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Ramakrishna Industries (P.) Ltd. and ors. Vs. P.R. Ramakrishnan and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtChennai High Court
Decided On
Case NumberO.S.A. Nos. 128 and 189 of 1981
Judge
Reported in[1988]64CompCas425(Mad)
ActsCompanies Act, 1956 - Sections 9, 397, 398, 433, 434, 439(1), 443 and 443(1); Companies (Court) Rules, 1959 - Rule 11
AppellantRamakrishna Industries (P.) Ltd. and ors.
RespondentP.R. Ramakrishnan and ors.
DispositionAppeal dismissed
Cases ReferredNeedle Industries (India) Ltd. v. Needle Industries Newey
Excerpt:
company - injunction - sections 9, 397, 398, 433, 434, 439 (1), 443, and 443 (1) of companies act, 1956 and rule 11 of companies (court) rules, 1959 - appeal questioning interim order passed by court - appellant contended that learned judge had no jurisdiction to pass interim order under section 443 (1) (c) at stage of admission of winding-up petition - section 443 (1) (c) refers to passing of interim order and it did not have any hidden meaning that no interim order can be passed by court at time of admission of winding-up application - even at stage of admitting winding-up petition court has inherent power to do everything necessary to prevent abuse of court or to advance cause of justice - inherent power of court not taken away or in any way restricted by section 443 (1) - appeal.....v. ramaswami, j. 1. o.s.a. no. 128 of 1981 is against the order dated august 19, 1981, in company application no. 844 of 1981 and 0. s. a. no. 189 of 1981 is against the order dated december 7, 1981, in company application no. 843 of 1981. both these applications were filed pending company petition no. 30 of 1981, which is a petition filed under sections 433(e) and (f), 434 and 439(1)(b), (c) and (d) of the companies act, 1956, for winding up of a company by name ramakrishna industries private ltd. company application no. 843 of 1981 is for the appointment of a provisional liquidator pending disposal of the main company petition and c.a. no. 844 of 1981 is an application filed under rule 11 of the companies (court) rules, 1959, read with order 39, rule 1, civil procedure code, for an.....
Judgment:

V. Ramaswami, J.

1. O.S.A. No. 128 of 1981 is against the order dated August 19, 1981, in Company Application No. 844 of 1981 and 0. S. A. No. 189 of 1981 is against the order dated December 7, 1981, in Company Application No. 843 of 1981. Both these applications were filed pending Company Petition No. 30 of 1981, which is a petition filed under Sections 433(e) and (f), 434 and 439(1)(b), (c) and (d) of the Companies Act, 1956, for winding up of a company by name Ramakrishna Industries Private Ltd. Company Application No. 843 of 1981 is for the appointment of a provisional liquidator pending disposal of the main company petition and C.A. No. 844 of 1981 is an application filed under Rule 11 of the Companies (Court) Rules, 1959, read with Order 39, Rule 1, Civil Procedure Code, for an order of injunction restraining the appellants herein from borrowing any moneys from banks, financial institutions or others without the prior permission of the court and from alienating and/or creating any charge or encumbrance over any of the assets of the company in its various enterprises, pending disposal of the winding-up petition.

2. On July 13, 1981, the company petition and also the two C.A. Nos. 843 and 844 of 1981 were posted before the court. The learned judge ordered notice to the company petition for the hearing on August 11, 1981. He also ordered notice to the appellants herein in the application for the appointment of a provisional liquidator and in C.A. No. 844 of 1981 granted an interim injunction and posted the application for further hearing on September 27, 1981. By an order dated August 19, 1981, the learned judge granted the injunction, the operative portion of which is as follows:

' In the result, there will be an injunction restraining respondents Nos. 1 to 6 from borrowing any moneys from banks, financial institutions or others and from alienating and/or creating any charge or encumbrances over any of the assets of the first respondent company in its various enterprises except that the first respondent company is entitled to honour any pending contracts entered into by the company with third parties before the presentation of this application, all its existing commitments vis-a-vis its staff and labourers, electric charges, central excise duty, LIC premium, payments due to employees' co-operative stores, telephone bills and sales tax due, availing of the existing bank facilities with any of its bankers subject to the condition that the particulars for all these payments and the source from which such payments were to be met, are furnished in detail in the applications. It is made clear that the company is always at liberty to approach the court for further directions and that the applicants' right to impugn any such transaction under Section 536(2) is left untouched.'

3. Against this order, O.S.A. No. 128 of 1981 has been filed. By another order dated December 7, 1981, in C.A. No. 843 of 1981, the learned judge appointed the official liquidator as the provisional liquidator pending the winding-up petition. Against this order, O.S.A. No. 189 of 1981 has been filed.

