of share- - holders, the trouble which is occasioned by the quarrels of the two directors and shareholders, the company ought to be wound up if there exists such a ground as would be sufficient for the dissolution of a private partnership at the suit of one of the partners against the other. Such ground exists in the present case.'
(56) The learned Master of the Rolls had, after narrating the facts. observed : 'In these circumstances, supposing it had been a private partnership,, an ordinary partnership between the two people having equal shares, and there being no other provision to terminate it, that would have been 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 quarreling, and such a state of animosity as precludes all reasonable hope of reconciliation and friendly cooperation 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 partner 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' ''. The Company in substance was held to be a partnership in the form or in the guise of a private company; and in spite' of certain general and wide observations of the learned Master of the Rolls, the case was that of a deadlook, as the only way of resolving it under the Articles, was arbitration, which was illusory and. held to be quite unsatisfactory for resolving day to day differences.
(57) The judgment in Yenidje's case has come up for consideration in a number of subsequent decisions. In all those cases, the company was treated in substance to be a partnership. The question for determination was, whether the principles of dissolution of partnership ought to operate only where there was a deadlock. In re Davis and Collett Limited, (1935) I Ch. 693,(18) the petitioner and the respondent held equal shares. The respondent who was the chairman was able, by the use of his casting vote, to appoint two of his nominees as new directors, although they were not qualified to be directors. acquired complete control and then excluded the petitioner from management. Crossman J. did not decide this case on the question of deadlock, as there was none, in view of the casting vote of the chairman. His Lordship in deciding whether it was just and equitable to wind up the company, considered in the widest possible terms, what justice and equity required. The company was ordered to be wound up; as on the authority of Yenidje's case, the position was considered in the same way, as it would have been considered if the question arose as to the right of one of the partners, to have the partnership dissolved. In re Lundie Brothers Limited, (1965) 35 Cc 827,(ia) two brothers, Cyril Lundie and Reginald Lundie on the one hand, and the petitioner on the other, had equal voting power. One of the Lundie Brothers was the Chairman with a casting vote. The petitioner had been forced out of his position as working director. Plowman J. observed that if this were a partnership and not a company, he should have no hesitation in concluding that the petitioner is entitled to an order for dissolution on the ground that the t
(58) The judgments in both, in re Davis and Collett Limited, (1935) Ch. 693(18), and in re Lundie Brothers Limited. (1965) 35 CC. 827(19) did not limit the Yenidje's doctrine, as the ratio in Yenidje's case has sometimes been called, to cases of deadlock. In the former, Crossman J. considered what justice and equity required; and was influenced by the irregular appointment of directors. In the latter case, the incompatibility of temperament and the unjustified exclusion of the petitioner weighed heavily with Plowman J. Both these cases came up for consideration before the Court of appeal in re Westbourne Galleries Limited, (1971) I All E.R. 561 where the company under consideration was admitted to be in substance a partnership, but winding up was refused. It was held that the exercise by a majority in the general meeting of the power under the provisions of the Companies Act or the Articles to remove a director from office and exclude him from participation in the management did not form a ground for winding up on just and equitable clause, unless the power was shown to have not been exercised bona fide in the interest of the company or that the ground for exercising it was such that no reasonable man could think that the removal was in the interest of the company References were made before the Court to particular passages in particular judgments attributing to them a weight or width which according to the Court would have surprised the authors. Russel L. J. who spoke for the Court said that the decision in re Davis and Collett Limited,^) may be supported on the ground that irregularity was involved. Re Lundie Brothers Limited,^) according to the learned law Lord, was wrongly decoded on the question of winding up. Thus, rejecting the views of Plowman J. in this case, the Yenidje's doctrine has been considered to be applicable to deadlock cases. Applicability of partnership principles to winding up of closely held companies has come up for consideration in a member of other English cases. The trend has been to apply these principles to deadlock cases. If the deadlock is found to bs resolvable by resort to the Articles of Association, then the applicability of the said principles has been ruled out. The articles have thus been given great importance. We, thereforee, turn to examine the other cases.
(59) In in re Bleriot ., (1918) Ch. 556 The provisions in the articles, permitting winding up on the facts of that case, were followed.
