D.K. Kapnr, J.
(1) Order dated July 20, 1981 a winding up petition instituted by Harish Bansal and some other praying for the winding up of M/s Moti Films Pvt. Ltd., was admitted after issue of show cause notice and citation was directed to issue. The company and one of its Directors have appealed to challenge the validity of the said order. The order under appeal shows there are five grounds on which the petition has been admitted. These are : (a) that previously a petititioners with Lesser allegations, being C.P. 64 of 1980 had been admitted; (b) that there were statements in the pleadings showing that the Company was in the nature of a partnership from which the petitioners had been ousted from mangements. The judgment in the case of Ebrahimi v. Westbourne. Galleries Ltd., (1973 Appeal Cases 360) was relied upon and a document dated May 2, 1980 showing the nature of partnership was relied upon. (e) Sums of money due to Mrs. Madhu Bansal and two of the partnership firms had not been paid, so the Company was unable to pay its debts. Moreover, it was claimed that the capital has been wiped out due to the loss of Rs. 1,20,000.00 in the first year. (d) There were allegations of lack of probity on the part of the respondents, one such allegation being that a flat bringing to the Company in Bombay which was bought for Rs. l,00,000.00 was sold to Mrs. Santosh Bhandari, mother of Ramesh Bhandari, for l,55,000.00 . This was after the agreement of May 2,1980 and after another suit relating to M/s Moti Plast Engineering Industury, one of the firms mentioned in the agreement of may 2,1980. That suit was instituted by Shn R.P. Bhandari for dissolution of the firm. (e) There was allegation regarding manipulation of the accounts of the firm which could only be examined after the evidence was recorded.
(2) Learned counsel for the appellants contended that these five reasons are not sound. On the first ground, it is submitted that the original winding up petition was withdrawn and in any case it contained more serious allegations. On the second ground, it is submitted that the Company is not in the nature of a partnership because it was set up by what may be described as the Bhandari Group and the Bensal Group was only allowed to participate in the same subsequently as minority shareholders. As regards the debt, it was claimed that no proper notice was given and, in any case the Company was willing to pay the debt immediately into Court. As far as the financial instability of the Company was concerned, an offer was made to purchase the shares of the petitioners in the winding up proceedings at more than the par value. (This offer was not accepted by those petitioners). The allegation that there was lack of probity was not justified. The fiat which was purchased for Rs. 1,00,000.00 was agreed to be sold only a few months later Rs. 1,55,000.00 to the mother of Ramesh Bhandari due to lack of funds in the Company. This was an act of good management and there was nothing illegal about it. In any case, this matter could be gone into if the proceeding was under Section 397 or 398 of the Companies Act, 1956.
(3) It may here be stated that the petitioners in the winding up proceedings offered to buy the flat for Rs. 3,00,000.00 but this offer was not acceptable to the Company or its Director. Lastly, it was stated that this was not a case in which the winding up order could be passed because it was a matter which fell squarely within the provisions of Sections 397 and 398 of the Companies Act, 1956.
(4) The problem in such cases in which the grounds of winding up are substantially those for winding up of the Company on the ground that it is just and equitable to wind up the same arises because the provisions of Section 443(2) of the Act are to the effect that the Court may refuse to make an order of winding up if it reaches the opinion that some alternative remedy is open. It is submitted that in the present case the proper remedy of the petitioners is proceedings under Section 397 and 398 of the Act. To advertise the petition would affect its reputation whereas all the over problems arising because of the conflict between the parties could be resolved in suitable alternative proceedings. It was submitted by the learned counsel for the appellants that we should direct this petition to be a treated as one under Sections 397 and 398 of the Act and, in such a case the problem of the flat in Bombay could also be resolved by a suitable order. The counsel for the respondents (petitioners in the winding up) was willing to adopt such a procedure provided the flat was put back in the Company and the agreement to give it to the mother of Ramesh Bhandari was abandoned. But, this was not acceptable to the counsel for the appellants. So, in substance, we have to see whether the winding up petition can continue as such.