4. Both before the learned single judge and before us, learned counsel for the appellants questioned the maintainability of the application for injunction. This was on the ground that the main winding-up petition was not set for hearing on that date and that, therefore, Section 443 of the Companies Act cannot be invoked by the applicants and that the applications cannot also be sustained either under Order 39, Rule 1, of the Civil Procedure Code or rule IX of the Companies (Court) Rules, 1959.

5. The relevant portion of Section 443(1) reads:

'(1) On hearing a winding-up petition, the court may-

(a) dismiss it, with or without costs ; or

(b) adjourn the hearing conditionally or unconditionally; or

(c) make an interim order that it thinks fit ; or

(d) make an order for winding up the company with or without costs, or any other order that it thinks fit.

6. The argument of learned counsel for the appellants is that on July 13, 1981, the learned judge has ordered notice for the hearing of the company petition on August II, 1981, and only when the company petition was to be taken up for hearing on August 11, 1981, the court would get jurisdiction to make any interim order and not on the date when the company petition was admitted and notice of hearing was ordered. We are of the view that the hearing of the winding-up petition starts even on the day when the winding-up petition is admitted and entertained and the order of notice for the hearing to the respondents after deciding to entertain would amount to a hearing of the winding-up petition itself. The words 'on hearing a winding-up petition' would cover the entire period from the date of entertainment and issuing of notice till an actual order of winding-up is made or the winding-up petition is dismissed. ' Hearing ' does not mean hearing the respondent to the company petition. Hearing of the petitioner for the purpose of admitting the petition and issuing notice is also part of the hearing of the winding-up petition. In fact, the Supreme Court in Hind Overseas (P) Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 C.C. 91 held (at page 105) :

' A prima facie case has to be made out before the court can take any action in the matter. Even admission of a petition which will lead to advertisement of the winding-up proceedings is likely to cause immense injury to the company if ultimately the application has to be dismissed. The interest of the applicant alone is not of predominant consideration. The interests of the shareholders of the company as a whole apart from those of other interests have to be kept in mind at the time of consideration as to whether the application should be admitted on the allegations mentioned in the petition.'

7. Again, Section 441(2) specifically states that the winding-up of a company by the court shall be deemed to commence at the time of the prosecution of the petition for winding-up and, therefore, from the date of presentation of the winding-up petition, the court gets jurisdiction. Section 450 also makes this very clear. Sub-sections (1) and (2) of this section provide that at any time after the presentation of the winding-up petition and before the making of the winding-up order, the court may, for special reasons to be recorded in writing, dispense with the notice to the company and appoint a provisional liquidator straightway. These provisions clearly establish that the court's jurisdiction to make interim orders is not postponed till the date set for hearing of the company petition after notice to respondents. In fact, this point is concluded by a Bench decision of this court in Ramakrishna Industries P. Ltd. v. P. R. Ramakrishnan : (1983)2MLJ227 . It may be mentioned that that case also related to the same company. On the same day along with CA Nos. 843 and 844 of 1981, the respondents herein also filed CA No. 845 of 1981, for the appointment of a Court Commissioner to take an inventory of the assets and accounts of the company. That application also came up for orders along with these applications which are the subject-matter of the appeals and by an ex parte interim order made on July 13, 1981, the learned company court judge appointed a Commissioner and that was questioned in the appeal. One of the objections of the appellants was that the learned judge had no jurisdiction to pass an interim order under Section 443(1)(c) at the stage of admission of the winding-up petition and that only at the time of the hearing of the winding up petition the company court can make interim orders. While rejecting this contention, the Bench has observed (at page 233):

' In our judgment, the investiture of the court with the winding up jurisdiction, as of other powers, must be interpreted as adding to the gamut of the court's existing jurisdiction. It would be a mistake to interpret the statute as stripping the court of all its powers first, and then conferring on it only such powers as are permitted, say by Section 443(1) and other related provisions. We are satisfied that having regard to the scheme of the Companies Act, we cannot read any provision in the statute which relates to jurisdiction of courts, as being in derogation of the full plenitude of the court's powers under the common law, unless we can find in it a clearly expressed, or equally clearly implicit, bar of restriction of the court's jurisdiction.