(60) In re Loch v. Blackwood Limited (1924) Ac 783 decided by the Privy Council, the company was registered to carry on the testator's business and to divide the profits between members of his family under his will. The managing director, who was the husband of one of the legatees, had a preponderating voting power. Although taking the form of a public company, the concern was practicably a domestic and a family concern. Upon a petition for winding up by minority shareholders, it appeared that the directors had omitted to hold general meeting or to submit accounts or to recommend a dividend and that they had laid themselves open to suspicion that their object in so omitting was to keep the petitioners in ignorance of the company's position and affairs and to acquire their shares at an under- value. It was impossible for the petitioners to obtain relief by calling a general meeting, owing to the permanent preponderance of the voting power in the other group, who had refused even to submit the value of shares to arbitration. Lord Shaw was of the view that 'at the foundation of applications for winding up on the just and equitable rule, there must lie a justifiable lack of confidence in the conduct and management of the company's affairs. But this lack of confidence must be grounded on the conduct of the directors not in regard to their private life or affairs, but in regard to company's business. Furthermore, the lack of confidence must 'lnrine not from dissatisfaction at being outvoted on the business affairs or what is called domestic policy of the company. On the other hand, wherever the lack of confidence is rested on a lack of probity in the conduct of the company's affairs, then the former is justified by the latter and it is under the statute just and equitable that the command be wound Up ' Yenide's case and the opinion of the Master of the Rolls was noticed; but the Board specially referred to the opinion of Warrington L.J. as 'accurate and careful.' Lord Shaw quoted with approval a passage from the judgment in Symington v. Symington's quarries, 8 F 121, (24) to the following effect : 'But then this is not a company that is formed by appeal to the public. It is what for want of better name, I may call a domestic company. The only real partners are the three brothers of the family, the other shareholders having only nominal interest for the purpose of complying with the provisions of the Act. In such a case it is quite obvious that all the reasons that apply to dissolution of a private company on the ground of incompatibility between the views or methods of the partners, would be applicable in terms to the division amongst the shareholders of this company and I agree with their lordships that this is a case in which it would be just and equitable that this company should be wound up and the partners should be allowed to take out their money and trade separately if they please.' The following words of Lord Clyde, Lord President of the Court of Sessions in Baird v. Lees, 1924 Sc 83, 92, were also quoted with approval : 'A shareholder puts his money into a company on certain conditions. The first of them is that the business in which he invests shall be limited to certain definite objects. The second is that it shall be carried on by certain persons elected in a specified way. And the third is that the business shall be conducted in accordance with certain principles of commercial administration defined in the statute, which provide some guarantee of commercial probity and efficiency. If shareholders find that these conditions or some of them are deliberately and consistently violated and set aside by the action of a member or official of the company, who wields an over helming voting power, and if the result of that is that for the extrication of their rights as shareholders, they are deprived of the ordinary facilities which compliance with the Companies Acts would provide them with, then there does arise, in my opinion, a situation in which it may be just and equitable to wind up the company'. The Board allowing the appeal ordered winding up on the broad ground that confidence in the company's management was, and that most justifiably, at an end.
(61) In re Cuthbert Cooper and Sons Limited, (1937), 1 Ch. 392 Simonds J. said : 'whether it be a matter of articles of association or articles of partnership, the rights of the parties are determined by those articles, and the question whether it is right for me applying here the principles of partnership to the question of dissolution, to wind up this company or not largely depends on what are the contractual rights of the parties as determined by the articles of association. Accordingly, when I come to consider the allegations, which are made in the petition. I must be guided by what are the legal rights of the parties as determined by the bargain into which they entered.' Mala fides was not alleged and the refusal to register the transfer of shares was not outside the provisions of the Articles. The petition for winding up under these circumstances was dismissed. Cuthbert Coover's case was cited before the Court of appeal in re Swaledale Cleaners Limited (1969) 39 Cc 161 This was not a case for winding up, but was a case dealing with transfer of shares. Harman and Sachs L. JJ. made no reference to Cuthberfs case. But Danckwerts L.J. said in passing that the conclusion reached in Cuthbert Cooper's case was wrong, saying further that it was a very hard case on the younger brothers to whom the shares had been bequeathed by their father; but had not been registered by the directors.
(62) The learned Company Judge noticed the above views of Danckwerts L.J. in Swaledale Cleaners' case, and on the basis thereof ignored the decisions in Cuthbert Cooper's case as being an extreme view. But Cuthbert Cooper's case was considered by the Court of Appeal iii two other cases. The first case was Charles Forte Investments Limited v. Amanda (1964) 34 Cc 233 Danckwerts L.J. had been a party to the judgment in this case. The defendant threatened to present a winding up petition contending that director's refusal to register transfer was against the Company's interest and constituted an abuse of power. The company sought on injunction restraining the defendant from presenting the petition on the ground that it was an abuse of the process of the Court. The trial Court refused to continue the interim injunction obtained ex perte. On appeal, it was found to be an attempt of the defendant to put pressure on the board. Willmer L.J. considered Cuthbert Cooper's case and said that the decision of Simonds J. was sound one that should be followed. The threat was said to be misconceived even if the allegation could be substantiated, having regard to the existence of an alternative and more suitable remedy under the articles. Danckwerts L. J. also observed that the case was covered by the decision in Cuthbert Coopper's case and said that the defendant being a minority shareholder, was governed by articles and that it would be most unreasonable to deal with him as if he were a partner with the rights of dissolution which were conferred by the rules of partnership law in appropriate case. Cross, J. agreeing with Willmer and Danckwerts L. JJ. also found support in Cuthbert Cooper's case to say that winding up was not the form of relief which the defendant could properly invoke.
(63) The other case is a recent one, re Westbourne Galleries Limited. (1971) 1 All E.R. 561, where Russel L.J. speaking for the Court of Appeal, referred to Cuthbert Cooper's case and said that it 'was plainly and rightly decided.'
(64) In ignoring the dicta in Cuthbert Cooper's case on account of Swaledale. Cleaner's case, the learned Company Judge, we must say, with respect, was not justified.
(65) In re Davis Investment (East flam) Limited, (1961) 3 All E.R. 926 the company had only two shareholders, who were the only directors, each holding fifty shares. In winding up proceedings at the instance of one of them, the petition had been dismissed as Articles had not been put in evidence. On appeal, Danckwerts L.J. who wrote the leading judgment of the Court of Appeal, noticing the absence of the articles of association, said that may be that the apparent differences can be overcome through the operation of those' articles. In the absence of evidence of that Kind. the trial Judge was said to have reached his conclusions rightly and the appeal was dismissed.
(66) In re : Surrey Garden Village Trust Limited, (1964) 3 All. E.R. 962 the learned Judge was of the view that a very strong case must be made out before the Court will by pass the domestic forum and make a winding up order on the 'just and equitable' ground; and that misconduct or mismanagement by the management was not of itself a ground for making an order on the petition, where other remedies were available. The winding up petition was dismissed.