(5) It is manifest that the present petition is one for winding up both on the ground that it is just and equitable and on the ground that the Company is unable to pay its debts. As there is an offer to pay the debt as well as to buy out the petitioners in the winding up at more than the par value, we may consider that this is merely a case which falls under just and equitable' clause and under no other clause for the purpose of deciding what to do with the petition.
(6) The question we have now to scs is whether the Court can refuse to proceed with the winding up petition at this stage. On this assumption, it was urged by the learned counsel for the appellants that the order of the Gujarat High Court in re Atul Drug House Ltd, (1971)41 Comp Cas 352, showed that in such a case the winding up petition should be dismissed and the parties concerned left to proceed under Sections 397 and 398 of the Act. Similarly, the Supreme Court had held in Hind Overseas P. Ltd. v. Raghunath Prashad Jhunjhunwalla and. Another, 1976)46 Company Cases 91, that the winding up petition should be dismissed. The question we have now to examine is whether these two cases are distinguishable.
(7) On giving the matter close consideration we are of the view that there arc two lines of cases, (a) where the Court could reasonably refuse to wind up a Company on the ground that there is an alternative remedy; and (b) another class of cases where such winding up order cannot be refused on this ground. It is true that in the present case too the petitioners could have applied under Sections 397 and 398 of the Act instead of applying for winding up, but that question we have to ask whether they could get proper relief in such a case. It is contended by the learned counsel for the appellants that the two class of cases mentioned in the two judgments arc ones in which either the partnership principle is applicable -and the other cases to which such a principle is not applicable. We do not quite agree that this is so. But assuming that this is the line of distinction, we have first to see whether the present case is one to which the partnership principle is not attracted.
(8) The appellants' case that the partnership principle is not attracted is based on the assertion that this Company was set up by the Bhandari Group and the Bansal Group came in later and only as minority shareholders. This may or may not be so, but we cannot keep out of consideration the agreement entered into between the parties on May 2, 1980. Even if this agreement was not acted upon, it tends to show what was the relationship between the parties It appears from the said document that it was agreed that Moti Plast Engineering Industry would come to the share of Bansal and Goel and Shri R.S. Bhandari would resign. Shri Harish Bansal was to retire from Fisher Plastic Industry, and Moti Films Private Limited would go to the share of the Bhandaris by the resignation of Harish Bansal and Suresh Goel. There were thus three different firms which were being run by the parties from which the parties had to separated. Then, it was provided that office of Moti Firms will be transferred to the name of Shri Ramesh Bhandari. Further the goodwill (value) of the flat in Bombay and the office in Chandni Chowk would be paid to the party who does not retain the same. Under this arrangement, Goel and Bansal had to resign from the directorship of Moti Films on the very next day but the film 'Bheegi Raat' was to be the concern of Goel and Bansal. Thus, the relationship between the parties was not confined to M/s Moti Films Private Limited but they had entered into some other partnership arrangements which were to come to an end. Reference to this agreement is necessary also to show that the goodwill of the flat in Bombay and the office in Chandni Chowk was to be shared. The fact that there were two partnerships and a private limited Company with a few share holders only showed, in reality, that the transaction could be described as a 'partnership arrangement'. thereforee, the partnership principle would prima facia be attracted, at least, sufficiently for the purpose of admission of the petition.
(9) Alternatively, even if the partnership principle was not attracted, we would have to see whether proceedings under Sections 397 and 398 of the Act would be a proper proceeding in a case of this type. Admittedly, there are large differences between the parties and litigation is going on in relation to other outstanding disputes also in the civil courts, such as the dissolution of the partnership M/s Moti Plast Engineering Industry at the instance of Shri R.P. Bhandari. In such a case, it does not appear that the provisions of Sections 397 and 398 of the Act would really serve the purpose.