We think it necessary for courts to construe statutes, such as the Companies Act, according to the wisdom of Parliament and not according to the folly of the draftsman. Section 443(1) is a case in point. The section sets about enumerating the different ways in which the court can tackle a winding-up petition when it comes before it for hearing. The section, in this context, enumerates the court's powers. But there are certain things which go without saying or ought to. Adjournment, for instance, is one of them ; you cannot regard it as a remarkable aspect of judicial power. And yet, Clause (b) of Section 443(1) very seriously mentions adjournment as one of the ways in which the court can give a disposal to the petition on the day of the hearing. This is quite an insane provision. Even without it, nobody would contend and certainly not practising lawyers, that a winding-up court has no power to adjourn the petition, but must get on with it even at the first hearing. Nor, for that matter, would any one argue that because of Clause (b), the court has lost its power, to grant adjournments on other occasions. So too is the case with Clause (c) of Section 443(1) which refers to the passing of interim orders. The presence of this clause in Section 443(1) cannot mean that, but for it, the court will have no power to pass any interim orders at any time, or, because of its presence in Section 443(1), its existence or exercise on other occasions must be ruled out. Courts and lawyers should read Acts of Parliament sensibly. They should not match the denseness of the draftsman with a dithering denseness on their part. We are satisfied that Section 443(l)(c) has not the hidden meaning which Mr. Biksheswaran attributes to it, namely, that no interim order can be passed by a winding-up court at the time of admission of the winding-up application '.

8. In National Conduits P. Ltd. v. 5. S. Arora [1967] 37 Comp Cas 786 the Supreme Court was considering the question whether a petition for winding-up cannot be placed for hearing before the court unless the petition is advertised. In that case, a director of the company presented a petition in the High Court of Delhi under Sections 433 and 439 of the Companies Act for an order of compulsory winding-up of the company. Notice of the petition was ordered to the company. The company filed an application that the winding-up petition filed by the director be dismissed and that the petition in the meantime not be advertised. The company petition was dismissed without advertisement on the ground that the proper remedy of the petitioner on the allegations of mismanagement of the affairs of the company and oppression of the minority shareholders was to file a petition under Sections 397 and 398 of the Companies Act and the petition was instituted with a view to unfairly prejudice the interests of the shareholders of the company. After referring to rules 24 and 96 of the Companies (Court) Rules, 1959, the Supreme Court observed (at page 788):

' A petition for winding-up cannot be placed for hearing before the court, unless the petition is advertised ; that is clear from the terms of Rule 24(2). But that is not to say that as soon as the petition is admitted, it must be advertised. In answer to a notice to show cause why a petition for winding-up be not admitted, the company may show cause and contend that the filing of the petition amounts to an abuse of the process of the court. If the petition is admitted, it is still open to the company to move the court that in the interest of justice or to prevent abuse of the process of the court, the petition be not advertised. Such an application may be made where the court has issued notice under the last clause of Rule 96, and even when there is unconditional admission of the petition for winding-up. The power to entertain such an application of the company is inherent in the court, and Rule 9 of the Companies (Court) Rules, 1959, which reads : Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the court to give such directions or pass such orders as may be necessary for the ends of justice or to prevent abuse of the process of the court.' '

9. These are clear authorities for the position that even at the stage of admitting the winding-up petition, or entertaining the winding-up petition, the court has also an inherent power to do that which is necessary to prevent the abuse of the process of the court or to advance the cause of justice or make such orders which are necessary to meet the ends of justice. That inherent power of the court is not taken away or in any way restricted by Section 443(1) of the Companies Act. We are, therefore, unable to agree with the contention of learned counsel for the appellants that till the date set for hearing of the petition, the hearing of -the company petition had not commenced and that the court had no jurisdiction to pass any interim orders.

10. We may also point out that in this case, the facts actually show that the hearing of the company petition had, in fact, commenced on July 13, 1981. When the applications were moved before the learned judge and the learned judge ordered notice of four weeks for hearing in C. P. No. 30 of 1981, Miss Bhanumathi, an advocate of this court, represented that she has instructions to appear and undertook to file vakalat for the appellants herein and that they oppose the application and that time might be granted to enable them to file their counter. It is admitted by learned counsel for the appellants that such a practice of taking notice on behalf of the respondents is in vogue and the courts have been adopting such a practice. Therefore, when the learned advocate took notice and undertook to appear for the appellants herein, it only means that the company had appeared before the court and the hearing of the winding-up petition itself had commenced. In fact, the company had given a vakalat on July 14, 1981, and counsel appeared for the hearing of the applications on the adjourned date on July 27, 1981. In fact, that the appellants herein were represented by a counsel and took notice of the applications and time was taken for filing counter was never denied and, in fact, especially admitted in paragraph 4 of the affidavit filed in support of CMP No. 7342 of 1981 in OSA No. 97 of 1981 and also in ground No. 4 of the grounds in that OSA. Therefore, it is clear that the company had appeared before the court on July 13, 1981, and objected to any order being made without giving them time for filing a counter and that, therefore, in any case the hearing of the winding-up petition shall be deemed to have commenced. We are, therefore, unable to accept the contention of learned counsel for the appellants that the applications were not maintainable under Section 443 of the Companies Act.