(67) In re Expanded Plugs Limited (1966) 36 Cc 497, the petitioner and another held between them the whole capital and were held in substance to be partners. The petitioner sought winding up. Speaking of deadlock, Plowman J. held that there was none owing to the existence of the chairman's casting vote. According to the learned Judge, this was a company and not a partnership, and while the partnership analogy may be of assistance in certain circumstances, it could not be pressed too far and in particular it could not be invoked for the purpose of giving a locus standi to a petitioner, who by company law. was denied one. The analogy seemed to him to break down in at least two important respects. In the first place, the 'liability of an ordinary partner is unlimited so that he has a financial interest in bringing the partnership to an end, whereas in the case of a limited company a fully paid member's liability cannot be increased by further trading. Secondly, an insolvent partnership cannot be dissolved at the instance of creditors, whereas they have the right to petition for the winding up of an insolvent company and,. indeed are the only persons with a financial interest in doing so since,. if a winding up order is made, the property of the company will be: exhausted in meeting their claims'. And further in 'a partnership' action the rights of the parties must be determined in the light of their partnership articles, so in my judgment, must the rights of quasi-partners be determined in the light of regulations which govern their relationship, namely, the company's articles of association'. In the absence of any proof of lack of probity in the conduct of the company's affairs, the petition was dismissed.
(68) In re, Anglo-Continental Produce Co. Ltd., (1939) 1 All E.R. 99 the majority desired to have repaid to them money which they had tied up in the company and complained of deadlock and friction. The court, it was held, inter alia, could not make a winding up order unless some wrong had been done to the company and the company was deprived of its remedies in respect of it by the improper use of voting power of the shareholders. In Elder v. Elder and Watson Ltd. (1952) (31) Slt 112,two of the petitioners had been forced to retire as Secretary and Factory Manager, while the offer of the others to sell their shareholding to the directors was rejected. There was no mismanagement to the detriment of the shareholders. Nothing was found that was designed to 'injure their right as shareholders'. thereforee, no relevant ground was found for winding up.
(69) In re K/9 Ment Supplies (Guildford) Ltd., (1966) 36 Cc 758 the only shareholders were the three directors who ran the company virtually as a quasi-partnership. One of them got into financial difficulties and resigned and was later adjudged bankrupt. Pennyeuick J. treated the company, a partnership, constituted upon the articles of association of the company. The event of bankruptcy was covered by the transmission articles, vesting the bankrupt's interest in his trustee. The learned Judge was of the view that the relation of quasi-partnership ceased when the bankrupt resigned his office. . 9-477HCD/72 'Certainly it did not continue to subsist when the bankrupt's trustee came into the saddle. The trustee in bankruptcy had no right or duty to take part in carrying on the business of the company. His ^ position was from the start simply that of an ordinary minority share- holder. There never was a quasi-partnership between the trustee in bankruptcy on the one hand, and the other two directors on the other.
(70) In re Fildes Bros. Limited (1970) 40 Cc 998Megarry J. was of the opinion that the words 'Just and equitable' were very wide in their scope. In the Cuthbert Cooper and K/9 Meat Supplies cases the principles of quasi-partnership,. according to the learned Judge had been extended, so as to have regard to the contract between the parties as shown by the articles of association. But as it was a contract between the parties which was important, the learned Judge regarded not merely what the articles said, but also what the parties were shown to have agreed in any other manner. The settled and accepted course of conduct between the parties, whether or not cast into the mould of a contract was considered to be important.
(71) Coming to Indian cases, the first one that attracts attention is B. Cowseji and others v. Nath Singh Oil Company Limited (1921) 59 I.C. 524 decided by the Lower Burma Chief Court. It was held that it would only be in extreme cases that the suggestion of the minority, the wishes of the domestic forum may be disregarded and the company be condemned to extinction. In Murlidhar Roy v. The Bengal .Steamship Company (1921) 59 Ic 542 the Calcutta High Court refusing winding up, in an allegedly deadlock case, was of the opinion that the Act creates, as between the shareholders, a domestic Tribunal, and, unless a clear case was made out, the Court will be slow to withdraw from it the decision whether the company's business shall or shall not be carried on.
(72) Re Janbazar Manna Estate Limited, : AIR1931Cal692 was a deadlock case of a private company. The dissatisfied shareholders' remedy was said to lie in obtaining a majority in favor of their view and through such majority electing a new directorate. The practical difficulties may be considerable, but this did not entitle them to the order asked for.
(73) In the Great India Motor Works Limited v. Chandi Das Nundy (1953) 23 Cc 287 a private company took over the business of a firm of partnership of two brothers, Chandi and Kristo. Kristo so arranged matters that he was able to have on the board other directors of his choice and his three sons as shareholders. The petitioner was removed from his position as a managing director and thus deprived of his remuneration. The company was not declaring any dividends. The majority was being used not for the benefit of the company, but for Kristo. It was under these circumstances pointed out that it was nothing more than a partnership converted into a company and the Court applied to a very great extent the rules applicable to the winding up of a partnership. It was considered just and equitable that the company should be wound up, as it was impossible for the company to carry on the business fairly and honestly.
