Skip to content


V.V. Krishna Iyer Sons Vs. New Era Manufacturing Co. Ltd., Palghat - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKerala High Court
Decided On
Case NumberCompany Petn. No. 25 of 1963
Judge
Reported inAIR1965Ker241
ActsCompanies Act, 1956 - Sections 428, 433, 434(1), 439(2), 439(3) and 443(2); Code of Civil Procedure (CPC) , 1908 - Order 6, Rule 2
AppellantV.V. Krishna Iyer Sons
RespondentNew Era Manufacturing Co. Ltd., Palghat
Appellant Advocate P.K. Kurien,; V. Desikan,; K.A. Nayar and;
Respondent Advocate T.S. Venkiteswara Iyer and; R.C. Plappally, Advs.; V.R.
DispositionPetition dismissed
Cases ReferredShuttleworth v. Cox Brothers
Excerpt:
company - winding up - sections 433 (e) and 433 (f) of companies act, 1956 - petition seeking winding up on grounds mentioned in sections 433 (e) and 433 (f) - majority of shareholders both in number and in value filed affidavits opposing winding up - no evidence to show oppression or self aggrandizement by member of board - validity of appointment of members of board not matter for consideration in winding up petition - nothing to show breach of petitioners' contract as shareholders to contribute to capital of company - held, petition for winding up liable to be dismissed. - - they claim to he creditors as well, but that claim is denied. 5. the definition of, contributory' in section 428 of the companies act, 1956 so as to include as holder of fully paid-up shares and the express.....p.t. raman nayar, j.1. the petitioners herein are admittedly contributories of the company whose winding up they seek on the grounds mentioned in clauses (e) and (f) of section 433 of the companies act. they claim to he creditors as well, but that claim is denied.2. in the cause title the petitioners are thus described: 'v, v. krishna iyer sons, a hindu undivided family represented by its manager, v. k. rajagopal.' it is said that this joint family has for its members two brothers, v. k. rajagopal and v. k. ramachandran and their issue, v. k. rajagopal, the elder, being the manager, v. k. rajagopal and v, k. ramachandran are the sons of v. v. krishna iyer and hence the family has, tor business purposes, adopted the name, v. v. krishna iyer sons. there are, however, a number of documents.....
Judgment:

P.T. Raman Nayar, J.

1. The petitioners herein are admittedly contributories of the company whose winding up they seek on the grounds mentioned in Clauses (e) and (f) of Section 433 of the Companies Act. They claim to he creditors as well, but that claim is denied.

2. In the cause title the petitioners are thus described: 'V, V. Krishna Iyer Sons, a Hindu undivided family represented by its Manager, V. K. Rajagopal.' It is said that this joint family has for its members two brothers, V. K. Rajagopal and V. K. Ramachandran and their issue, V. K. Rajagopal, the elder, being the manager, V. K. Rajagopal and V, K. Ramachandran are the sons of V. V. Krishna Iyer and hence the family has, tor business purposes, adopted the name, V. V. Krishna Iyer Sons. There are, however, a number of documents marked in the case to which V. K. Rajagopal and V. K. Ramachandran are parties which describe there persons as partners of Messrs V. V. Krishna Iyer Sons. This I am told is a mistake born of ignorance of the difference between a joint family business and a partnership business, that in fact there is no partnership and that V. V. Krishna Iyer Sons is only a trade name of the joint family. If that be so--and it is not disputed that that is so--then this petition is in truth by V. K. Rajagopal in his capacity as manager of his joint family. This however, makes little difference to the case, and I shall proceed on the footing that the petition is, as it purports to be, one brought on behalf of the joint family in the name of V. V. Krishna Iyer Sons as if that were a firm name.

3. The company was incorporated in January 1946 with a nominal capital of Rs. 5,00,000/- divided into 1000 six per cent, cumulative preference shares of Rs. 100/- each and 4000 equity shares of Rs. 100/-each. The paid-up capital is Rs. 2,68,000/-. The main purpose for which the company was formed was to carry on the manufacture of brooms and brushes of all varieties.

4. The petition is vehemently opposed by the company which has been able to muster creditors of the total value of over Rs. 1,10,000/- (leaving out of account one V. K. R. V. Vaidyanatha Iyer to whom about Rs 45,000/- was due but who, it would appear, has transferred the debt to one C. R. Ganapathy) and the holders of 1192 shares to support it in its opposition whereas the petitioners have been able to muster creditors of the total value of about Rs. 92,000/-(including themselves about Rs. 73,000/- is claimed as due to them) and the holders of 827 shares (including themselves they hold 500 shares) to support the winding up. The total number of shares is 2778 and the total liability of the company is about Rs. 2,60,000/-, and that means that the bulk of the creditors and members are before Court.