11. The learned judge gave a finding that the company is out and out a domestic one, that the shareholding by each of the two branches of the founder's sons, namely, one belonging to appellants Nos. 2 to 5 and respondent No. 6 and the other represented by respondents Nos. 1 to 5, was almost equal, that the two brothers, namely, the third appellant and the first respondent, have the right of equal participation in the management and in the affairs of the company and that the right of equal participation by the two branches represented by the third appellant on the one hand and the first respondent on the other is guaranteed under the constitution of the company. The learned judge was also of the view that the substratum of the company is based on the cordiality and mutual trust and confidence expected of both the brothers and when such cordiality and co-ordination anxiously intended to be preserved by the constitution of the company is completely undermined, there is complete and irrevocable deadlock in the company on account of lack of probity. The learned judge further held that the company is in reality a partnership concern under the garb of a corporate veil. He then referred to Article 38 of the articles of association and held that this article enables any member to apply for immediate winding-up of the company should there be any disagreement between the two brothers and, in fact, it is the only solution contemplated. In view of the open differences and complete deadlock and the virtual exclusion of the first respondent by the appellants in the management, the learned judge was of the further view that the balance of convenience is in favour of grant of an injunction and accordingly made the injunction order as stated above. The learned judge also held that the appellants are guilty of mismanagement of the affairs of the company and diversion of the funds of the company to their personal use as also manipulating the books of account and that by the appointment of a provisional liquidator there will be a successful prevention of fraudulent preference and appointed the official liquidator as provisional liquidator.

12. Learned counsel for the appellants seems to have contended before the learned single judge that it cannot be said that the shareholding by the third appellant's branch on the one hand and the branch of the first respondent on the other was equal and that if the shareholding was not equal there is no room for the contention that the respondents had an equal right in the management of and participation in the affairs of the company. This contention seems to have baen raised on the basis that the third appellant got transferred to himself as managing trustee 300 shares held by V. Rangaswami Naidu Educational Trust and if that is taken into account the respondents would be holding only 38.12 per cent of the issued capital and the appellants' family would be holding 59.02 per cent. Learned counsel seemed to have further placed reliance on the amended Articles 30 and 31 of the articles of association also in support of the contention that it is not possible to hold that the two branches have the right of equal management of and participation in the affairs of the company.

13. The third appellant and the first respondent are shown as the promoters of the company, though there is no dispute that their father is the founder of the company. The nominal capital of the company is Rs. 20,00,000 divided into 2,000 equity shares of Rs. 1,000 each. The issued, subscribed and paid-up capital is Rs. 15,95,000 divided into 1,595 equity shares of Rs. 1,000 each. The family of the first respondent is holding 608 equity shares of the face value of Rs. 1,000 each. The family of the third appellant is holding 642 shares of Rs. 1,000 each. A trust by name V. Rangaswami Naidu Educational Trust was holding 300 shares of Rs. 1,000 each. The trust was founded by the father of the third appellant and the first respondent. The third appellant, the first respondent and their father, V. Rangaswami Naidu, were the founder-trustees for life. The father is now dead and the third appellant and the first respondent are now the family trustees for life. It was contended on behalf of the appellants that the third respondent got transferred to himself as management trustee the 300 shares held by the trust by virtue of a resolution passed through circulation to the members of the company. The allegation of transfer was disputed by the respondents herein.

14. The learned judge after going into this question factually found that the appellants have failed to establish that there was a transfer of 300 shares of the trust in favour of the third appellant. This finding of fact is not canvassed before us and no reliable evidence was also produced before us evidencing such tranfer. In the circumstances, therefore, we have no hesitation in holding that the shares held by the two branches are almost equal.

15. Articles 30 and 31 of the articles of association before they were amended in 1971 in the extraordinary general meeting of the company held on September 25, 1971, read as follows :

' 30. The general management of the affairs of the company shall vest in the two life directors. The two life directors, their successors and nominees shall alone exercise all the powers and be entitled to manage the affairs of the company.

31. Mr. P. R. Ramakrishnan shall be styled as the managing director of the company and he shall be paid a remuneration of not less than Rs. 1,000 a month during the tenure of his office.'

16. The amended Articles 30 and 31 read as follows :

'30. The general management and administration of the affairs and matters of the company shall vest in two life directors who may be appointed from time to time.

31. Sri V. Raj Kumar shall be the managing director of the company and he shall be paid such remuneration as may be fixed by the board of directors from time to time.'