(74) In Jaldu Anantha Raghurama Arya v. East Coast Transport & shipping Company (Private) and another Air 1958 Ap 259, the petitioner and the second respondent holding among themselves shares of the value of Rs. one lakh out of the subscribed capital of Rs. two lakhs, prayed that the company consisting of the five shareholders, should be wound up. The third respondent did not seem to take serious objection to this. Respondents Nos. 4 and 5 alone opposed strongly the petition and complained that the affairs of the company have not been carried on in a spirit of amity among the shareholder, laying the blame on the petitioner and the second respondent who according to them, were trying to squeeze them out of the company by means of the winding up order. They themselves had filed applications for the appointment of an Inspector for investigation and also for the appointment of an Administrator for administering the company's affairs. It was considered, under these circumstances. that if the petitioner and respondents Nos. 2 to 5 had been carrying on their business as a partnership, there would have been every justification for directing a dissolution of the partnership. The fact that they conducted the business by means of the machinery of a limited company was not considered to make any difference. The compulsory order was, thereforee, made on the just and equitable ground.
(75) In Veeramachineni Seethiah v. Bode Venkata Subbiah and others Air 1949 Mad 675 it was held that the just and equitable clause should not be invoked in cases where the only difficulty was the difference of view between the majority and the minority. The mere incompatibility of good relations between the rival factions in the directorate, in the absence of the other grounds such as misappropriation or malversation of funds, was not sufficient for ordering wind- ing up In S. S. Raj Kumar v. Perfect Castings Private Ltd (1968) 38 Cc 187 the Madras High Court was of the view that though the just and equitable rule is wide it has its own circumspection. Existence of actions amongst shareholders, bickerings as between one group and another group, vague allegations against the quality of management by the person in charge of the company and mere exclusion from management were not considered by themselves a ground for winding up of a company. Proved malversation and conversion of funds, deliberate and wanton expression by the management in power, of the minority shareholders with a view to make personal illegal gains, indulging in subversive activities so as to jeopardise the substratum of the company, a justifiable lack of confidence in the conduct and management of the company's affairs due to lack of probity on the part of those in management, where there is open mismanagement and there is no panacea to remedy the evil. such are instance, though not exhaustive, when the courts, it was said, exercised their jurisdiction under the 'just and equitable' rule to wind up the companies. In the case before the Court, the cumulative effect of the facts and circumstances did not disclose 'such necessary circumstances as to shake the conscience of the court, and direct the winding up of the company'. The observation of Plowman J. in re Expanded Plugs Ltd. were quoted with approval.
(76) In re Bilasrai Juharmal and another, : AIR1962Bom133 . (41) the general allegation regarding the oppression of the minority by the majority was considered to be of no avail. That was a question relating to internal management; and it was a settled principle that it was the right of the majority to carry on the management of the company. The mere fact of differences between two groups by itself was not considered sufficient to conclude that a situation similar to that of deadlock had arisen. Referring to the Yenidje's case, the Bombay High Court was of the view that the principles relating to the dissolution of the partnership were applicable because of the peculiar circumstances and facts prevailing in that case and could not necessarily be applied to all private companies. The position of a partner, it was observed, stood on a different footing from the position of shareholders of a company. The doctrine of agency prevailed in the case of partnership and each partner represented the other partner and had a right to participate in the conduct of the affairs of the firm. That was not the case so far as the position of the shareholders of a company was concerned. The management of the affairs of a company was vested in a small body of directors. It was only when a situation analogous to deadlock arose amongst the directors inter se that the principles relating to the dissolution of partnership could be extended to the winding up a company. No shareholder was considered to have a right to participate in the governance of the affairs of the company.
(77) In Maharani Lalita Rajya Lakshmi, M.P. v. Indian Motor Company (Hazaribagh) Limited and others, : AIR1962Cal127 it was held that denial of access to or inspection of the books of account of the company to the shareholder is not an act of oppression because a shareholder has no such right recognised by the Act. Similarly, the Board of Directors has a discretion to declare dividend and the rate of such dividend. There is no law which obliges a Board of Directors to use up all its profits by declaring dividend. This will be no ground for winding up. Where the company is unquestionably a profitable and thriving one, far from being just and equitable that such a company should be wound up, it was held to be just and equitable to prevent such a company from being pushed into winding up.
(78) In Raghunath Prasad Jhunjhunuwala v. Hind Overseas Private Limited (1971) 31 Cc 279 the original idea was to form a partnership and a common account was opened. Later, however, the company was formed and the shares were held mainly by two groups in the proportion of six to ten. Disputes arose between the two groups and though there was no deadlock in the administration of the company and no mismanagement, one of the groups filed winding up petition in the Calcutta High Court. Mr. Justice A. N. Ray (as he then was) kept in mind, firstly, that the petitioners and the respondents did not hold shares in equal proportions, secondly, that there were 19 shareholders, thirdly, that the parties were not of the same family, and fourthly, that the domestic company on the pattern of a partnership was not to be found as a feature in that case. Discussing the various cases, both English and Indian, the learned Judge came to the conclusion that the partnership principle could not be applied to' that case, as it was not a case of equal shareholding. In applying the partnership principles, the emphasis, according to the learned Judge, was on equal holdings, which are not capable of solution, secondly, there must be exclusion from management, thirdly, there should be exclusion from any benefit asshareholders, fourthly, there must be persistent illegal and wrongful acts, for long continuous period. It was in such a structure of domestic disharmony, that it was often said that no redress was possible except by destruction of the structure itself. Further, the rights of shareholders, said the learned Judge should not be allowed to be imperilled because of friction between directors or because of conflict or competition for power between them. Such disputes or friction are of internal quality and character in regard to the members of the board. The learned Judge further observed that the dissolution of partnership principle had been applied to companies on the ground of complete deadlock or on the ground of domestic or family companies. The complete deadlock was where the board has two real members or the ratio of shareholding was equal. In