5. The definition of, 'contributory' in Section 428 of the Companies Act, 1956 so as to include as holder of fully paid-up shares and the express provision in Sub-section (3) of Section 439 to the effect that a contributory shall be entitled to present a petition for winding up notwithstanding that he may be the holder of fully paid-up shares, or that the company may have no assets at all, or may have no surplus assets left for distribution among the share-holders after the satisfaction of its liabilities--neither provision, it may be noted, finds place in the English Act or in the Act of 1913--put it beyond doubt that holders of fully paid-up shares like the petitioners are entitled to bring a winding up petition even when they allege, as the petitioners do in this case, that the company is insolvent. Even under the 1913 Act, the view generally taken by the Courts was that, despite appearances to the contrary, the definition of 'contributory' in Section 158 of that Act was wide enough to take in a holder of fully paid-up shares and that the effect of Section 170(1) which (like the proviso to Section 443(1) of the present Act and Section 225(1) of the current English Act--this provision was first introduced in England by the Companies Act 1907, Section 29) said that the Court shall not refuse to make a winding up order on the ground only that the assets of the company have been mortgaged to an amount equal to or in excess of those assets or that the company has no assets was to render decisions like In re, Patent Artificial Stone Co. Ltd., (1884) 34 L J Ch 330, In re, Lancashire Brick and Tile Co Ltd., (1865) 34 L J Ch 331, In re, Rica Gold Washing Co., (1879) 11 Ch D 36, In re, Diamond Fuel Co., (1879) 13 Ch D 400, and in In re, Uron Colliery Co. (1882) 20 Ch D 442, which laid down that 'a fully paid up share-holder who presents a petition to wind up the company must both allege in his petition, aud show by evidence that there are assets of the company of such an amount that in the event of a winding up he would have a tangible share or surplus to receive', more or less obsolete--see Nataraja Textile Mills Ltd. v. Angidi Chettiar, (1954) 24 Comp Cas 94. (Mad) and the decisions referred to therein.

The decision of Neville J. in In re, Kaslo-slocan Mining and Financial Corporation Ltd., (1910) W. N. 13, dismissing a petition by a fully paid-up shareholder who alleged that the company had no assets, and was insolvent, was criticised on the score that it was a very short judgment of only three sentences-giving no reasons for the decision and merely following the law laid down in the older decisions without noticing the change effected by Section 29 of the Companies Act of 1907. (The report however, shows that pointed attention was drawn by counsel to Section 141 of the Act of 1908 which had taken the place of Section 29 of the Act of 1907, and it is to be noticed that recent English decisions such as In re, S. A. Hawken Ltd. 1950 2 All E R 408 and Newman and Howard Ltd., In re, (1961.) 3 W L R 192, proceed on the footing that the rule established by the old English cases already referred to that 'where a contributory presents a petition he must allege and prove, at least to the extent of a prima facie case, that there are assets of such an amount that: in the winding up he will have a tangible interest', is still extant and that the enactment of Section 29 of the English Companies Act 1907, now Section 225 (1) of the 1948 Act, has made no difference). The new provisions in Sections 428 and 439(3) of the Companies Act, 1956, it would appear, only expressly declare what was already the law under the Act of 1913.

6. That a fully paid-up share-holder even of an insolvent company is entitled to bring an application for its winding up is quite clear, this being expressly provided by statute. But the fact remains that ordinarily he has nothing to lose by the continuance of the company and nothing to gain by its winding up, or, to borrow the language of the English decisions, that he has no interest in a winding up. Although, in the face of Sub-section (3) of Section 439 of the Companies Act 1956, this is no disqualification and his petition is not on that account demurrable, to borrow the language of the English Law, I apprehend that this reason which underlies the English decisions is not altogether irrelevant. For, it seams to mo that it has an important bearing on the 'just and equitable' aspect of the matter as also on the exercise of the discretion vested in the Court by Section 433. The Court is not readily moved to exercise its discretion by a person who is not really aggrieved; nor is it readily persuaded by such a person that it is just and equitable that a company should be wound up. A man who hits no apparent axe to grind usually has a hidden and dangerous axe to sharpen, and decisions have recognised, in the context of a winding up sought by a fully paid-up shareholder of an insolvent company, that

'when a person asks for an order without any tangible interest in the result there is ordinarily good ground for thinking that the application is for ulterior purpose and not a bona fide application'

and that

'the provision in law that a petition shall not be refused merely on the ground that there are no assets does not make it any the less necessary for the Court to be vigilant that the Court's process is not abused'

Per Das Gupta J. in Davco Products Ltd, v. Rame-shwarlal, AIR 1954 Cal 195 at p. 197 quoted with approval in (1954) 24 Comp. Cas. 94 (Mad) to reach the conclusion that want of assets would be an element in deciding whether the petition is bona fide.

7. As we have seen Sub-section (3) of Section 439 of the present Act effected no change in the law but only expressly declared what was regarded as already implicit in Section 170 (1) read with Section 166 of the 1913 Act in the light of the well-established meaning of the word 'contributory' as including a holder of fully paid-up shares. Section 213, 224 and 225 (1) of the English Act are the same as the corresponding provisions in Sections 158, 166 and 170 (1) of our 1913 Act and it should follow that, notwithstanding the absence in the English Act of an express provision like our Section 439(3), the law under the English Act and our present Act should be the same.

8. We have already seen that, even today, the English Courts regard the rule laid down in the older English cases suck as (1879) 11 Ch. D. 36, as extant, and it seems to me too much to assume that they are so hide-bound by precedents as to ignore the effect of the statutory provision, first enacted in the Companies Act 1907, Section 29, and repeated in the 1948 Act, Section 225 (1), if that provision made any difference. This is what Buckley says on the question (at page 466 of his book, Thirteenth Edition, 1957):

'If the company's assets are insufficient for payment of its debts a paid-up shareholder has no interest. If he presents a petition he must allege and prove, at least to the extent of a prima facie case that there are assets of such amount as that in the winding up he will have a tangible interest. Semble, these principles are not affected by Section 225 (1) (d).'

and the authorities relied upon for these propositions are, (1879) 11 Ch. D 38, (1879) 13 Ch. D 400 and (1910) W N 13. Palmer (Company Precedents, Seventeenth Edition, 1960, Part 2, p. 43) is more guarded:

'A fully paid-up shareholder is a contributory, and as such entitled to present a winding up petition. It was held in several cases before 1907 that being under no further liability, he must satisfy the Court that there will be a substantial surplus of either actual or probable assets divisible among the shareholders, but Section 29 of the Act 1907 (now Section 225 (1)) provides that the Court shall not refuse to make a winding up order on the ground that the company has no assets. This section appears to apply to a contributory's petition. It is desirable, if possible, however, to allege the existence of assets available for contributories. A contributory will not, however, be entitled to an order if the sole ground for the petition is insolvency, though it is otherwise where there is a case for investigation or other good grounds for a petition.'