17. On the basis of these amendments, learned counsel for the appellants seems to have urged before the learned single judge that the management of the company vested in the sets of directors, namely, two life directors and a resident director. After a consideration of the arguments, the learned judge rejected the contention of the appellants, that equality in participation which was provided in the unamended Articles 30 and 31 is destroyed by the amendment. The learned judge also did not accept the contention that Articles 20, 21 and 24 ruled out the possibility of equal participation in the management of the affairs of the company between the two life directors. We have to point out that this finding of the learned judge was also not canvassed by counsel for the appellants before us. In the light of these facts, we confirm the finding that the first appellant company is out and out a domestic one, that the management of the company vested in the life directors and continued to vest even after them in their successors in interest and nominees, that the right of equal participation by the two branches each represented by the first respondent on the one hand and the third appellant on the other was guaranteed under the constitution of the company and that the shareholding by each was almost equal.

18. Learned counsel for the appellants contended that Article 30 of the articles of association which was heavily relied on by the learned judge in support of his finding that a prima facie case has been made out for winding up the company under Section 433(f), is void under Section 9 of the Companies Act on the ground that it is opposed to the provisions of Section 433(f) and also on the ground that it is opposed to public policy. The learned judge has overruled this objection holding that Article 38 does not run counter to Section 9 of the Act or the provisions of Section 433(f). Article 38 of the articles of association reads as follows :

' In the event of disagreement between the directors at any time prejudicially affecting the emoluments or the interests of any member of the board, then the aggrieved party may either sell his shares to the other members at a fair value or purchase the share of the other members at a fair price, thus settling the matter between them. In case any member fails to agree to the method above said to end the deadlock, then the company shall be wound up forthwith, and for the purpose of realisation of assets, the assets may either be sold for monetary consideration or may be distributed among the members in specie provided all the debts and liabilities due by the company shall entirely be discharged. For the purpose of the special resolution, every member shall vote in favour of the resolution for winding up when such contingencies arise.'

19. It is well-settled that the articles of association will have a contractual force between the company and its members as also between members, inter se in relation to their rights as such members. Therefore, the parties are bound by such contractual obligations. Section 9 of the Companies Act provides that save as otherwise expressly provided in the Act, the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company and that any provision contained in the memorandum and articles shall, to the extent to which it is repugnant to the provisions of the Act, become void. It was contended, on behalf of the appellant, that the provisions of Article 38 are void in so far as they enabled the company to be wound up on a ground which is not specified under Section 433 of the Companies Act. We are unable to agree with learned counsel that Article 38 adds any ground for winding up other than those specified in Section 433. As may be seen from the last sentence in that article, the company passes a special resolution for winding up when such a contingency arises. Section 433(a) contemplates the company resolving by a special resolution that it may be wound up by the court. It is this resolution for voluntary liquidation that is provided under Article 38 also and, therefore, it could not be contended that it adds any new ground to Section 433. It is also not contrary to and does not in any way affect the power of the court to order a company to be wound up when it is of opinion that it is just and equitable. The court may consider that in a case where Article 38 is applicable, it will be just and equitable to wind up. The power of the court is not in any way fettered in considering whether to pass an order of winding up or not in exercise of its power under Section 433(f). Necessarily, the court may while considering the question whether it is just and equitable that the company should be wound up (sic). But it cannot be contended that it is in any way derogatory to the powers of the court under Section 433(f) We are, therefore, of the view that Article 38 is valid and binding on the company and its members.

20. It was then contended by learned counsel for the appellants that till the provision in the first limb of Article 38 is complied with, the second limb will not come into operation, that the conditions specified in the first limb of Article 38 have not been complied with by the respondents and that since it is the respondents who complained that the appellants have acted detrimentally to their interests they should have offered to sell the shares to the appellants, that the appellants have a right to purchase the shares at a fair price to be fixed in conformity with the articles and, that it is only when the appellants fail to agree to purchase the shares at a fair value to be fixed that the contingency, namely, that the company should be wound up would arise. In the instant case since there had been no offer at all by the respondents to sell the shares, they are not entitled to invoke to their aid the second limb of Article 38. Learned counsel for the appellants also contended that the learned judge erred in construing Article 38 in isolation. The learned judge has overruled this contention of the appellants and held that it was unnecessary to claim the relief under the second limb of Article 38 to go through the farce of the offer of selling the shares and awaiting the rejection thereof. It is the disagreement that would matter. The learned judge also held that the disagreement within the meaning of Article 38 relates to the ' method ' as such but not to the several processes involved in the said method such as a member offering his share for sale and the other member refusing to purchase the share at the fair value to be fixed in conformity with the articles. Since the respondents herein have stated that they are not willing to adopt the method provided for in the first part of Article 38, automatically they are entitled to proceed on that basis and claim that the company should be wound up forthwith.