the domestic or family companies, Courts applied the dissolution of partnership principle where shareholdings were more or less equal and there was ousting not only from management, but from benefits an shareholders. Lack of probity has to result in prejudice to company's business affecting rights of complaining parties as shareholders and not as directors. If the deadlock could be resolved by the articles there was no deadlock to bring a winding up and if there were alternative remedies the company should not be wound up. The learned Judge, thereforee, found that this was not a case where the partnership principles could be applied; there was no evidence to establish continuous and persistent mismanagement and further that the substratum of the company was not gone. The application for winding up was, thereforee, dismissed. This case went up in appeal before the Division Bench of the Calcutta High Court, which set aside the judgment of the learned single Judge [see Raghunath Prasad Jhunjhunuwala v. Hind Overseas Private Limited (1971) 41 Cc 308 The appellate Bench held that the company had to be wound up applying the principles of partnership. The company in that case at its inception and for a number of years afterwards was found to be really in substance a partnership. This did not of course mean, observed the Bench, that all the legal features of a partnership will be found in the company. In the nature of things that could not be, for, after all, it was a company incorporated under the Companies Act. It was just possible to expect that if a company was dissected, the anatomy of a partnership was found. When one says that a company is in substance a partnership, what was really meant was that a company should be in the image of a partnership. The three most important indices of partnership, Wz., equal status of the partners (though not necessarily equal interest), equal participation in management and mutual confidence are the basis of association. A private limited company which is an association of persons in a joint-stock company, who have agreed to keep the membership amongst themselves and who have divided the participation more or less equally should, thereforee, be ordinarily treated as analogous to partnership. In this case a specific averment of the petitioner in the application for provisional liquidator that the company was in substance a partnership was not denied by the other side. Mukherjea, J., who spoke for the Bench was, thereforee, of the opinion that circumstances which will justify the dissolution of a partnership, would be applicable to that case. And quoting Lindley, the dissolution of partnership was said be justified, if the partnership agreement was willfully and persistently violated; or one partner so behaved in the partnership business that the other partners found it impossible to carry on business in partnership with him; or some partners were in effect excluded from the concern; or the misconduct of one or more partners was such that the mutual confidence which must subsist in a partnership was destroyed; or there was a state of animosity which precluded all reasonable hope of reconciliation and friendly cooperation; or it was impossible for the partners to place that confidence in each other which each has a right to expect, provided that the impossibility was not caused by the persons seeking to take advantage of it.
(79) While the learned single Judge interpreted the judgment in Yenidje Tobacco Company's case to mean that unless there was a deadlock the partnership principle did not apply, the Bench was of the view that, according to the said ratio, if a private company could be fairly called a partnership in the guise of a private company then the things which might be a ground for dissolution of a partnership will apply also in the case of a private company. Deadlock was not material. It was under these circumstances that the judgment of the learned single Judge was set aside; and it was considered just and equitable to wind up the company. With utmost respect for the learned Judges of the Calcutta bench in Raghunath Prasad's case we do not find ourselves in agreement with them. For a company after all, on incorporation, becomes an entity different from a partnership. And the rules for dissolving a partnership on just and equitable grounds cannot easily be imported in a case for dissolving a company on similar ground. There may be cases where partnership principles may be applicable; such as deadlock cases; but apart from other things, the provision in the Articles, whereby the deadlock, if any, can be resolved, and the availability of the alternative remedies cannot be ignored. Specific provisions have been made in the Companies Act, to which we will refer later, which have made available to the shareholders, in suitable cases, remedies not open to a partner in a partnership. We are, thereforee, in respectful agreement with the views in that case expressed by the learned single Judge. We were informed by the learned counsel, that an appeal against the judgment of the. Bench is pending in the Supreme Court,
(80) The question of applying the partnership principle for winding up a company, came up for consideration before the Gujarat High Court in re Atul Drug House Limited (1971) 41 Cc 352. In this case, the company was started as a small family company of Shahs, Subsequently. East African Match Company consisting mainly of two families joined in capital participation. Disputes arose between the Shahs and the two families. Shah group petitioned for winding up invoking the partnership principle. The judgment in this case was delivered after the judgment of the learned single Judge in Raghunath Prasad's case but before the aforesaid judgment of the Bench in appeal. J.B. Mehta J. held that a company was a domestic concern. so long as it was a private limited company of Shah group; but with the participation of East African Match Company, it ceased to be a domestic concern, notwithstanding the majority of the shares of East African company being, held by two families. There was no irresolvable deadlock in the administration of the company. The learned Judge held that it was only in cases of complete irresolvable deadlock, where remedies of sections 397 and 398 were not available, that the partner- ship principle can apply. A case of deadlock was considered to arise where there were really two partners, or where the partners had equal holding, for there was something in the constitution itself in such cases which resulted in a deadlock. The learned Judge was of the view that the legislature by enacting sections 443(2), 397 and 398, must be taken to have intended that the winding up jurisdiction even on partnership lines could be invoked in a solvent company only when there was an irresolvable deadlock because of something in the constitution of the company in itself, without,. any oppression or mismanagement. In that case the petitioner had alternative remedies under sections 397 and 398. They had availed of the remedy of investigation under section 408. The petition for winding up, thereforee, was not admitted.
(81) It may be useful here to notice two other decisions. In Kalinga Tubes Limited v. Shanti Prasad Jain, : AIR1963Ori189 the case was under section 397 of the Act. The company consisted of three groups, who amongst themselves had entered into an agreement to share in the management of the company. They were like partners so long as the company continued to be a private company. Later on the company was converted into a public company. The contractual obligations worked out with reference to the theory of partnership were held to be no longer continuing, as the articles constituted the contractual obligations amongst the shareholders.