(10) It is well to keep the principles that apply to proceedings under Section 397 and 398 of the Act in view alongside the principles which apply to winding up. These are two completely different alternatives which the Court has. In the one case, the court endeavors to solve the problems of oppression, mismanagement and internal conflict in the management by conjuring up an order which not only resolves the past disputes but makes provision for the future. In such proceedings the Court estimates that it is possible to run the Company on certain principles. It may be that the Court may even come to the conclusion that one or other party should buy the other out. Inpractice, the resolution of internal disputes under Sections 397 and 398 of the Act is based on hope. That hope must come from the possibility of co-operation between the parties. It is manifest that if the disagreements relate not only to the Company under consideration but to other firms also and there are other factors such as the running of arrival firm by Bansal and Goel which makes it difficult in the present case to hold that any order under Sections 397 and 398 of the Act will enable the Company to rim, except on the total ouster of one or other party. What then is the relief that the petitioners can get in such a petition There is a question of flat in Bombay which is on the point of being said or transferred outright for Rs. l,55,000.00 to the mother of R.P. Bhandari. If this transaction goes through, the question of the petitioners getting their due share will be lost and even if the Court is able to cancel that transaction, what is to prevent the Directors selling it again to somebody else In short, it is difficult to find a proper solution under Sections 397 and 398 of the Act. This is not a case where a patchwork arrangement can satisfactorily resolve a cleavage which to all intents and purposes is fundamental, absolute and complete.
(11) It, thereforee, appears that the only possibility which may be left to the petitioners is a winding up order, provided, of course, they are entitled lo the same on any grounds made out by them, which would result in the liquidation of the assets of the Company and, thereforee, also the flat in Bombay. This could result in the capital investments being realised and also capita] accretions; the parties being then equally entitled to all benefits or losses according to the share-holding in the Company. Whether this is actually the correct order to pass will have to be determined at the final hearing of the petition. It cannot be said that the winding up petition can be dismissed in liming, on the short ground that the management must not be allowed to reap the benefit of transactions impugned on account of lack of probity.
(12) Some very fundamental questions are involved in this case. It in good to pose and examined these. The Company Court's jurisdiction has been complicated by the introduction of Sections 397 and 398 of the Act. Before these provisions appeared a shareholder placed in the position of the petitioners in the winding up petition under consideration had only one remedy and no other; that remedy was to apply for winding up of a Company on 'just and equitable' clause. Now, there are two choices open: The second choice being an application under Section 397 or 398 for an appropriate order to bring to an end mis-management, oppression or other act relating to the Company. The second choice was introduced with the purpose of enabling the Court to interfere in the internal management of the Company which it might not be able otherwise to do under the equitable rules relating to internal management. The new power has obviously to be used only when it is possible for the Court to end internal disputes. When the Court finds that it cannot pass any order suitable to the circumstances, or the case does not seem to be suitable for resorting to those provisions, then it can be said that the choice before the petitioner is to move a winding up petition and no other alternative relief is available.
(13) On an examination of the various aspects of this case it appears that the partnership principle is attracted, and the relations between the parties are not confined only to being shareholders of the same Company. They are also partners in other partnerships which are co-related to the Company. This view is expressed on a prima facie basis, as far as it is necessary at the stage of considering the question whether the petition should be admitted.
(14) The afore-mentioned two judgments referred to by the learned counsel for the appellant, in the case of Atul Drug House Ltd., (supra) decided by the Gujarat High Court, and Hind Overseas Pvt. Ltd., (supra) decided by the Supreme Court, arc cases in which the Court thought that an alternative remedy did exist. It was also found that the petitions were motivated by some other considerations. The Court has power to stay a winding up petition if it finds that resort to winding up is for ulterior purposes. It is not necessary to go into the facts of the two cases which are far complex in the present case. We do not find any ulterior purpose in the present case. It is quite obvious that the parties are at loggerheads. So we agree with the learned Single Judge that this was a case in which the petition had to be admitted and citation issued. We would accordingly dismiss the appeal, leaving the parties to bear their own costs.