He relies on the authority of (1910) W N 13, for the proposition that a fully paid-up shareholder will not be entitled to an order if the sole ground for the petition is insolvency. And the criticism implied by the statement in the 16th Edition that 'this case is very shortly reported and it should be noted that the petition was opposed by a large body of shareholders' is no longer there. However, in his Company Law (Twentieth Edition, 1959, page 702) he says :

'Occasionally a contributory petitions on the ground that the company is insolvent or unable to pay its debts; but in such case the petitioner, if fully paid, should, if possible, allege and prove that there will be a substantial surplus for the shareholders, otherwise he has no interest in the company, and in spite of Section 224 of the Act there is a serious risk that a petition by a fully paid up shareholder alleging that the company has no assets will be dismissed.

And he cites (1879) 11 Ch. D 36 and (1910) W N 13, for authority. Halsbury (Simonds Edition Vol. 6 page 541) says :

'A fully paid share-holder may, as a contributory, present a winding-up petition and the Court cannot refuse to make a winding-up order on the ground only that the assets have been mortgaged to an amount equal to or in excess of those assets or that there are no assets (for this proposition he relies upon Section 225 (1) of the Companies Act, 1948 first introduced by the Companies Act, 1907, Section 29, and adds that cases like (1879) 11 Ch. D. 39, decided before 1907 must be read subject to this provision), but a contributory is not entitled to an order in such a case where there is no ground for a winding-up order except insolvency, and the petition is opposed by other share holders, (1910) W N 13. In any case the Court has a discretion and may refuse to make an order on a contributory's petition where the circumstances do not justify a winding-up order. The Court will more readily make the order if the contributory alleges and proves that there is a reasonable probability of a surplus being left for distribution amongst shareholders. (1879) 13 Ch D 400.'

Charles worth (Company Law, Seventh Edition, 1983 page 282) sums up the position thus :

'Although it is no ground for refusing to make a winding-up order that the company has no assets (Section 225 (1)) the Court will not, as a rule, make an order on a contributory's petition unless the contributory can prove that there will be assets, for distribution among the share-holders. (1879) 11 Ch D. 36. The reason is that unless there are such assets, the contributory has no interest in a winding up.'

9. As I have already said, our Act of 1959 made no change in the law but only clarified it and, it seems to me, that Section 439(3) notwithstanding, the law under that Act regarding a winding up petition by a fully paid-up shareholder of an insolvent company is not so different from the law in England as might at first sight appear excepting of course, that, in view of the express provision in Section 439(3), such a petition is not demurrable. In its practical working, the law seems to me much the same in both countries. A contributory's petition is after, all comparatively rare; for, the Act establishes a domestic tribunal as between the members and the company, and thus enables the members themselves by passing the requisite resolutions, to determine whether there shall be a voluntary liquidation, of whether the Court shall be asked to make a compulsory order. Accordingly a contributory, to obtain an order must make out a special case, and the case usually made out is that it is just and equitable that the company shall be wound up because the substratum of the company is gone, in other words, because the main object for which the company was formed has become impracticable. (Palmer's Company Law Twentieth Edition Page 701). A fully paid-up share-holder of an insolvent company who has really no interest in a winding up must make out a very special case indeed, and the ground of the company's inability to pay its debts is virtually unavailable to him.

In this connection it may be noted that, so far as the statute is concerned, a creditor is entitled to bring a winding-up petition on any of the grounds mentioned in Clauses (a) to (f) of Section 433 of the Act. Supposing a creditor of a solvent company were to bring a petition under one or the other of these clauses, the Court would, I take it, straightaway ask him, 'what has that got to do with, you? You can take your money and go. Why should the discretion Under the section be exercised in your favour?' A fully paid-up share-holder of an insolvent company might not be exactly to the same position, for, while a creditor has no interest in the company as such but only in his debt, a share-holder has an interest in the company notwithstanding its insolvency. Yet, unless special reasons are shown, much the same question can be put to him, and, if he has any genuine grievance to redress, I should think that, in the generality of cases, he would have some adequate remedy other than a winding up so that Sub-section (2) of Section 443 would come into play.

In India, as in England, I should think that, us stated by Halsbury, the Court would more readily make a winding-up order at the instance of a contributory if he alleges and proves that there is a reasonable probability of a surplus being left for distribution amongst the shareholders. That seems to me but an understatement of what is said by Charlesworth, namely, that

'the Court will not, as a rule, make an order on a contributor's petition unless the contributory can prove that there will he assets for distribution among the share-holders'.