(82) This case went up in appeal to the Supreme Court (Shanti Prasad Jain v. Kalinga Tubes Ltd. 35 Cc 351) (II). The judgment of the Orissa High Court was affirmed. The Supreme Court observed :-
'AS has already been indicated, it is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a. part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as shareholder.'
(83) Starting from the Yenidje's case, we, thus, find that although the learned Master of the Rolls was not prepared to limit the just and equitable clause as one of the grounds for winding up a company, to complete deadlock cases, yet the case before his lordship was of a company consisting of only two members, who were: the directors. The animosity between them had reached the stage of a complete deadlock. Apart from them, there: was no general body of shareholders. to whom an appeal could be made. The partnership principles were applied under these circumstances to the said case. and the company was wound up. These principles in main, have continued to hold the field throughout.
(84) It is, thereforee, safe to conclude: that the powers of the court, under the just and equitable clause are not limited; and the court will be guided by the rules of equity and will do what justice demands, keeping in view the facts and circumstances of each case. All the same the principles on which a partnership is dissolved, may be applied to the case of a company, which consists of two members only or where the shareholding is equal or where it is a family or domestic company with the shareholding equally divided between two rival groups, which has resulted in a deadlock. Extending this doctrine a little, the Articles of Association of the company assume great importance; and if the Articles can help to resolve the deadlock the winding up has to be ruled out. The Articles have to be taken as the terms of the contract between the members, showing their intention as to how they agreed to transact the business of the company; and which must, thereforee, govern the relationship amongst them inter se. Another important principle that has emerged from the aforesaid decisions is that winding up of a domestic or family company on just and equitable rule is permissible if there is a justifiable lack of confidence in the conduct and management of the company's affairs, grounded on the conduct of directors in regard to company's business. This lack of confidence must not arise from mete dissatisfaction at being outvoted on the business affairs or the domestic policy of the company. It must rest, on the other hand, on a lack of probity in the conduct of company's affairs; and provided that an appeal to the domestic forum is not possible; and further that the lack of probity results in injury to the petitioner in his character as member.
(85) Mr. R. M. Lal submitted that the company in this case was a ' domestic company. It was a partnership to begin with, which had later on been converted into a limited company. The essential features of partnership, according to him, did not disappear on its assuming the guise of a limited company. It would be of some importance, thereforee, to examine the circumstances under which the company was formed.
(86) The family of Seth Shiv Prasad consisting of himself and his brothers, acquired in 1930, one fourth interest in the Laxmi Sugar Mills. This was sold and with the sale proceeds and certain loans, a sugar mill called Shiv Prasad Banarsi Dass Sugar Mills, was set up by the family, at Bijnore in 1934. In 1936, the family disrupted and the Sugar Mill business was converted into a partnership of Shiv Prasad and his brothers. The other assets of the undivided family were also partitioned by an award, exhibit RW18/1, as stated by Shiv Raj Bhalla, the arbitrator. A partition deed, exhibit RW17/1 was also executed, where the disruption of the family was narrated. Shiv Prasad at that time was married and had four sons, and, thereforee, formed a joint family along with his wife and sons. He obtained the share as his family's share on disruption and was assessed to incometax as a Hindu undivided family. In 1938 Shiv Prasad along with his three brothers, Kundan Lal, Banarsi Dass and Devi Chand set up a new Sugar mill under the name. of Lord Krishna Sugar Mills, which was later converted into a public limited company, the actual business starting in 1939, after the company was formed. The original partnership consisted of four partners. Three others, viz. Munna Lal, Kanshi Ram and Puran Chand, joined them as subscribers to the Memorandum and Articles of Association. Their shareholding was unequal. Shiv Prasad and Banarsi Dass held shares of the face value of Rs. 2,61,500 each. Kundan Lal had shares of the face value of Rs. 2,00,000. Devi Chand held shares of the face value of Rs. 1,75,000, Munna Lal, who was not one of the partners in the original partnership, purchased shares of the face value of Rs.1.00 lakh, while Kanshi Ram and Puran Chand held shares of the face value of Rs. 1000 each. Munna Lal cannot be said to have joined merely to comply with legal formalities, as his stake in the company was substantial being I/I 0th of the then total subscribed capital. Only four out of the seven members were directors. There was, thus, no intention from the very beginning to have an identity of ownership and management. A director did not hold office, in his own right, as according to Article. 96 he was to be excluded on being requested in writing by his co-directors to resign. Article 143 provided that the shareholders other than the directors had no right to inspect the accounts or other books or documents of the company, except such as were allowed to be inspected. The company was registered as a public company and not a private company, showing that the intention was not to limit the membership to only a few. On account of certain disputes winding up petitions were filed on two occasions, but were compromised. Ultimately, Seth Shiv Prasad gave up his family's l/6th share in the Bijnore mill and purchased the entire shareholding in the company by July 16, 1948, thereby becoming its virtual sole proprietor.