21. We are in agreement with the learned judge that the two limbs of Article 38 provide for two different methods of settling the deadlock. It is open to the party aggrieved to choose either of the methods to end the deadlock. If he chooses the first method, he has to offer his shares to the other members at a fair value or offer to purchase the share of the other members at a fair price. If the other party agrees to sell or purchase, the deadlock is ended by such settlement. This part uses the words that the aggrieved party may either sell his shares or purchase the shares of the others and thus settle the matter. The right is thus to purchase the others' shares or sell his shares. The word ' may ' here cannot also be read as ' shall ' ; if the word ' may ' cannot be read as ' shall ', it is obvious that the first part also deals with the method of settlement and not a condition for invoking the second limb of Article 38. If the member does not want to get the matter settled by the process contemplated in the first part, then he is entitled to invoke the method provided for in the second part.

22. It may also be seen that the words ' any member ' in the second limb of Article 38 are wide enough to include any member who may or may not be an aggrieved party. The aggrieved party may refuse to sell or purchase or it may be the other party who refuses to purchase or sell at a fair price. The only condition is that he should be a person who is not willing to follow the procedure prescribed in the first limb. In this case, the respondents have stated that they are not willing to adopt the method provided for in the first limb. They are entitled to state that they are not willing to agree to the methods provided therein to end the deadlock. In fact, the learned judge has referred to the wide and open differences between the respondents' group and the appellants' group and has also catalogued the complaints of the respondents against the appellants. In the light of those circumstances there can be no doubt that it would be asking for the moon to expect the parties to agree to the method contemplated under the first limb of Article 38. We also agree with the learned judge that it is unnecessary in order to claim the relief under the second limb of Article 38 to go through the farce of offering to sell or purchase the shares and that it is the disagreement that mattered. We may also point out that the respondents have expressed that the appellants would not have the fair value fixed, when they have the majority in the meeting and it would be a futile exercise to go through the formality. In the light of the mutual distrust and lack of confidence among the two warring groups, we are also satisfied that it is highly improbable that there would be any agreement between the parties to settle their disputes.

23. In consonance with the right of equal participation in the management and in the affairs of the company, Article 38 also guarantees that should there be any disagreement between the two brothers, the only solution is to have the company wound up. The object and purpose of Article 38 also seem to us to be to guarantee against any undue advantage to any one branch and to ensure, under the threat of losing the entire business itself, that better sense would prevail and the brothers would co-ordinate with each other and that one does not exclude the other from active participation in the management and affairs of the company. In the circumstances, therefore, we entirely agree with the learned judge that the substratum of the company is based on the cordiality and mutual trust and confidence expected of both the brothers in the smooth running of the company. When such cordiality and co-ordination is completely undermined as found by the learned judge with which we agree, there could be no doubt that there is a complete and irresolvable deadlock in the company on account of lack of probity and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern.

24. The Supreme Court in Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla [l976] 46 Comp Cas 91, observed that :

'...when shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding-up on the just and equitable ground,'

25. There could, therefore, be no doubt that a prima facie case for winding-up under Section 433(f) has been made out.

26. The amendment to Article 15 has in no way affected the scope or interpretation of Article 38. Under Article 15, as it originally stood, there was an embargo on selling the shares to an outsider under any circumstances. The amended provision only enables the selling of the shares to an outsider in certain circumstances.

27. Learned counsel for the appellants then contended that no grounds have been made out in the common affidavit, filed in support of C. A. Nos. 843 and 844 of 1981 and also in the affidavit filed in support of the company petition itself for the appointment of a provisional liquidator, that the application for such appointment of a provisional liquidator should have been disposed of on the averments made in those affidavits only and the court should not have taken into consideration the subsequent events. The subsequent event, by itself, cannot be a ground for appointment of a provisional liquidator ; and, in the instant case, the learned judge has not relied on any ground'in the affidavit, but only on an alleged subsequent event of diversion of funds of the company for personal benefit. In support of this contention, learned counsel placed before us the following decisions : Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao [1956] 26 Comp Cas 91, Vidhyasagar Cotton Mills Ltd. v. Nazmunnisa Begum 68 CWN 782 and Mohta Brothers P. Ltd. v. Calcutta Landing and Shipping Co. Ltd, [1970] 40 Comp Cas 119. In Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao [1956] 26 Comp Cas 91, the Supreme Court held that (at page 95) :

' The validity of a petition must be judged on the facts as they were at the time of its presentation, and a petition which was valid when presented cannot, in the absence of a provision to that effect in the statute, cease to be maintainable by reason of events subsequent to its presentation. '

28. In that case, what happened was that an application was filed for the winding up of a company. The petitioner had stated that he had obtained the consent of 80 shareholders, which was more than one-tenth of the total number of members, and had thus satisfied the condition laid down in Section 153C of the Indian Companies Act, 1913. Certain shareholders who had given their consent to the filing of the application had subsequently withdrawn that consent and the number of persons who had consented was reduced to 52. It was, therefore, contended that the condition laid down in Section 153C was not satisfied. It is with reference to this point the Supreme Court made the above observation.