(Can it be that in unrepentantly continuing to hold that a winding up petition brought by a fully-paid shareholder of an insolvent company is demurrable, the English Courts regard their Section 225 (1) which, like our Section 443(1) proviso, covers only the range of cases in which a creditor can have no interest in a winding up, there being no assets at all or the assets being mortgaged to the hill so that he can get nothing, and not the wider range of cases covered by our Section 439(3) where a fully paid contributory has no interest there being no surplus available for distribution, as applicable only to a creditor's petition? If that be so and that be the correct position -- that was not, however, the view taken by the Indian Courts with reference to the corresponding provision in Section 170 (1) of the 1913 Act--Section 439(3) of the 1956 Act was a departure from the English law and the 1913 Act and not a mere declaration of the law under that Act. But I have been able to find no suggestion either in the Text books or in the decided cases to that effect unless Palmer's statement (Company Precedents, Seventeenth Edition page 43) that Section 225 (1) appears to apply to a contributory's petition is to be read as implying such a suggestion. However that might be, as I have already said, all that Section 439(3) does is to declare that a fully-paid share holder is entitled to bring a petition notwithstanding that there are no surplus assets with the result that such a petition is not demurrable, and, although that means that there must be cases in which a winding up order can he made on such a petition, that provision in no way affects the exercise of the discretion vested in the Court by Section 435).

10. The petitioners' claim to be creditors of the company is thus relevant and I shall proceed to consider that claim before going to the merits of the grounds on which they seek a winding up. The petitioners were the managing agents of the company on a remuneration of Rs. 400/- per mensem and ten per cent of the net profits until 15-8-1980 when their agency terminated by the operation of Section 330 of the Act. A firm called the United India Distributors of which the petitioners were partners were the sole solling agents of the company until 29-3-1961 when their contract expired. In this connection the firm had made a deposit of Rs. 1,50,000/- with the company on which they wore to get interest at 6% per annum in addition to their remuneration of a commission of 3% on all sales. It would appear that the partners of the firm made the deposit in separate shares, and it is not disputed that the share deposited by the petitioners was Rs. 59,000/. On the termination of the selling agency on 28-3-1961, the deposits made by the remaining partners were converted into loans bearing interest at 9% per annum, but the deposit of Rs. 59,000/- made by the petitioners was transferred to a suspense account.

From 1956 onwards the company had been paying the interest accrued due on the petitioners' share of the agency deposit, as also their snare of the sales commission, to one M. V. Narasimhan to whom, according to the company, the petitioners had transferred their rights in the agency deposit by way of security. And, even after the transfer of the petitioners' share of Rs. 59,000/- to the suspense account interest at 9% was being paid to M. V. Narasimhaim It is this sum of Rs. 59,000/- and the interest of Rs. 9350/- accrued due thereon up to 1-11-1963 that the petitioners claim as a debt due to them by the company and in respect of which they allege that the company has failed to respond to their notice under Section 434(1)(a) of the Act thus giving them the right to a winding up order ex debito justitice under Section 433(e).

11. Although in its counter-affidavit the company took the stand that the agency deposit of Rs. 1,50,000/- was something due to the firm as such and denied the petitioners' right to recover any specified portion of the deposit, it was conceded at the time of the hearing that the sum of Rs. 59,000/-transferred to suspense account was the petitioners' share of the deposit and that the shares deposited by the remaining partners having been treated as debts due to them individually, this deposit of Rs. 59,000/-made by the petitioners could not be differently treated, lint the question remains whether this sum of Rs. 59,000/- and the interest accrued thereon is due to the petitioners or to M. V. Narasimhan to whom, according to the company, the petitioners have transferred their rights by way of security. With regard to this, the notices Exts. P2 dated 9-10-1963 and Ext. P3 dated 15-10-1963 issued by the petitioners to the company put it beyond doubt that the legal right to recover the amount vests in M. V. Narasirnnam and not in the petitioners.

In Ext. P2 there appears the unequivocal statement that the petitioners had transferred their 59/150 share in the agency deposit of Rs. 1,50,000/- to M. V. Narasimhan; and that notice called upon the company to pay the overdue interest on this 59/150 share either to M. V. Narasimhan or to the petitioners within a week, failing which it warned the company that legal steps would be taken against it by the petitioners along with M. V. Narasimhan. In Ext. P3 the petitioners claimed that out of the agency deposit of Rs. 1,50,000/-, Rs. 59,000/. belonged to them and they called upon the company to pay them this sum of Rs. 59,000/- within 21 days. They said nothing about the transfer to M. V. Narasimhan but they referred to the notice dated 9-10-1963 demanding payment of the interest accrued and did not withdraw, or in any way qualify, that notice. Even now the petitioners have no case that the statement in Ext. P2 regarding the transfer to M. V. Narasimhan was a mistake, and they have made no attempt to explain away that statement.

There is thus an unequivocal and unexplained ad-mission by the petitioners that the debt of Rs. 59,000/-due to them in respect of the agency deposit has been transferred by them to M. V. Narasimhan. How this transfer was effected we need not stop to inquire for, no question has been raised as to its validity; and whether the transfer was an absolute transfer or only by way of security, all rights in respect of that debt now vest in M.V. Narasimhan under Section 130 of the Transfer of Property Act and none in the petitioners. If the transfer was only by way of security, the petitioners would no doubt have a right to the residue, if any, left after satisfying the security. But that right they would have to enforce against M. V. Narasimhan in whom all rights and remedies in respect of the debt is vested. It follows, therefore, that it is to M. V. Narasimhan and not to the petitioners that the debt is due from the company and that M. V. Narasimhan, and not the petitioners, is the creditor.