(87) Mr. R. M. Lal contended that Shiv Prasad's shareholding was his personal asset and not the asset of the Hindu undivided family. It is, however, not necessary to decide this controversy in view of Seth Shiv Prasad having become the virtual sole proprietor. On May 3, 1953, Seth Shiv Prasad transferred shares of the face value of Rs. 71,750 to his eldest son, Bimal Prasad and of the face value of Rs. 71,640 each separately to each of his other six sons. He also gifted shares of the face value of Rs. 72,000 to the appellant and shares of the value of Rs. 71,000 to Kanwal Kishore, his minor son from the appellant. According to Mr. Ved Vyas, this was by way of partial partition. According to Mr. R. M. Lal, these transfers were by way of gift. He, however, changed his stand and said that the transfers to the appellant and her son was by way of gift, but the transfers to his sons from the first wife was merely benami. Nothing however, appears to be turning on that. The important features to be taken note of are that the present shareholders of the company are fourteen in number, namely, the appellant and her minor son, respondents Nos. 2 and 3 and their four brothers, and Shanta Rani and her minor children. Two of them, viz. respondents Nos. 2 and 3 are the whole time directors. Shanta Rani is a non-working director. Kuldip Chand, and Ramesh Chand, sons of Seth Shiv Prasad are officers in the employment of the company. The remaining sons of Seth Shiv Prasad and the children of Bimal Prasad are merely shareholders. The interest of all of them are not indentical. None of them has invested any money in the business of the company, nor have they entered into any agreement between themselves to share the profits of the business, nor is the business carried on by all or any of them acting for all, nor have they come together on the basis of any mutual trust or confidence. The members have become members by force of circumstances, by accepting the shares, whether as gifts or on partition, or by inheritance, on terms and conditions spelt out in the Articles of Association of the company. The Chairman of the company has under Article 71, a casting vote. A director can be excluded, as already stated, at the instance of his co-directors. The members do not have an unrestricted right of inspection and, thereforee, have no unrestricted right to look into the company's affairs. The members thus neither have the right to take part in the management, nor to share in the profits of the company, although they can receive such dividends, if any as may be declared. There is no element of agency, as the directors are the agents of or trustees for the company and not the agents of members.
(88) It has been stated in paragraph 10(f) of the petition, that respondents Nos. 2, 3 and 4 have not only defrauded the appellant and her minor son but also the other minors (children) of Seth Shiv Prasad and Seth Bimal Prasad. There are members of the company, other than the appellant and her son, whose interest, according to the. appellant herself, conflicts with that of respondents Nos. 2 to 4. Their interests are not shown to be identical inter se. It cannot, thereforee, be said that the company consists of two individuals or two or more groups equally or more or less equally balanced, having rights analogous to those enjoyed by partners. The company has not the. remotest resemblance with a partnership. It would be dangerous to think that any one of them in such a set up has the right to send the company into winding up on the, analogy of a partnership. Many shareholders, who may be vitally affected, are not even parties to these proceedings.
(89) The law of partnership in England differs from that in India, inasmuch as agreement, as such, is not a necessary condition precedent for the formation of a partnership under the English law. Section I of the U.K. Partnership Act, 1890 reads as follows :-
'(1)Partnership is the relation which subsists between persons carrying on a business in common with a view of profit. (2) But the relation between numbers of any company or association which is- (a) Registered as a company. .. .......; or (b) Formed or incorporated. .........; or (c) A company engaged in working mines. .........; is not a partnership within the meaning of this Act.'
(90) Section 5 of the Indian Partnership Act, on the other hand, specifically provides that the relationship of partnership arises from contract and not from status. The members of the Hindu undivided family carrying on a family business as such, in particular have been excluded from the definition of partners. The concept of Hindu undivided family does not exist under the English law. thereforee,, the English decisions on this aspect of the question may not be a very safe guide for deciding all such cases in our country. If the veil of incorporation of a limited company is pierced, what may be found may not necessarily be a partnership, it may be a Hindu undivided family or some other relationship for the dissolution of which, the principles under which partnership is dissolved may have no bearing. A member of a Hindu undivided family, for example, cannot dissolve the family although he may have a right to separate his own interest. Even this right may not be available to a member in the life time of his father, in Punjab. Respondent No. 1 company, thereforee, can under no circumstances be said to be a partnership between its members under the guise of a company. The question of the applicability of partnership principle, for its winding up would, thereforee, not arise. Even if, for any reason such principles are considered to be applicable, the present is not a fit case where the same can be applied.
(91) The concept of an incorporated company is a concept which envisages certain amount of continuity and a comparatively more permanence. The analogy of a partnership, thereforee, cannot be extended too far to a company, for the basic idea would be frustrated if it could be dissolved in the like manner as a partnership would be.
(92) A partner's liability is unlimited; he, thereforee, is financially interested to bring the partnership to an end, when things are going bad. But a fully paid member's liability in a limited company cannot be increased by further trading. This aspect makes an important difference. Under the Company Law in cases of extreme mismanagement or oppression, under certain circumstances, it was found )ust and equitable to wind up the company. It was then felt that it was unfair even in such cases, to wind up an otherwise solvent company merely on account of the fault of a few. Section 210 was, thereforee, included in the English Companies Act, 1948 to provide an alternative remedy so that winding up could be avoided. A similar provision was introduced In' the Indian Companies Act, 1913 in the shape of section 153(3), which now has been incorporated in the 1956 Act as sections 397 and 398. These sections provide an alternative remedy where, inter alia, the affairs of the company are found to be conducted in a manner oppressive to any member or prejudicial to the public interest or the interest of the company. A further safeguard has been introduced by section 443(2) reading as follows :-
'WHERE the petition is presented on the ground that it is just and equitable that the company should be wound up the Court may refuse to make an order of winding up, if it is of opinion fiat some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing the other remedy.'
(93) The basic idea is to maintain the continuity and permanence of the entity of the company as far as is possible and to avoid an easy approach to the Court for a compulsory order.
(94) In the present case, the appellant has failed to establish any deadlock in the affairs of the company as the company is carrying on a thriving business and in spite of the pendency of the present proceedings, has been able to declare dividends ranging from 20% to 35%. It has been able to carry out considerable expansion in its textile units. The company's affairs are not facing any deadlock. The appellant has failed to establish any justification for her lack of confidence in the conduct and management of the company's affairs, nor has she been able to prove any lack of probity on the part of the directors in regard to the company's affairs, or towards her interest as a shareholder. Her prayer for the winding up of the company, thereforee, is wholly unjustified and cannot be accepted.