29. The decision in Vidhyasagar Cotton Mills v. Nazmunnessa Begum : AIR1964Cal335 , does not support the case of the appellants and in fact it was held therein that subsequent events can be taken into consideration. In that case, a shareholder who was having a large number of fully paid up shares died intestate on March 11, 1960, leaving his widow, Nazmunnessa Begum, and some other persons as his heirs. His widow as the administratrix to the estate of her husband applied for rectification of the share register by placing her name therein in the place of the deceased. On December 24, 1960, the board of directors of the company resolved to hold the annual general meeting on February 9, 1961, and notice was also issued that the share transfer book of the company would be closed from January 26, to February 9, 1961. The widow of the deceased shareholder obtained letters of administration on January 20, 1961, and on the same date her attorneys wrote to the company requesting registration of the shares of her husband formally in her name, enclosing the original letters of administration and other relevant papers. The widow and her attorneys desired the shares to be transferred before January 25, 1961, by rectifying the share register so as to enable her to vote on February 9, though the board of directors called for a meeting on January 25, 1961, to consider her application for rectification of the share register. They did not rectify the register but adjourned the subject. The share register remained closed from January 26 to February 9, 1961. Thereupon the widow moved an application on January 30 to the court under Section 155 of the Companies Act, 1956, praying for the rectification of the register. On February 8, the company court passed an order restraining the company and its directors from holding the annual general meeting on February 9, except for the purpose of adjourning the same and directed the company to hold a meeting of its board of directors on February 14, for the purpose of considering the application of the widow for rectification of the share register and taking a final decision thereon and giving liberty to file further affidavits. It appeared from the further affidavits filed that one Manzoor Ahmed had applied on February 14 for revocation of the grant of letters of administration of the estate to the widow. On February 14, a meeting of the board of directors was also held, but the meeting resolved that the application of the widow be adjourned till the decision of the court in respect of Manzoor Ahmed's application for revocation of the Letters of Administration. Manzoor Ahmed's application for revocation was dismissed on April 10, 1961; but the rectification of the register was not done. On September 28, 1961, the application of the widow filed under Section 155 was allowed and the court directed the rectification of the share register by inserting her name as the holder of the shares standing in the name of her deceased husband. In the appeal filed against that order, one of the contentions on behalf of the company was that there had been no default or unnecessary delay within the meaning of Section 155(l)(b) of the Act and, consequently, the court had no jurisdiction to pass the order of rectification under Section 155. This was on the ground, namely, that on January 30, 1961, when the application under Section 155 was filed, the board of directors had not considered the application, nor had they rejected it, nor could it be said that there was any unreasonable delay before the application under Section 155 was filed. On the scope of Section 155(l)(b), the Division Bench held that the section covers all cases of improper refusal or neglect and that it has been held that default on the part of the company is not essential and that if upon deciding the question of legal title it appears that the right name is not registered, there is jurisdiction to rectify. The facts disclosed in the further affidavits filed in pursuance of the order of the court made on February 8, namely, that the company had not considered the request for rectification in its board meeting on February 14, and the board adjourning the decision till the decision of the court in respect of Manzoor Ahmed's application for revocation and the fact that the revocation petition was dismissed and still the company had not rectified the register, were taken into account by the learned judges. These events which took place subsequent to the filing of the application under Section 155 were taken into account for holding that there was a default and unnecessary delay in entering on the register the fact of the widow becoming a member and the fact of the deceased ceasing to be a member. Learned counsel for the appellant contended that these subsequent events could not be taken notice of by the court, relying on the decision in Rajah-mundry Electric Supply Corporation Ltd. v. A. Nageswara Rao [1956] 26 Comp Cas 91. The Division Bench of the Calcutta High Court held that the decision of the Supreme Court is in no way inconsistent with the principles enunciated in Raicharan Mondal v. Biswanath Mondal, AIR 1915 Cal 103 ; 20 CLJ 107 and that the court may take notice of events which have appeared since the making of the application and afford relief to the parties on the basis of these events where it is necessary to base the decision on the altered circumstances in order to do complete justice between the parties.

30. It may be seen from the decision that on the date when the application was filed, there was no default or unnecessary delay in the rectification of the register within the meaning of Section 155(l)(b), However, the subsequent facts disclosed there was default or unnecessary delay which was relied on in support of the application for rectification of the order.