12. M. V. Narasimhan has not joined in the petition and has not issued any notice in respect of this particular debt. But he has appeared to support the petition and has filed an affidavit dated 20-2-1964 to the effect that the petitioners had given their share of Rs 59,000/- in the partnership known as the United India Distributors as security to a bank known as the Narasimhan Bank of which he is a partner. In that affidavit there appears the following statement;

'The abovesaid Rs. 59,000/- belongs to Messrs. V. V. Krishna Iyer Sons and they alone have the right to recover the amount from the company, but when the amount is paid to them I am entitled to get from them Rs. 30,275/- and interest. I hold the sum for and on behalf of Messrs V. V. Krishna Iyer Sons.'

Whatever this might mean, it makes no difference to the case so long as there has been no re-transfer of the debt to the petitioners, for, it is not for M. V. Narasimhan to after the provisions of Section 130 of the Transfer of Property Act.

13. It will be recalled that while the petitioners were managing agents of the company they were, as partners of the United India Distributors, drawing commission on sales. This was in violation of Section 358 of the Companies Act, and, in O. S. No. 45 of 1962 on the file of the Subordinate Judge Palghat, the company sued them under Section 363 of the Act for recovery of the sum of Rs. 8617.66 drawn by them as sales commission. To this suit the company made M. V. Narasimhan a party in view of the contention of the petitioners that they had assigned their interest in the United India Distributors to M. V. Narasimhan and that it was he and not they that had drawn the commission. The company denied that there had been any such assignment and averred that the assignment, if any, was at best only a benami transaction, M. V. Narasimhan being only a benamidar for the petitioners. This contention of the petitioners, in which they were supported by M. V. Narasimhan, was rejected by the court which decreed the suit, and it is said that the decision conclusively establishes that the debt of Rs. 59,000 due by the company belongs to the petitioners and not to M. V. Narasimhan, that, in fact, it operates as resjudicata.

14. Ext. PS is a copy of the judgment in the suit. Issues (1) and (2) of the issues settled therein, which are the issues relevant for the present purpose, run thus :

'(1) Have defendants 1 and 2 (the present petitioners) ceased to be partners of the selling agency firm If so, from what date ?

(2) Is 3rd defendant (M. V. Narasimhan) a benamidar for defendants 1 and 2 Is plaintiff estopped from setting up this plea of benami'?'.

In paragraph 24 of the judgment the findings on these issues are thus recorded :

'On issue (1) 1 hold that defendants 1 and 2 had not ceased to be partners of the selling agency firm United India Distributors and on issue (2) I hold that the 3rd defendant was only drawing the commission for and on behalf of defendants 1 and 2 as a person holding in security their interests.'

It will be noticed that the finding is that the petitioners continued to be partners of the United India Distributors and that M. V. Narasimhan had not taken their place, not that the petitioners' share of the agency deposit was due to them and not to M. V. Narasimhan. In fact the finding on issue (2) that M.V. Narasimhan was holding in security the interests of the petitioners indicates that the debt due to them in respect of the agency deposit had been transferred by the petitioners to M. V. Narasimhan by way of security. The decision, far from supporting the case of the petitioners that they are the creditors, is against them.

15. I hold that the petitioners are not creditors of the company and that they are only fully paid-up share-holders who, far from alleging that there will be a surplus left for distribution among the shareholders, have alleged that the company is commercially insolvent,

16. It is said that the petitioners have guaranteed repayment of a loan granted to the company by the Madras Industrial Investment Corporation in 1950 and that this contingent liability (on which however the petition is not based) gives them an interest in the winding up even if they are to be regarded only as contributories. But the loan, on which only about Rs. 18,000/- is now due, and which is payable only in instalments extending up to June 1967. is more than amply secured so that the petitioners' liability and their consequent interest is, for all practical purposes, non-existent.

17. There is another matter that has some bearing on the bona fides of this petition. It would appear that ever since the petitioners ceased to be managing agents of the company in 1960 there has been a great deyl of rivalry between them and one V. K. R. V, Vaidyanatha Iyer, a director of the Company, with regard to its management and that it is this rivalry that has culminated in the present petition. In fact, the petition was adjourned from time to time at the request of both parties on the representation that it might he possible to reach some understanding, but, as the events proved, the time thus obtained was utilised by the parties not for negotiation but for bolstering up their respective cases. In 1960, the petitioners along with their brother-in-law brought a suit (O. S. 548 of 1960 of the Munsiff's Court, Palghat) for a declaration that V. K. R. V. Vaidyanatha Iyer's appointment as director was invalid and for an injunction restraining him from functioning as a director. In this suit they succeeded. Vaidyanatha Iyer) however, secured a fresh appointment as director and attempts were made to appoint him in turn as director-in-charge, managing agent, and managing director, all of which were opposed by the petitioners and failed by reason of the Central Government with-holding approval.

The main complaint of the petitioners is that, in spite of all this, Vaidyanatha Iyer, whose fresh appointment as director is according to them invalid, continues to function as a director and is practically carrying on the business of the company. By the lawyer's notice, Ext. P. 4 dated 26-3-1982, the petitioners called upon the company to file a suit against Vaidyaimtha Iyer and another director, Lakshminarayana Iyer, both of whom were partners of the United India Distributors, for a refund of all the remuneration they had drawn from the company as directors and all the selling agency commission they had drawn as partners of the United India Distributors since these directors, they alleged, had held places of profits in violation of Sub-section (1) of Section 314 of the Companies Act and were liable to make the refund under Sub-section 2. It is this notice that probably gave the company the cue and provoked it to institute O. S. No. 45 of 1982 on the file of the Sub-ordinate Judge, Palghat, for recovery of the amounts drawn by the petitioners as selling agency commission. That suit was decreed against the petitioners on 3-10-1963. Within a week thereafter they issued the notice, Ext. P. 2, and, within a fortnight the notice, Ext. P. 3, calling upon the company to pay the debt which they claimed to be due to them; and on 20-11-1983 they followed up these notices with the present winding up petition. There can thus be little doubt that the immediate cause for the winding up petition was the decree that the company had succeeded in obtaining against the petitioners.