(95) Having come to the above conclusion, the question arises, whether the petition should be dismissed or some other order should be passed. Section 443 of the Act deals with the powers of the Court on hearing the winding up petition. The Court may dismiss it or under subsection (d) make an order for winding up or any other order that it thinks fit. In this case, although the appellant is not entitled to a compulsory order, yet in the interest of the company and of all shareholders including the appellant and the respondents, it would be appropriate if the appellant and her son are allowed to withdraw and separate their interests from the company. This is exactly what the learned single Judge directed, although for reasons, with which, we say with respect, we have not able to persuade ourselves to agree. But, the directions of the Court were addressed to parties some of whom were not before it and the date, on which the valuation of the shares was to be made was not determined. We, thereforee, consider that the said judgment and order cannot be maintained and the same are set aside.
(96) Mr. Ved Vyas submitted on behalf of the respondents that the company or its shareholders were not desirous of excluding Abnash Kaur and Kanwal Kishore from the membership of the company. They, on the other hand, were willing to allow them to continue as members entitled to full proprietary rights as such. He even offered to accept the appellant as a director if she was prepared to join in a spirit of cooperation. He stated that after Kanwal Kishore had completed his education and if he desired to join the company as an officer, the respondents would even be willing to give him a suitable assignment. If, on the other hand, the appellant insisted on separating her interest. it may not be possible for the sons of Seth Shiv Prasad from his first wife or the children of Seth Bimal Prasad, to purchase her shares, more especially as some of them were not parties to these proceedings and others are minors. Respondents Nos. 2 to 4 would find it extremely difficult to pay the price of the shares of the appellant. In this situation, he suggested that the company would be prepared to accept the surrender of the shares of the appellant and her minor son at a fair price to be fixed by the Court. In view of the extreme stringency in the money market and the practical impossibility of raising loans on the security of shares of the company, which are not quoted on the Stock Exchange, it was not possible, said the learned counsel even to accept the surrender of the appellant's interest, unless Installments spread over five years were provided. It was further contended by him that so far as the shares of Kanwal Kishore are concerned, he was not a party to these proceedings. His shares should be left out of consideration. If, however, the appellant insisted on his shares also being taken over, the same could not be surrendered to or taken over by the company unless the requisite sanction was obtained from the Guardianship Court, which should be so obtained by the appellant.
(97) Mr. R. M. Lal submitted that this offer was not acceptable to the appellant. She was not prepared to invoke even the investigation provisions of the Act. She only pressed for the winding up of the company, as that was the only way, according to him, which could bring to light the misdeeds of respondents Nos. 2 to 4. We must say with regret, that this attitude is most unreasonable.
(98) The offer of Mr. Ved Vyas is fair and just. In order to give time to the appellant to consider the above offer in its true light, and to bring to an end this unfortunate and prolonged litigation, we allow her an option to surrender her interest in the capital of the company, for being taken over by the company, thereby resulting in consequent reduction of its share capital for which purpose suitable applications shall be made by the company. The purchase price shall be determined by the Court (the Company Judge) after taking into consid'eration the report of an expert valuer, whom it shall appoint for the purpose and after hearing the parties. The valuer will determine the- fair value of the shares after taking into consideration all the relevant factors including the revaluation of the assets and liabilities. The value so determined shall be paid by the company, in five equal six- monthly Installments spread over two and a half years. The date for the payment of the first Installments shall be fixed by the Court. Ordinarily the value is determined at the date of the filing of the petition [see decision of the House of Lords in Scottish Cooperative Wholesale Society Limited, v. Mayer and another (1958) 3 All E.R. 66 This, however, is a peculiar case, which has remained under trial now for about twelve years. We, thereforee are of the view that the value of the shares shall be determined as on the date of this judgment. In case the appellant is desirous of the interest of Kanwal Kishore also being taken over by the company, she shall make the offer to that effect in her capacity as the guardian of Kanwal Kishore, to the company in writing and obtain the required sanction from the Guardianship Court for that purpose. In the absence of such an offer regarding the interest of Kanwal Kishore, the company shall take over the shares to which the appellant may be found to be entitled, whether they actually stand registered in her name or not. The appellant must exercise the above option both in respect of her own shares as also in respect of the shares of her son, within six months from the date of this judgment. If the option is exercised, the order in this appeal would be a direction to the company to take over and to the appellant to surrender to the company, her shares, as well as that of her son, if surrendered, on the above terms, and the appeal would stand disposed of accordingly. If the option is not exercised by the appellant within six months from the date of this judgment, her appeal, Ca 11 of 1971, shall stand dismissed.
(99) In appeals, Case 8 and 10 of 1971, the respondents have prayed for the dismissal of the appellant's winding up petition. In case the appellant exercises her aforesaid option within six months the said two appeals shall stand disposed of in accordance with the aforesaid order. If the appellant does not exercise her said option, these two appeals shall stand accepted; and the petition for winding up shall stand dismissed, as already stated.
(100) The appointment of the Chairman of the Board of Directors as also of the Internal Auditors of the company shall come to an end with effect from May 31, 1972. During this period, the Chairman with the help of the Internal Auditors shall work out last balances in the books of account of the company, as on the date of this order and shall sign the same as also other relevant records and books of the company.
(101) In the peculiar circumstances of this case, the parties shall bear their own costs.