31. In Mohta Bros, P. Ltd. v. Calcutta Landing and Shipping Co. Ltd. [1970] 40 Comp Cas 119, a Division Bench of the Calcutta High Court held (at page 127):

' In our view, this question is well settled, namely, that, in a petition under Sections 397 and 398 of the Companies Act, 1956, the court must confine itself to the case as made out in the petition and to the allegations in the petition itself and supporting affidavits, if any, and not look at other evidence with regard to events that might have happened subsequent to the petition.'

32. But this is not the whole statement of the law as may be seen from the latest judgment of the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743. In that case the Supreme Court did take into account facts which came into existence after the company petition was filed. The Supreme Court observed on the facts there (at page 797):

' It is true that in saying this, we have partly taken into account facts which came into existence after the company petition was filed. But those facts do not reflect a new trend or a new thinking on the part of Coats, generated by success in the litigation. Finding that they had succeeded in the High Court, Coats took courage to pursue relentlessly their old attitude with the added vigour which success brings.'

33. The ratio of these decisions, therefore, is that normally the court dealing with an application should confine itself to the allegations in the petition itself and not embark on a rambling enquiry into indefinite charges. However, there is no prohibition to either rely on the subsequent events as pieces of evidence to sustain the grounds already alleged or where having regard to the question to be decided if the court considers it necessary to base a decision on the altered circumstances in order to shorten the litigation or to do complete justice between the parties.

34. In the instant case, though the learned judge has relied on a subsequent diversion of substantial money of the company to the personal benefit of the appellants, the learned judge himself had stated that in the catalogue of charges contained in the main petition itself, the respondents have charged applicants Nos. 2 and 3 with diversion of the funds of the company to their personal benefit, but only adduced events which had taken place subsequent to the filing of the petition also as evidence thereof and, therefore, it is not contrary to law. The learned judge has, after setting out briefly the charges in the petition filed for winding up concentrated his attention on the charge of diversion of the funds of the company by appellants Nos. 2 and 3. After referring to the evidence available and the contention of the parties, the learned judge held that the respondents have established that large funds of Rs. 11,10,000 are diverted elsewhere by the appellants and not utilised for the benefit of the company. We may point out that except making the legal submission, learned counsel for the appellants did not canvass the finding of the learned judge on facts relating to this diversion, though learned counsel for the respondents referred to many documents supporting the finding of the learned judge. We do not think it necessary, in the circumstances, to again trace all the evidence available which shows the diversion of the funds of the company. We may also state that learned counsel for the appellants is not fully correct instating that, the learned judge has relied only on this diversion of the company funds in support of the claim for appointment of a provisional liquidator. The learned judge has referred to the manipulation of records, particularly the minutes books relating to the meeting of the board of directors, by making false entries in the minutes book relating to the meeting, taking advantage of the custody of minutes books in their hands, collusive transfer of share held by the company in Radhakrishna Mills Ltd. to Sri Kanchanlal Hiralal Nanvathi and another at the instance of Vysya Bank Ltd., making false entries in the general body minutes book, transferring 300 shares held by the trust in favour of the third appellant fraudulently and in illegal manner in order to gain superiority in the strength of the shareholding, making feverish attempts to dispose of some of the valuable assets of the company as could be seen from the resolution dated September 25, 1979, and some other (acts. We must also point out that though C. A, Nos. 843 and 844 of 1981 were filed with a common affidavit in support of the same, they came to be disposed of on two different dates and in C. A. No. 844 of 1981, which is for an injunction, the learned judge had made the order on August 19, 1981, in which he had dealt with the question of mismanagement, manipulation of accounts, etc., in detail and it was in those circumstances the learned judge said that he is giving his supplemental or additional justifications in this order for holding that appellants Nos. 2 and 3 are guilty of mismanagement of the affairs of the company and diversion of funds of the company to their personal use as also of manipulating the books of account. The learned judge also held that, in order to prevent the fraudulent preferences and malpractices, it is necessary to appoint a provisional liquidator. We are in entire agreement with this view of the learned judge.

35. On the above findings there is no scope for the contention that the respondents have an alternative remedy of resorting to the provisions of Sections 397 and 398 of the Companies Act and the other argument that the applications for injunction and for the appointment of a provisional liquidator would amount to interfering in matters of internal administration of the company. There is also no substance in the contention of the appellants that by reason of the institution of certain suits in civil courts, the respondents should be deemed to have availed of the alternative remedy in the form of suits and that consequently they cannot file the petition for winding up. As pointed out by the learned judge, the relief sought for in this court could not have been obtained in the suits instituted by the respondents and, therefore, no question of election could arise.

36. For the foregoing reasons, both the appeals are dismissed with costs.


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