18. On this aspect of the case I might add that the allegation made by the compiny in para. 8 of their counter-affidavit opposing the petitioners' application for the appointment of a provisional liquidator (which has been read as part of the counter-affidavit in the winding up petition) that, in February 1961, the petitioners started a rival concern under the name, Premier Brush and Allied Industries, and are manufacturing and marketing brushes and other articles of the same kind as those made by the company, has not been denied.

19. I shall now consider the two grounds on which the petitioners would have the company wound up and the allegations made in support of these grounds. The first ground, that the company is unable to pay its debts, both in the sense that it is actually unable to pay debts presently due and demanded, and in the sense that it has reached a stage where, in the language of Sir William James, V. C. in In re, European Life Assurance Society, (1869) L R 9 Eq 122 at p. 128, it is

'Plainly and commercially insolvent--that is to say, that its assets are such, and its existing liabilities are such, as to make it reasonably certain--as to make the court feel satisfied--that the existing and probable assets would be insufficient to meet the existing liabilities',

language which seems to be the origin of the phrase 'commercially insolvent' as of Clause (c) of Sub-section (1) of Section 434 of the Companies Act 1956. This sub-section, I might observe now, covers the whole range of in-ability to pay debts, Clauses (a) and (b) covering inability to meet current demands, and Clause (c) covering what formerly used to be brought under the 'just and equitable' Clause (Clause (f) of Section 433) under the name, 'commercial insolvency', so that every kind of in-ability to pay debts falls, within Clause (e) of Section 433 and resort to Clause (f) is unnecessary. (See Buckley, Thirteenth Edition, p. 458 under the head, 'Insolvency' and p. 460 under the head, 'Other insolvency' and Palmer's Company Precedents, Part 2, Seventeenth Edition, p. 26 under the head, 'As to para, (d) of Section 223').

20. For bringing the case within Clause (a) of Section 434(1) the petitioners depend on the notices, Exts. P 2 and P 3, they sent the company for the return of their share of the agency deposit which it is their case, on the termination of the agency, became a debt presently due. But, as we have seen, this debt has been assigned by them to M. V. Narasimhan, and, whether the assignment was absolute or only by way of security, it is Narasimhan and not the petitioners that is the creditor. The petitioners' notices are therefore of no avail, and, Narasimhan not having issued any notice demanding the payment of this debt, and there being no case that the petitioners have acted as agents for Narasimhan, it follows that neither the demands made by the petitioners nor the fact that Narasimhan has appeared to support the winding up can bring the case within the clause in question.

21. The company has a case that, by reason of Ext. D11, the debt due in respect of the agency deposit is not presently payable and cannot therefore provide a cause of action under Clause (a) of section 434 1. Ext. D11 is a letter passed to the company by the petitioners and the other partners of the United India Distributors by which they agreed not to demand repayment of the agency deposit of Rs. 1,09,000/- until the liability of the company to the Madras Industrial Investment Corporation Ltd., was discharged. It is true that that liability has not yet been discharged, but then the agreement is only in respect of a sum of Rs. 1,09,000/-, and, with regard to the balance, it would appear that the debt is a debt presently payable.

22. A sum oE Rs. 10,000/- and odd is admittedly due from the company to M. V. Narasimhan on some other account and in respect of this debt Narasimhan issued a notice of demand on 9-1-1964, seven weeks after the institution of this winding up petition. (So did another creditor M. R. Narasimhan to whom Rs. 8500/- and odd is admittedly due, two days later. This Narasimhan also has appeared to support the winding up on the ground, that his debt has not been paid). It is said that this demand, which admittedly remains unsatisfied to this day, makes out a casa under Clause (a) of Section 434(1), but then that was not the case on which the petition was brought, and a winding up order cannot be made on a case which the company was not required to meet. (See Buckley, Thirteenth Edition, 1957, page 471, 'An order will not be made if a sufficient case is not stated on the petition, even if such a case is proved in evidence.' Also In re, Spence's Patent Non-Conducting Composition and Cement Co., (1869) 9 Eq. 9, where a supporting creditor was not allowed to rely upon his cause of action, which was not a cause of action on which the petition was founded, to obtain a winding up, and the argument of counsel for the company that, although a creditor is allowed to come in and support a petition for winding up a company, he must support the petition as it stands and cannot he allowed to make a fresh case of his own, was accepted.)

23. I might perhaps add that the company claims to have enough cash on hand to pay both the Narasimhans and that would appear to be so--and that it is stated on its behalf that it is only the pendency of this winding up petition and certain restrictions placed upon the company by an order made in an application for the appointment of a provisional liquidator that has stood in the way of its making the payments. Whether that is so or not it will be time enough to consider if a petition is brought on the basis of the failure to pay these debts.

24. For making out a case under Clause (c) of Section 434(1), reliance is placed by petitioners on Ext. PI, the balance sheet of the company for the year ending 31-3-1903. That balance sheet does not disclose that the assets of the company are insufficient to meet its liabilities including contingent and prospective liabilities. But, it is said that that would be the position if the fixed assets and the plant and machinery, which are necessary for carrying on the business of the company, are ignored. I do not see on what principle these can be ignored. And it these are ignored, I am afraid that most manufacturing companies, excepting long established companies which have built up substantial reserves, would have to be regarded as insolvent and therefore liable to be woundup. For it is very rarely indeed that the subscribed capital of such a company suffices to meet the capital outlay required to enable it to commence production. Such capital expenditure is almost invariably met out of borrowed funds and, if the fixed assets and plant and machinery thus acquired are to be ignored in assessing the solvency of the company, it would necessarily follow that the assets would fall far short of the liabilities.

After all, the question Is not whether, at the given time, the company can pay all its debts whether presently due or only in the future, and stilt continue to function. The question is whether it is able to meet its current demands--it would, of course, be insolvent if it cannot do that even if it has assets not presently available but more than ample to pay its debts and is in that sense rich--and whether its existing and probable assets would suffice to meet future demands. That, if all the demands were forth-with made upon it, it would be able to meet the demands only by mortgaging or selling its capital assets, perhaps closing down, does not mean that it is insolvent. If a man can, by disposing of all his assets, pay all his liabilities, no one would think of calling him insolvent even if the result might be that, as a result thereof he has to close down his business undertakings or even Bell his dwelling house. The position of a company is no different. Japan Cotton Trading Co. Ltd. v. Jajodia Cotton Mills Ltd., A I R 1927 Cal 625, Sudhiya Nath v. Bihar National Insurance Co. Ltd. Patna, A I R 1941 Pat 603 and In re, Cine Industries & Recording Co. Ltd., A I R 1942 Bom 231 are cases where assets necessary for the company to carry on its business have been taken into account in determining its solvency.

25. It is contended on behalf of the petitioners (in all seriousness I am assured, and that binds me to serious examination) that the paid-up share capital which figures among the liabilities in the balance sheet should be taken into account in determining the company's solvency and that, if that is done, it will be found that the company's liabilities are in excess of its assets. But, although for balance sheet purposes share capital is shown among the liabilities, it is no more a liability of the company than losses, which in a balance sheet are shown among the assets, are an asset of the company. A company does not owe its members the share money paid by them, and, except when there has been a reduction of share capital (whereupon the excess ceases to be share capital) the members have no right to ask for the return of the money paid by them. Even in a winding up, what the members get if they get anything at all, is not a return of their share' money, but their rateable share of any surplus left after satisfying the creditors, and this share may be less or more than the share money paid.

It is true that ordinarily the Court does not go behind the company's balance sheet to ascertain its financial position, but this does not mean that the mere fact that a particular item appears in the balance sheet under the head, 'liabilities' conclusively establishes that that item is a liability of the company in the sense in which the word 'liability' is used in Section 434(1)(c) of the Companies Act. Notwithstanding that the word, 'liabilities' and not the word 'debt' is used in that provision when referring to the contingent and prospective liabilities of the company, it is quita apparent that the liability referrad to therein must be a debt which the company has, or might or will have, to pay, something which cannot be said with regard to its share capital. In (1869) 9 Eq 122, the subscribed but uncalled-up capital of the company was said to be about the First asset which one looks to in testing the solvency or insolvency of a company, and if that be so, it obviously follows that the paid-up capital cannot be regarded as a liability.

26. That disposes of the first ground, the ground of inability to pay debts. In support of the second, 'the just and equitable' ground, it is alleged that the company is commercially insolvent, an allegation I have already dealt with, that its substratum is gone, that it is mismanaged, and that its affairs have reached a deadlock.

27. It is not disputed that the company was carrying on its business of manufacturing brushes etc. until on 27-11-1993, a week after the presentation of this petition, it declared lock-out. A commissioner appointed in connection with the application for the appointment of a provisional liquidator has reported that,

'the finished goods in the store appeared to be of excellent quality and matched or even excelled foreign goods of the same kind.'

Also that the company has

'in recent months secured big orders from the Defence and other Departments of the Government of India, the Hindustan Aircraft Factory, the Integral Coach Factory, Madras, etc. which seem to have proved very profitable to the company.'

This appears to bear out the company's case that, far from its substratum having gone, its affairs have improved considerably since the petitioners ceased to be its managing agents in August 1980 and the Board assumed direct management. It is, however, pointed out that although until the end of 1955 the company was making meagre profits (with the exception of the year 1947 when it made a loss of Rs. 2,400/- and odd) it has been consistently making losses from 1959 onwards.

Exhibit P-1, the balance sheet for the year ending 31-3-1963, discloses that the losses have accumulated to the sum of Rs. 1,32,892.25 which amounts to nearly half the paid-up capital. It is said that these consistent losses are sufficient to show that it is impossible to carry on the business of the company except at a loss and that there is no reasonable hope that the object of trading at a profit with a view to which the company was formed would be obtained. (Davis & Co., Ltd. v. Brunswick (Australia) Ltd., (1938) 1 All E R 299) But the fact that the company has made losses over a number of years is by itself insufficient to show that it will never be able to achieve its object of trading at a profit, and the balance sheets for 1960 onwards repeal that, after the Board took over the management from the petitioners, there has been a considerable diminution in the losses. Thus during the year ending 31-3-1991 there was a loss of Rs. 29,000/- and odd during the 7 1/2 months of the petitioners' management, whereas the loss for the remaining 4 1/2 months of the present management was only Rs. 8,100/- and odd. The loss for the period from 1-4-1961 to 31-3 1983 was only Rs. 6100/- and odd, and the commissioner who prepared a rough balance sheet and profit and loss account for the period from 1-4-1983 to 20-12-1963 has reported a net profit of Rs. 4,9001 and odd, calculating depreciation at the rates adopted in the previous years. He has, however, stated that if the full depreciation prescribed by Section 350 of the Companies Act is taken into account there would be a loss of about Rs. 150/-.

This report of the commissioner has no doubt been seriously attacked and it is said that the balance sheet and the profit and loss account prepared by him are substantially incorrect and that, properly worked out, far from there being any profit, there would be a loss of Rs. 21,000/-. I do not think it necessary to go into this, for, assuming, that the company has worked at a loss in the year 1963 as well, it does not as I have already said, follow that it cannot hereafter work at a profit. The principle laid down by Lord Cairns in In re Suburban Hotel Co., (1867) 2 Oh App 737, that it is not permissible to argue from the mere fact that a company has consistently made losses in the past that it has no reasonable prospects of earning profits in the future has been repeatedly affirmed and the decision itself has been taken to have established the fact that a com-pany 'has lost, is losing and will continue to lose' does not of itself justify a winding up order, at least when the capital has not been exhausted.

However, in the present case, the indications, both because of the reduction in losses and the increase in sales and because of orders placed by the Government and the Hallways, seem to be that the company can make profits, and, in any case, this is a matter which is primarily for the members of the company to decide. It is not the business of the Court to manage the affairs of a company (per Scrutton L. J. in Shuttleworth v. Cox Brothers & Co. (Maidenhead) Ltd., (1927) 2 K B 9 at p. 23) and the winding up process of the Court, cannot be used and ought not to be used, as the means of evoking a decision as to the probable success or non-success of a company as a commercial speculation (per Lord Cairns in (1867) 2 Ch A 737 at p. 750). It is only in very extreme cases, if at all, that the Court will take upon itself the unaccustomed duty of choosing between conflicting views in order to settle what is really of the nature of a business problem. (See (193fi) 1 All E R 290).

In the present case the majority of the shareholders, both in number and in value, have entered appearance and filed affidavits opposing the winding up, and they say that they are satisfied that the winding up of the company would be injurious to their interests that they understand that the company is working satisfactorily at present and that there is reasonable hope of the company showing good results in the near future. And so have the majority of the creditors. It is said that these members and creditors have been misled by the incorrect report made by the Commissioner. But there is nothing to show that that is so.

28. As to deadlock and mismanagement what is alleged in the petition is that the members of the Board have not been lawfully appointed to their office, that one of the directors V. K. R. V. Vaidyanatha Iyer, is virtually in sole charge and is conducting the affairs of the company in a manner prejudicial to its interests and in furtherance of his own, and oppressive to the minority share-holders. No evidence has been offered of the oppression or of any self-aggrandisement by Vaidyanatha Iyer or the other members of the Board, and, as for the validity or otherwise of the appointment of the members of the Board, that does not seem to ma a matter for consideration in a winding up petition. That is, in the first instance, a matter for the company in general meeting, and, if the general meeting offers no redress, then it is for the petitioners to establish their case by a suit, something which they have not been slow to do in the past. It is enongh to say that the company was functioning at the time the winding up petition was brought and that there is no proof either of mismanagement or of dead-lock.

29. There is a very learned article on the 'just and equitable' clause in the Modern Law Review, Vol. 27, page 282. There, it is suggested that the underlying principle which governs the making of orders on the 'just and equitable' ground is little more than the application in the field of company-law of the contractual doctrines of discharge by frustration and discharge by breach. This might be open to the criticism that it amounts to explaining the difficult in terms of the not less difficult. But it seems to me that nothing has been proved in this case which can be described as a frustration or as a breach of the petitioners' contract as share-holders to contribute to the capital of the company.

30. It is said that if tomorrow either of the Narasimhans chooses to bring a winding up petition on the ground that their demands in respect of admitted debts have not been satisfied, or the petitioners on the ground that the company has suspended its business for more than a year since 27-11-1963. when the lock-out was declared, the company could have no possible defence and a winding up order must automatically follow. Therefore, to dismiss the present petition would be meaningless and it would be just and equitable to make a winding up order on the present petition. The answer is simple and has already been suggested by me. The grounds on which a new petition of the kind suggested may be brought are not grounds which the company has now been, called upon to answer. Before such a petition is, in fact, brought, it is quite possible that the company might be able to pay or secure the debts due to the two Narasimhans; and, in case a petition is brought on the ground of suspension of business, it may be-that it can satisfy the Court that it would be able to continue its business hereafter and that the Court should not, in its discretion, order a winding up. And, it should not be forgotten that it is asserted on behalf of the company that the moment the restrictions that have been placed upon it by the order made on the application for the appointment of a provisional liquidator are removed, it will be in a position to satisfy both the Narasimhans and to raise the lock-out. Whether that confidence is well-founded or not, of course remains to be seen, but it is not a. matter for consideration now.

31. Quite apart from that the majority of the creditors and members are opposed to a winding up, that the petitioners are fully paid-up shareholders who have alleged that the company is insolvent, and that, to put it at the lowest, their motives are open to suspicion I do not think that a case has been made out--and I am considering, as I must, the cumulative effect of all that has been made out--for ordering a winding up.

32. I dismiss the petition. The petitioners will pay the company its costs and also bear their own.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //