C.P. No.67 of 2006 is filed by Sri Ajay Kumar Gupta Dochania, and C.P. No.104 of 2006 is filed by Amarnath Gupta Dochania and 6 others, seeking winding up of the respondent company under Section 433(f) read with Section 439(1)(c) of the Companies Act, 1956 (“the Act” for short). As the respondent company is common in both these company petitions, it would suffice if the pleadings in C.P. No.67 of 2006 are noted. Though several contentions are raised in the company petition, filed for winding up of the respondent company, Sri S. Ravi, Learned Senior Counsel appearing on behalf of the petitioners, would restrict his submissions only to Section 433(c), and submit that it would suffice if this Court were to note the pleadings in support thereof.
Both the petitioners herein are shareholders of the respondent company. While the petitioners claim that they, along with their family members, held 1/3rd of the share capital of the respondent-company, it is the case of the respondents that the entire share holding of the petitioners group, in the respondent company, is only around 10%. The 1st respondent is a private limited company incorporated on 18.10.1978. Its registered office is situated at Hyderabad. The nominal capital of the respondent company is Rs.30.00 Lakhs divided into 30,000 equity shares of Rs.100/- each. Its paid up capital is Rs.9.00 lakhs divided into 9000 equity shares of Rs.100/- each. The 1st respondent purchased, and was allotted land, of an extent of Ac.2-30 guntas (approximately 13,310 sq. yards), by the APIIC at Phase – I, Jeedimetla, Medchal Mandal, Ranga Reddy District, on which it built some sheds. It commenced its business from the year 1978-79 after obtaining term loans from the Andhra Pradesh State Financial Corporation (APSFC) and State Bank of India (SBI). After carrying on business for three years, it started suffering losses, its business started dwindling, and slowly its commercial activity came to a stand still.
The petitioners would contend that no meeting of the shareholders was ever formally held, nor were any notices, of the annual general meetings of the company, ever sent to them; the machinery and movables were sold and appropriated; the 1st respondent has lost its substratum; it has not been carrying on any business for several years; its accumulated losses are substantial, and its assets insufficient to meet its liabilities; and the Balance Sheets for the years 1995-96 to 2007-08, if produced, would establish that the first respondent has lost its substratum. C.A. No.845 of 2009 is filed by the petitioner to receive the Balance Sheets of the respondent-company for the years 2004-2006; and a copy of the list of allotment of shares to several persons belonging to both the groups.
In its counter affidavit, the 1st respondent would detail the circumstances under which it ceased to carry on business. It is their case that their plant and machinery were seized by APIIC; it was, thereafter, registered as a SSI unit with the District Industries Center, Balanagar, Hyderabad on 24.6.2004; the company has now been revived; it is now undertaking trading and other job works; and the winding up petition has been filed without verification, and with malafide intentions and ulterior motives. In the additional counter affidavit, the 1st respondent would reiterate that it is engaged in the job work of printing and steel fabrication and structures, and cannot be said to have lost its substratum.
Both Sri S. Ravi, Learned Senior Counsel appearing on behalf of the petitioner, and Sri V.S. Raju, Learned Counsel for the respondent, made elaborate submissions, and cited several judgments.
Sri S. Ravi, Learned Senior Counsel, would submit that the Balance Sheets, for the years ending 2004, 2005 and 2006, would reveal that the respondent-company is not carrying on its main objects; and, as it has ceased to carry on its main objects ever since the year 2004, it is liable to be wound up under Section 433 (c) of the Companies Act. He would submit that the Balance Sheet as at 31.3.2006 reveals that the income from operations is for a negligible sum of Rs.93,256/-; no manufacturing expenses are reflected therein; the accumulated losses were Rs.1,17,71,112/-; the depreciation statement showed that the 1st respondent had sold its entire furniture, the entire pipe-line, and a substantial portion of its plant and machinery; clause 6 of the notes on accounts, annexed to the Balance Sheet as at 31.3.2004, states that there was no manufacturing or trading activity during the year; the Balance Sheet as at 31.3.2005, and the profit and loss account for the said year, showed that the entire quantity purchased in the year of 320.853 kgs had been sold, and both the opening stock and the closing stock was nil; as the respondent is not carrying on business, in relation to its main objects ever since 2004, Section 433(c) is attracted; Form 45 does not require the sub-clause of Section 433 to be mentioned; the intention of the respondent to revive its business in future is neither protected under Section 433(c), nor is it a ground to deny relief; and, while existence of an alternate remedy may justify refusal to entertain a petition for winding up of a company on just and equitable grounds under Section 433 (f), the provisions of Section 443(2) are inapplicable to a petition seeking winding up under Section 433(c) of the Act.
On the other hand Sri V.S. Raju, Learned Counsel, would draw attention of this Court to the legislative history behind introduction of Section 13(1)(d) of the Act by the Companies Amendment Act, 1965. After narrating the difficulties which the respondent-Company faced, including seizure of its plant and machinery by the APSFC, Learned Counsel would submit that it was only after the loans were repaid was the plant and machinery released in the year 2005. While fairly stating that the respondent-Company is not carrying on business in pursuit of its main objects from the year 2004 onwards, Learned Counsel would submit that it is carrying on trading activity, and is undertaking job works in printing, steel fabrication and structurals which fall within the ambit of clause (c)(5) under the head “other objects”; Section 149(2A), (which was also inserted by the Companies (Amendment) Act, 1965), empowers even a public limited company to carry on business under the head “other objects” if a special resolution is passed to that effect; and, since such a requirement is not stipulated for a private limited company in view of Section 149(7)(a), the respondent (a private limited company) can carry on business under the head “other objects” even without a special resolution being passed by its shareholders. He would draw attention of this Court to Schedule I, Table-B of the Act, and to Form 20-A of the Companies (Central Government) General Rules, to submit that all the objects, in the memorandum, are independent clauses; as such, the respondent company can carry on its “other objects” independently; and, as long as the respondent is carrying on any business, even if it be in pursuit of its “other objects”, it cannot be said to have ceased to carry on business, or to have suspended its business for a year. He would put in issue the maintainability of the Company Petition itself, and contend that, as the company petition is filed under Section 433(f) read with 439 (1)(c) of the Act, it is not open to the petitioner to now seek winding up under Section 433(c) of the Act. According to the Learned Counsel, as the petitioner has an alternative remedy of approaching the Company Law Board for oppression and mismanagement which remedy they have chosen not to avail, the Company Petition is liable to be dismissed in limini; and this Court should not readily accept a request for dissolution, or for winding up, as the company can always revive its business.
FAILURE TO SPECIFY THAT WINDING UP IS SOUGHT UNDER SECTION 433(C) OF THE ACT – IS IT FATAL?
Before examining the rival contentions on merits, it is necessary to consider the objections raised regarding the maintainability of the company petition. In S. Palaniappan v. Tirupur Cotton Spinning and Weaving Mills Ltd ((2003) 114 Comp.Cas.288 (Madras High Court)),the Madras High Court held that, in the absence of specific pleadings and materials to show that the respondent has suspended its business for one year, a petition is not maintainable under Section 433(c) of the Act.
In ordinary circumstances, the petitioners must be confined within the bounds of the allegations made by them in the petition. However, when it is possible for the Court to consider new material in the petition itself, it would not be proper to drive the petitioners to file a fresh petition. (In re Akola Electric Supply Company (Private) Ltd ((1962) 32 Com.Cas.215 (Bom.HC))). Even if an objection has not been raised in the petition, in certain circumstances it can be permitted to be raised. (Narasaraopet Electric Corporation Ltd. v. A. Ramachandram ((1983) 53 Comp. Cas. 100 (A.P))). It is no doubt true that the question, whether the substratum of the company has gone, has to be alleged and proved as a fact, (Madhusudan Gordhandas and Co. v. Madhu Woollen Industries (P.) Ltd. ( 42 Comp. Cas. 125 (SC));K.S. Mothilal v. K.S. Kasimaris Ceramique P. Ltd (Madras) ((2003) 113 CC 562 (Madras High Court)c)), and the petition, in the present case, does not refer to Section 433(c). However, in the company petition, the petitioners assert that, after three years of commencement of business, the respondent started suffering losses; it has slowly started to dwindle; and slowly the commercial activity of the company had completely stopped and ceased; and, for the long past, it had ceased to be a viable commercial entity. In their counter affidavit, the respondent admits that the company is now undertaking trading and other job-works. In their additional counter affidavit, the respondent submits that it is engaged in the job work of printing, steel fabrication and structurals; and it cannot be said to have lost its substratum. It is evident, therefore, that the petitioners’ plea of the respondent having lost its substratum has been understood, and has been rebutted, by the respondent. Rule 95 of the Companies (Court) Rules, 1959 stipulates that a petition for winding up shall be in Form No.45, 46 or 47, as the case may be, with such variations as the circumstances may require. Form No.45 is the General Form of a petition for winding. The heading of the said form is the same as in Form I which is “General heading for proceedings”. While the winding up petition in Form 45 requires details of the petitioner, the respondent, the registered office of the respondent, its nominal capital and its objects to be stated, along with the facts on which the relief is sought, it does not require any reference to be made to the sub-section of Section 433 under which winding up is sought. As the petitioner has specifically pleaded, and the respondent has understood the petitioner’s plea of their having lost their substratum, mere failure to mention Section 433(c) in the company petition is not fatal. I see no reason, therefore, to non-suit the petitioners on this ground.
EXISTENCE OF ALTERNATIVE REMEDY: IS IT A BAR FOR ENTERTAINING A PETITION FOR WINDING UP UNDER SECTION 433(C) OF THE ACT?
Section 433 of the Companies Act provides for six circumstances in which a company may be wound up by the Court. The sixth clause i.e., Section 433(f), namely “just and equitable”, is not to be read asejusdem generiswith the preceding five clauses. Section 433 (f) has to be read with Section 443 (2) of the Act. (Hind Overseas v. Raghunath Prasad Jhunjhunwalla ( 46 Comp Cas 91 (SC))). A contrast between the provisions under clause (a) to (e) of Section 433 of the Act on the one hand, and clause (f) thereof on the other, shows that a bar is created under Section 443(2) of the Act from entertaining a winding-up petition on 'just and equitable' grounds when an alternative remedy is available. (B. Mohan Babu v. Heritage Foods India Ltd., Hyd. ((2001) 5 ALD 800 = (2002) 108 CompCas 771); P Sridevi W/o P Murali Krishna v. Cherishma Housing Private Ltd ((2009) 147 CompCas 130 (AP))). The legislature has consciously chosen not to extend the requirement of compliance with Section 443(2) to any of the other circumstances in clause (a) to (e) of Section 433. Extending the requirement of Section 443(2) also to a petition under Section 433(c) of the Companies Act would either require deletion of the words “just and equitable” or its substitution by the words “the company has not commenced its business within a year from its incorporation, or has suspended its business for a whole year” in Section 443(2) of the Act. It is not a sound principle of construction to brush aside words in a statute, as being inapposite surplussage, if they can have a proper application in circumstances conceivable within the contemplation of the statute. (Gurudevdatta VKSSS Maryadit v. State of Maharashtra (2001(4) SCC 534), Manohar Lal v. Vinesh Anand ((2001) 5 SCC 407)).It is left to the discretion of the Court whether a petition for winding up should be entertained or not despite the fact that an alternative remedy is available, and has been availed by the petitioner. (UTI Bank Ltd. v. Shree Rama Multitech Ltd. ((2005) vol. 126 CC 15 (Guj))). This petition, seeking winding up on the ground that the respondent has suspended its business for a whole year, is not barred merely because an alternative remedy exists. The limitation in Section 443(2) is inapplicable to proceedings under Section 433(c) of the Act.
The Memorandum of Association of the “respondent company” stipulates, in Clause III thereof, the objects for which it was incorporated. These objects are classified into three categories. Under Clause (A) are the main objects to be pursued by the company upon its incorporation. Clause (B) relates to objects incidental and ancillary to the attainment of the main objects mentioned at Clause (A), and Clause (C) details the “other objects”. It is not in dispute that the respondent has, for the past several years, ceased to carry on business in pursuit of its main objects. While Sri S. Ravi, learned Senior Counsel, would contend that failure on the part of the respondent-company to pursue, or carry on business in pursuit of, its main objects, for more than a year would attract the ingredients of Section 433(c) of the Act, and the company should be held to have lost its substratum; Sri V.S. Raju, Learned Counsel for the respondent, would contend that it would suffice if the respondent-company carries on some business, even if such business falls not under the “main objects” but under the head “other objects”.
MEMORANDUM OF ASSOCIATION - INTERPRETATION OF ITS CLAUSES:
The questions which arises for consideration is whether it is permissible for a private limited company to carry on business merely in pursuit of objects classified under the head “other objects”, even if it is not pursuing its “main objects”; or whether a company, (be it a public or private limited company), must necessarily carry on business in pursuit of its main objects and, while a private limited company is free to pursue its “other objects” in addition to its “main objects”, a public limited can do so only if it complies with the conditions prescribed under the Act?; and whether a company which is not carrying on business in pursuit of its “main objects” must be held to have lost its substratum?
Whether or not the substratum has gone depends on a true construction of the memorandum of association, and each case has to be dealt with on its own merits. It resolves to the interpretation of the memorandum of association of the company to find out if the company was incorporated for a particular object only. If so, in view of the disappearance of such business, the court has no other alternative but to pass an order for winding up. (Kumarapuram Gopalakrishnan Ananthakrishnan v. Burdwan-Cutwa Railway Company Ltd. ((1978) 48 Comp Cas 211 (Cal High Court))). The memorandum of association of a company is its charter defining the objects of its existence and operation. Its purpose is to enable the shareholders, creditors and those dealing with the company to know what is its permitted range of enterprise. In setting out the objects of a company, its memorandum usually sets out the several powers which the company will be entitled to exercise in carrying out its objects. (Selvarajan and Co v. Registrar of Companies (1987(62) CompCas 220 (Mad High Court));Cotman v. Brougham ( AC 514)). The memorandum contains the conditions upon which alone the company is granted incorporation – conditions which are fundamental, but some of which are alterable by the correct procedure. The Articles of Association are the internal regulations of the company, and over these the members have full control and may alter them from time to time as they think fit by pursuing the proper course; subject only to this, that they keep within the limits marked out by the memorandum of association and the Act itself. The memorandum is, as it were, the area beyond which the action of the company cannot go; inside that area the shareholders may make such regulations for their own government as they think fit. (Palmer’s Company Law, (25th edition) volume 1, Page No.2070, Para 2.305). Thepurpose (of the memorandum of association) is two fold. The first is that the intending corporator who contemplates the investment of his capital shall know within what field it is to be put at risk. The second is that any one who shall deal with the company shall know without reasonable doubt whether the contractual relation into which he contemplates entering with the company is one relating to a matter within its corporate objects.The narrower the objects expressed in the memorandum the less is the subscriber’s risk, but the wider such objects the greater is the security of those who transact business with the company. (Cotmon (Supra); Nagavarapu Krishna Prasad v. Andhra Bank Ltd ((1983) 53 Comp.Cas. 73 (AP))).
Clause III (A) (1) (i.e., the “main objects”), and Clause III (C)(5) (under the head “other objects”), of the Memorandum of Association of the respondent read thus:-
Clause III (A) (1):
To carry on the business as manufacturers, processors, designers printers, dyers, weavers, spinners, bleachers, mercers, drapers, consultants, finishers and promoters for any or all varieties of silks. Artificial silks, synthetics, polyster, rayon, nylon, cotton or any other types of yarn and cloth, fabrics and linen from any base whether organic and inorganic or compounds or mixtures thereof by physical, chemical or any other process or treatment now prevalent or may be devised in future and of manufacturing the chemicals, Dye-stuffs, equipments, vitriol, washing, bleaching and dying materials and all other requisites needed for all or any of the above purposes and of byproducts which can be conveniently produced therefrom.
Clause III (C)(5):
To carry on business as manufacturers, producers, processors, makers, converters, repairers, importers, exporters, traders, buyers, sellers, retailers, wholesalers, suppliers, indenters, packers, movers, preservers, stockists, agents, sub-agents, merchants, distributors, jobbers, brokers, concessionaires of Aluminium, Aluminium die casting, Iron and Steel, Fan components and allied items connected with above items.
SECTION 13(1)(d) and 149(2A) OF THE ACT: ITS SCOPE?
It is useful to refer to Section 13 (1) before and after the Companies (Amendment) Act, 1965 in juxtaposition with each other:
|Before the Companies (Amendment) Act, 1965||After the Companies (Amendment) Act, 1965|
|(1) The memorandum of every company shall state-|
(a) the name of the company with "Limited" as the last word of the name in the case of a public limited company, and with "Private Limited" as the last words of the name in the case of a private limited company;
(b) the State in which the registered office of the company is to be situate; and
(c) the objects of the company, and, except in the case of trading corporations, the State or States to whose territories the objects extend.
|(1) The memorandum of every company shall state-|
(a) the name of the company with "Limited" as the last word of the name in the case of a public limited company, and with "Private Limited" as the last words of the name in the case of a private limited company;
(b) the State in which the registered office of the company is to be situate;
(c) in the case of a company in existence immediately before the commencement of the Companies (Amendment) Act, 1965, the objects of the company;
(d) in the case of a company formed after such commencement,-
(i) the main objects of the company to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main objects;
(ii) other objects of the company not included in sub-clause (i).
Under Section 149(2A)(a) of the Act a public limited company, which was in existence before the commencement of the Companies (Amendment) Act, 1965, is prohibited from commencing any business in relation to any of the objects stated in its memorandum in pursuance of Section 13(1)(c). The Explanation to Section 149(2A) makes it clear that, even when the memorandum of association hitherto did not classify the objects under “main”, “ancillary” and “other heads”, and all the objects were classified under one head, a company could not any carrying on any new business, not germane to the business which it was carrying on in relation to its objects. The very fact that Section 149(2A)(a), inserted by the Companies (Amendment) Act, 1965, prohibits an existing company from pursuing any “object”, not germane to the “object” already being pursued by it, can only mean that, under Section 13(1)(d)(i) and (ii), a company can pursue its “other objects” only if it is in addition to, and not in substitution of, the main objects for which it was incorporated. Form 20A of the Companies (Central Government) General Rules and Table B of Schedule I of the Act do not lend support to any construction to the contrary.
RESTRICTIONS ON THE POWER OF A COMPANY TO ALTER THE OBJECTS CLAUSE OF ITS MEMORANDUM OF ASSOCIATION:
Section 17(1) of the Act does not permit alteration of the objects of a company, unconnected with the main objects which it is required to pursue. The Section enables a company, by a special resolution, to alter the provisions of its memorandum with respect to its objects to enable it (a) to carry on its business more economically or more efficiently; or (b) to attain its main purpose by new or improved means; or (c) to enlarge or change the local area of its operations; or (d) to carry on some business which, under existing circumstances, may conveniently or advantageously be combined with the business of the company; or (e) to restrict or abandon any of the objects specified in the memorandum. In examining the contentions raised herein, it is unnecessary to make any reference to clause (c) of Section 17(1) of the Act.
A company can alter the objects of its memorandum, by a special resolution, only to the extent required to enable it to do any of the things specified in sub-clause (a) to (e) of Section 17(1), and for no other purpose. That is the limitation. (In Re: Indian Iron and Steel Co. Ltd. ((1957) 27 CC 361 (Cal))). The intention of the Legislature is to prevent too easy an alteration of the conditions contained in the memorandum of association of a company, but there is no intention to shut out a company from making some alteration which is of a nature and quality to enable it to carry on its business more economically or more efficiently, or to attain its main purpose by new and improved means. The words "with respect to" are no doubt words which are not easy of definition. The probability is that the Legislature intended that they should not be too definite, and to give a discretion, but sub-paras (a) and (b) show the sort of course which was intended to be followed - namely, the efficient and economical carrying on of the main objects of the company. (Scientific Poultry Breeders’ Association Ltd., In re ((1933) 3 Comp.Cas.89 (Court of appeal))).
The words 'economically'' and ''efficiently" in Section 17(1)(a) are designedly vague with large import, for the obvious purpose of enabling the company to alter its Memorandum in respect of its objects with as much freedom as possible. (In Re: Indian Iron and Steel Co. Ltd (Supra)). The alteration which Section 17(1)(a) contemplates is an alteration, which will leave the business of the company substantially what it was before, with only such changes in the mode of conducting it as will enable it to be carried on more economically or more efficiently. (In re Cyclists’ Touring Club ((1907) 1 Ch 269)). Under Section 17(1)(b) the objects clause can be altered to enable the company to attain its main purpose by new or improved means. One has to see whether or not the main object is maintained and to see whether or not, while that object is maintained, there is something inserted ancillary to that object - namely, a better method of carrying that object into operation. Where the alterations are desirable for the purpose of more efficiently carrying on the main objects of the company, which are left unaltered, and of attaining those objects by improved means, that the alterations come within the scope of the Section. (North of England Zoological Society v. Chester Rural District Council ((1959) 3 All E.R. 116)).
The important conditions to bear in mind in interpreting Section 17(1)(d) of the Act are (1) the "existing circumstances'' of the company should be considered; and (2) the nature of the proposed new business must be such that, either on the ground of convenience or of advantage, it can be combined with the existing business of the company. The words 'some business' in that clause must include business other than the business which is already being carried on under the existing memorandum. (Bhutoria Brothers (Private) Ltd., In re. ((1958) 28 Com.Cas.122); Straw Products Ltd. v. Registrar Of Companies ((AIR 1969 Ori 91)); Goneshberi Tea Co. Private Ltd., In re ((1964) 34 Comp. Cas 556)). It is essentially a business proposition whether an additional business can or cannot be conveniently or advantageously carried on under existing circumstances with the business of the company. The additional business, of course, must not be destructive of or inconsistent with the existing business. It must leave the existing business substantially what it was before. But the additional business may be one which is different from the original business, and yet may well be capable of being conveniently and advantageously combined with the business which is being carried on. (Modi Spinning and Weaving Mills Company Limited In re ((1963) 33 Comp C. 901 (Allahabad High Court)); and Parent Tyre Company Limited, In re ((1922 (2) Ch 222)). The existing business of the company, when combined with the new business, should advance the purpose of Section 17(1)(d) i.e., “to carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company.” (Punjab Distilling Industries Limited v Registrar of Companies (1963 (33) CC 811 (Punjab High Court));In re Hissar Merchants Transport Co. Ltd (Judgment of Punjab High Court in C O No 3 of 1961 dated 12th May, 1961); In re Indian Iron and Steel Co Ltd. (Supra)and In the matter of Bhutoria Brothers Private Ltd. (Supra)).
Section 17(1)(e) enables a company to amend its objects clause to restrict or abandon any of the objects specified in the memorandum of association. In Re Hampstead Garden Suburb Trust Ltd. ( Ch. 806),the Chancery Division opined:-
“……It seems to me impossible to regard the promotion in this way of a default beneficiary to the status of the primary beneficiary as being within the ambit of the words, "to restrict or abandon any of the objects specified in the memorandum." Mr. Warren contends that the resolution first abandons one object, namely, the institution or institutions having objects similar to the objects of the company, and then restricts the remaining objects, namely, the charitable objects, by confining them to a certain named charity. It seems to me that this ingenious way of putting it disregards one essential element in the alteration, namely, the promotion of the default beneficiary to be a primary beneficiary, irrespective of whether or not there exists an institution or institutions having objects similar to the objects of the company.
The point may be illustrated by supposing a rather simpler provision, comparable to that in sub-clause (T). Suppose that the provision is to transfer the balance to hospital X if existing at the date of the winding up; but if hospital X is not then existing, to hospital Y. It seems to me that a resolution that the balance shall go to hospital Y whether or not hospital X then exists, would clearly not be a provision restricting or abandoning any of the objects specified in the memorandum within the meaning of those words in section 5 of the Act…..”
The objects clause of the memorandum cannot be so altered as to enable a company to abandon its sole “main object”, and thereby pursue any of its “other objects”. A company can avoid carrying on its business in pursuit of any of its main objects, only if the objects clause of the Memorandum is so altered as to abandon that particular main object. The logical corollary thereto is that no company can, without altering its objects clause in accordance with Section 17(1), pursue its “other objects”, instead of its “main objects”, as that would amount to abandoning the main object even without alteration of the objects clause of the memorandum.
In re Bharat Mining Corporation Ltd ((1967) 37 CC 430) the Calcutta High Court held: -
“……….With the name of the company as the Bharat Mining Corporation Limited, it will be not only illogical but misleading to the world dealing with this company to introduce these independent and separate businesses which cannot, by any means, be called business, which, under the existing circumstances, may conveniently or advantageously be combined with the business of the company as in Section 17(1)(d) or that these new businesses are necessary to enable the company to carry on its existing business more economically or more efficiently or to attain its " main " purpose by new or improved means as in Section 17(1)(a) or (b) of the Act……..”
The respondent’s name is “Bhagyanagar Silk Mills Private Limited”, and its main objects are to carry on business as manufacturers, processors, designers, printers, dyers, weavers and promoters for any or all varieties of silks, artificial silk, synthetics, polyster, rayon, nylon, cotton or any other types of yarn and cloth, fabrics and linen. The objects which they claim to be carrying on, (i.e., trading activity, job work of printing, steel fabrication and structurals), is far removed from either their name or their main objects. The respondent, in effect, is misleading outsiders, including its creditors, who are dealing with it, or may do so in the future, on the premise that, in view of its name and main objects, the respondent is carrying on manufacture of silk and silk yarn, when in fact it is merely carrying on business in pursuit of objects wholly alien thereto.
SECTION 13(1)(d): SHOULD A PURPOSIVE CONSTRUCTION BE PLACED THEREUPON?
Even if it is presumed that the construction placed on Sections 13 and 149 of the Act by Sri V.S. Raju is a possible interpretation, this Court should, nonetheless, resort to a purposive interpretation of these provisions. When the material words are capable of two constructions, one of which is likely to defeat or impair the policy of the Act whilst the other construction is likely to assist the achievement of the said policy, then the courts would prefer to adopt the latter construction. It is only in such cases that it becomes relevant to consider the mischief and defect which the Act purports to remedy and correct. (Kanai Lal Sur v. Paramnidhi Sadhukhan (AIR 1957SC 907)). Even if there exists some ambiguity in the language or the same is capable of two interpretations, the interpretation which serves the object and purport of the Act must be given effect to. In such a case the doctrine of purposive construction should be adopted. (Swedish Match AB v. Securities and Exchange Board of India ((2004) 11 SCC 641); Nathi Devi v. Radha Devi Gupta ((2005) 2 SCC 271)). The expressions used in a statute should, ordinarily, be understood in a sense in which they best harmonize with the object of the statute, and which effectuate the object of the legislature. Therefore, when two interpretations are feasible, the court will prefer that which advances the remedy and suppresses the mischief as the legislature envisioned. (Mor Modern Cooperative Transport Society Ltd. v. Financial Commissioner and Secretary to Govt. of Haryana ((2002) 6 SCC 269)). Four things are to be discerned and considered: (1). What was the law before the making of the Act., (2). What was the mischief and defect for which the law did not provide., (3). What remedy the Parliament hath resolved and appointed to cure the disease; (4). The true reason of the remedy. Judges should always make such a construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for continuance of the mischief, and pro privato commodo, and to add force and life to the cure and remedy, according to the true intent of the makers of the Act, pro bona publico.” (Bengal Immunity Co. Ltd. v. State of Bihar (AIR 1955 SC 661); Parayankandiyal Eravath Kanapravan Kalliani Amma (Smt) v. K. Devi ((1996) 4 SCC 76); K.P. Varghese v. ITO ((1981) 4 SCC 173); Goodyear India Ltd. v. State of Haryana ((1990) 2 SCC 71); Pawan Kumar v. State of Haryana ((1998) 3 SCC 309)). It is not only legitimate but highly convenient to refer both to the former Act and to the ascertained evils to which the former Act had given rise, and to the later Act which provided the remedy. (Eastman Photographic Material Company v. Comptroller General of Patents, Designs and Trade Marks (1898 AC 571); In re Mayfair Property Company ((1898) 2 Ch.28)Bengal Immunity Co. Ltd. (Supra); Parayankandiyal Eravath Kanapravan Kalliani Amma (Smt) (Supra)).
A statute cannot always be construed with the dictionary in one hand and the statute in the other. Regard must also be had to the scheme, context and to the legislative history of the provision. (CIT v. N.C. Budharaja and Co., (1994 Supp (1) SCC 280)). It is a cardinal principle of construction that the courts must adopt a construction which would suppress the mischief and advance the remedy. In other words, the court must adopt a purposive interpretation of the provisions under consideration. (A-One Granites v. State of U.P., ((2001) 3 SCC 537)). The courts should, where possible, identify ‘the mischief’ which existed before the passing of the statute and then, if more than one construction is possible, favour that which will eliminate ‘the mischief’ so identified. (Anderton v. Ryan ((1985) 2 All.ER 355))). The Court must adopt that construction which, “suppresses the mischief and advances the remedy” (Pawan Kumar (Supra)).It is the duty of the court to further Parliament's aim of providing a remedy for the mischief against which the enactment is directed, and the court should prefer a construction which advances this object rather than one which attempts to find some way of circumventing it. (Francis Bennion on Statutory Interpretation, 2nd Edn., p. 711; Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd., ((1996) 1 SCC 642)).
The legislature is presumed to have enacted a reasonable statute. (Breyer, Stephen (2005): Active Liberty: Interpreting Our Democratic Constitution, Knopf (Chapter on Statutory Interpretation, p. 99 “Reasonable Legislator Presumption”;Bharat Petroleum Corpn. Ltd.v. Maddula Ratnavalli ((2007) 6 SCC 81); UCO Bank v. Rajinder Lal Capoor ((2008) 5 SCC 257)). To enable a statute to be interpreted in a reasonable manner, the court must place itself in the chair of a reasonable legislator/author. (Ashoka Marketing Ltd. v. Punjab National Bank ((1990) 4 SCC 406); New India Assurance Company Ltd. v. Nusli Neville Wadia ((2008) 3 SCC 279);Rajinder Lal Capoor (Supra);Union of India v. Ranbaxy Laboratories Limited ((2008) 7 SCC 502);D. Purushotama Reddy v. K. Sateesh ((2008) 8 SCC 505);Mahalakshmi Sugar Mills Company Limited v. Union of India ((2009) 16 SCC 569)). In so doing, it would not be permissible for the court to construe the provisions in such a manner which would destroy the very purpose for which the same was enacted. (KrishnaKumar Birla v. Rajendra Singh Lodha ((2008) 4 SCC 300)). ‘Purpose’ is a subjective concept, and the interpreter should imagine himself or herself in the legislator's shoes. There are, however, two elements of objectivity: First, the interpreter should assume that the legislature is composed of reasonable people seeking to achieve reasonable goals in a reasonable manner; and second, the interpreter should accept the non-rebuttable presumption that members of the legislative body sought to fulfil their constitutional duties in good faith. This formulation allows the interpreter to inquire not into the subjective intent of the author, but rather the intent the author would have had, had he or she acted reasonably. (Aharon Barak, Purposive Interpretation in Law (2007) at p. 87; Nusli Neville Wadia (Supra);Rajinder Lal Capoor (Supra); Ranbaxy Laboratories Limited (Supra); D. Purushotama Reddy (Supra); Mahalakshmi Sugar Mills Company Limited (Supra)).
The legislation is primarily directed to the problems before the legislature based on information derived from past and present experience. It may also be designed by use of general words to cover similar problems arising in future. But, from the very nature of things, it is impossible to anticipate fully the varied situations arising in future in which the application of the legislation may be called for, and words chosen to communicate such indefinite referents are bound to be, in many cases, lacking in clarity and precision, and thus giving rise to controversial questions of construction. The process of construction combines both literal and purposive approaches. In other words, the legislative intention i.e. the true or legal meaning of an enactment is derived by considering the meaning of the words used in the enactment in the light of any discernible purpose or object which comprehends the mischief, and its remedy to which the enactment is directed. (Ameer Trading Corpn. Ltd. v. Shapoorji Data Processing Ltd., ((2004) 1 SCC 702); District Mining Officer v. Tata Iron and Steel Co. ((2001) 7 SCC 358)). Parliament intends that an enactment shall remedy a particular mischief and it is therefore presumed that Parliament intends that the court when considering, in relation to the facts of a given case, which of the opposing constructions of the enactment corresponds to its legal meaning should find a construction which applies the remedy provided by it in such a way as to suppress that mischief. (Ameer Trading Corpn. Ltd. (Supra);Halsbury's Laws of England, Vol. 44(1), 4th Reissue, para 1474, pp. 906-07).
If a company, formed after the commencement of the Companies (Amendment) Act, 1965, is held to be entitled to pursue any of its objects, whether under the head “main objects” or the “other objects”, would it not then render Clause (d) of Section 13(1), and the very classification of the objects into three different categories, redundant? It would be wholly inappropriate for this Court to deem that the legislature had, by amending Section 13(1) of the Companies Act and in introducing Clause (d) thereto, indulged in a futile exercise. It is, therefore, necessary to ascertain the purpose for which the amendment was made, and Clause (d) inserted to Section 13(1) of the Act.
From the notes on clauses, explaining the amendment of Section 13(1)(d) of the Act, it is evident that this clause was introduced on the recommendation of the Daphtary – Sastri Committee which, in turn, is based on observations in the Vivian Bose Commission Report; and the purpose of the amendment is to provide for clear definitions of the main and the subsidiary objects of a company in its Memorandum of Association.
The relevant observations of the Vivian Bose Commission report are that it is customary to make the objects and purposes of a company’s memorandum as wide as possible in order to obviate applications to the Court when some new venture is contemplated; while no objection can be taken to make the objects as wide in scope as possible but, at the same time, this practice holds out ample opportunities for participating in activities which are neither the main activities nor are ancillary thereto, but are very remote in character, and far removed from the principal and ancillary objects for which a company has been incorporated; the shareholders should have some say in the matter; and it is, therefore, recommended that (i) the Companies Act, 1956 (1 of 1956) should be suitably amended to provide that every company shall clearly state its purposes and objects under two separate categories, viz., (a) the principal and ancillary objects which the company intends at the time of its incorporation to pursue; and (b) all other objects which are separate from the principal and ancillary ones mentioned in item (a) above; and (ii) a provision should be made in the Act to the effect that a company shall not engage itself in any activities coming within the scope of Clause (b) unless such activities are sanctioned by a special resolution of the company in a general meeting.
The recommendations of the Daphtari – Sastri Committee are that Section 13(1)(c) of the Act requires the objects of a company to be stated in its memorandum of association; the memorandum states what shall be the powers of the company, and the objects for the attainment of which the powers could be exercised; the objects specified in the memorandum give a measure of protection to the subscribers to the share capital and persons dealing with the company, and are intended to indicate plainly and unambiguously the purposes for which the funds of the company can be used or the field of business within which the company’s activities have to be confined; an act, which is beyond the powers of a company, as specified in the memorandum, is ultra vires; a change in the memorandum involves the observance of certain formalities; it has, therefore, become normal to specify objects having a wide scope and variety, and in an anxiety to avoid acts of directors being declared ultra vires, a multitude of objects are specified without any distinction being made between the object and the powers; the principal or real object often gets buried beneath a mass of words, and a multitude of other objects and powers brought indiscriminately into the memorandum; disapproval has been expressed of this tendency, but no attempt has so far been made to correct it; the remedy does not lie merely in making provision for separating the principal objects from other objects, for even then it is possible to include under the head “principal objects” a variety of objects not necessarily having any connection with one another nor reflecting the real intention of the promoters; at the same time, any safeguards provided in this direction should not hamper legitimate corporate activity; further statutory provision should be made, therefore, whereby even at the initial stage, the shareholders have an opportunity to inform themselves of the principal industrial or business activity the company would embark upon; the promoters, the signatories to the memorandum, and the first directors of a company, should be required to obtain the approval of the company, in a general meeting by a special resolution, of the decision of the directors regarding the activities the company shall engage in, in the first instance; thereafter sanction of the company in a general meeting, by a special resolution, should also be obtained, if the directors later on propose to engage in new activities; every such resolution should be incorporated in all copies of the memorandum of the company; provision should be made in the Capital Issues (Control) Act (now the SEBI Act) for informing the Controller of the starting of a fresh business enterprise in accordance with the special resolution; and a copy of the special resolutions, enlarging the business of the company, should be furnished to the Registrar of Companies of the State.
As the recommendations are for a company to pass a special resolution where it seeks to enlarge its business, the intention appears to be to permit a company to pursue its “other objects”, only in addition to its “main objects”, and not in substitution thereof. The legislative intent, in inserting clause (d) to Section 13(1) of the Act, is to ensure that companies pursue the main objects for which they were incorporated. While they may, in addition, pursue any “other objects” also, they cannot pursue only the “other objects” without pursuing the “main objects”. As Section 13(1)(c), before its amendment, enabled a company to pursue any of its objects, (all of which were classified under one head), it was wholly unnecessary for the legislature to insert Clause (d) to Section 13(1) if its intention was to permit a company to pursue any of its objects. The mischief, which the amendment sought to remedy, was that the earlier provision merely required the memorandum to state the objects which enabled a company to pursue any of its objects, even if it be far removed from the object for which it was incorporated. The remedy, which the legislature provided by insertion of clause (d) to Section 13(1), is to classify the objects into “main”, “ancillary” and “other objects”. The legislative intent is evident. The very purpose of classifying the objects under three different heads is to ensure that all companies pursue their main objects. While a company can, in addition, pursue its “other objects”, the legislature did not intend for it to do so without pursuing the “main objects” for which it was incorporated.
LOSS OF SUBSTRATUM:
There can be no hard and fast rule, or uniform principle, applicable to all cases for fixing the relevant date for computing suspension of business by the company, as it will depend on the facts of each case. In considering whether the company has suspended its business for the whole year, ordinarily, the material time is the date when the order is to be passed. (In re Kitson and Co. Ltd ((1946) 1 ALLER 435 (CA))). The date of the order, in such a winding-up petition, would be the material date when the condition of the edifice (substratum) has to be examined. (Kumarapuram Gopalakrishnan Ananthakrishnan (Supra)).It is not in dispute that, in the present case, the respondent is not carrying on business in pursuit of its “main objects” as on date. The counter affidavit filed by them does not reflect any intention on their part to pursue their “main objects” in the foreseeable future. The respondent-company can be said to be carrying on business only if the business, being carried on by it, is in pursuit of its “main objects”. As the respondent has not been pursuing its main objects for the past several years, and has not even indicated any intention to do so in the near future, the only conclusion that can be drawn is that the respondent has suspended its business for the whole year.
The business contemplated under Section 433(c) is a business which a company is authorised to carry on in terms of its memorandum of association. Such business cannot include a business which is ultra vires its powers and is thus illegal and unauthorised or otherwise prohibited by law. (Kumarapuram Gopalakrishnan Ananthakrishnan (Supra)). The fact that business has not been commenced by a company within a year, or the business has been suspended for a whole year or more, gives jurisdiction to the court to order winding up of a company. The fact of commencement or suspension of business is evidence which indicates that the company has no intention of carrying on business or that it is likely to do so. Suspension of business for more than one year cannot be a ground for winding up, if the company has resumed business, the material date being the date of the winding-up petition. The question which needs to be examined is whether there is a reasonable hope of the company commencing or resuming business and doing it at a profit, or whether the substratum of the company has disappeared. (Bikkina Gopalakrishna Rao v. Seavalley Resorts Pvt. Ltd ((2001) 104 Comp.Cas.267 (AP));Registrar of Companies v. Bihar Wire and Wire Products Pvt. Ltd. ((1975) 45 Comp Cas 194); Kumarapuram Gopalakrishnan Ananthakrishnan (Supra)).
The expression "substratum of the company has gone" has a special significance. The word "substratum" signifies the foundation of the company. Once that is taken away, the whole edifice, which stands on it, crumbles. Such a state of affairs, if allowed to continue, would affect the interests of the shareholders and the creditors. (Kumarapuram Gopalakrishnan Ananthakrishnan (Supra)). In determining whether or not the substratum of the company has gone, the objects of the company and the case of the company on that question will have to be looked into. (Madhusudan Gordhandas and Co. (Supra);K.S. Mothilal v. K.S. Kasimaris Ceramique P. Ltd (Madras) ((2003) 113 CC 562)). There is a difference between a company which, on a true construction of its memorandum, is formed for the paramount purpose of dealing with some specific subject matter, and a company which is formed with wider and more comprehensive objects. If the main object is the carrying on a type of business, then, so long as the company can carry on that type of business, it is impossible to say that its substratum has gone. On the other hand to compel the shareholders to remain bound together, even if the main object of a company fails, is to force them into a different adventure to that which they contracted to engage together. (In re Kitson and Co. Ltd (Supra); Kodali Sivakumar v. Navata Agro-products (P) Ltd ((2000)1 Comp LJ 381 A.P)). The winding up order cannot be resisted by merely showing that there are large subsidiary powers contained in the Memorandum of the company. Substratum of the company is deemed to be gone, on a true construction of the memorandum, when the main object for which the company was formed has failed or has become impracticable. (O.P. Basra v. Kaithal Cotton and General Mills Co. Ltd (AIR 1962 PandH 151);In re Cine Industries and Recording Co. Ltd., (AIR 1942 Bom 231)). Where the primary object has failed, and all the other objects are merely ancillary provisions, the substratum is gone. (Lawang Tshang v. Goenka Commercial Bank Ltd ((1961) 31 Comp.Cas. 45 (Cal. High Court));In Re: Suburban Hotel Co., ((1867) 2 Ch 737);In re: German Date Coffee Co., ((1882) 20 Ch D 169)). In such a case shareholders may fairly claim that they ought no longer to be forced to risk their property in going on. (In re Akola Electric Supply Company (Private) Ltd (Supra); p. 702 of Palmer's Company Law. 12thEdn., 1959).
Substratum of a Company is said to have disappeared when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the Company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities, (Seth Mohan Lal v. Grain Chambers Ltd ((1968) 38 Comp.Cas. 543 (SC); Kumarapuram Gopalakrishnan Ananthakrishnan12;Palmer's Company Precedents, volume II, page 29 (17th edition). Where the substratum of the Company is gone, and there is no reasonable chance of the Company starting business again, (Davco Products Ltd. v. Rameswarlal Sadhani (AIR 1954 Calcutta 195)), or its only business has become impossible, it is a ground for winding up. But where the substratum has not completely gone, and other business can be carried on, the company should not be directed to be wound up. (K.S. Mothilal (Supra);Haven Gold Mining Co., In re ( 20 Ch. D. 151);TalduaRubber Co., In re ( 2 All ER 763);Hindustan Cooperative Insurance Society Ltd., In re ( 65 C.W.N. 68)).In this context the distinction, between cases where an act of the board of directors is ultra vires the memorandum of association and cases where the company has to be wound up because the substratum has gone, must be borne in mind. In the first case, as long as the objects clause of the memorandum permits a company to carry on the business, the act complained of would not be ultra vires if it comes within the meaning of any of its objects and it is immaterial whether any particular object is the main object or not. On the other hand, in considering the question whether the substratum of the company has disappeared, it is possible for the court to come to the conclusion that, though the memorandum mentions several objects, and the company is authorised to carry on several businesses, the main object is to carry on one or more businesses only. (Nagavarapu Krishna Prasad (Supra)).
InKodali Siva Kumar (Supra) this Court observed:-
“……….Testing the facts of the case on that touchstone, and the law laid down by the apex court and various High Courts and referred to above, I hold that substratum of the respondent company has gone for the reason, that it has got no funds for the construction of the rice mill or to do the business in rice as it failed to carry on the business in the rice mill which it had previously hired, that the transport business also failed, and the lorry purchased had to be sold out. The Board meeting as also the annual general body meeting could not be convened for the last so many years and that the managing director of the company though claimed to have made attempts yet could not accumulate funds in an attempt to proceed with the construction work of the rice mill or to do the business. He could only succeed in leasing out the land belonging to the respondent company to none else but to his son on a lease money of Rs. 21,000.00 only, which as noted above appears to be on the lower side. Right from the year 1983 till today, as the company could not do any substantial work, it has become defunct. Therefore, it appears to be just and reasonable and fair in the interest of all the shareholders including the managing director of the company in liquidation to wind up the respondent company…………..”
InReserve Bank of India v. Kirloskar Investments and Finance Ltd ((2011) 162 Comp. Cas. 522) the Karnataka High Court held:-
“……….It is clear from the records that, the subject matter of the company has gone and the object with which the company was incorporated has substantially failed, the revised scheme also shows that, the company is intending to do real estate business i.e., the business different from non-banking business. Even the proposed revisable scheme is considered, it does not ensure any profit and it is likely to cause more loss. These circumstances do establish that, the company is not in a position to revive and it is also not in the interest of the public. As the company is not permitted to carry on the business for which it is not incorporated, mainly because there is a reference to real estate business, it is not substantial business for which the company is incorporated…….”
Reliance placed by Sri V.S. Raju, Learned Counsel, on Narasaraopet Electric Corporation Ltd v. A. Ramachandran ((1983) 53 Comp.Cas 100), is misplaced. A subsequent Division Bench of this Court, in Nagavarapu Krishna Prasad (Supra),considered the said judgment and observed:-
“……….The learned counsel for the respondents also relied upon an unreported decision of a Division Bench of this court in O.S. Appeal No. 7/1970, dated January 28, 1974, (Narasaraopet Electric Corporation Ltd. v. A. Ramachandran [since reported in  53 Comp Cas 100 reversing the decision of a single judge which is reported in A. Ramachandran v. Narasaraopet Electric Corporation Ltd.  42 Comp Cas 182 (AP). In that case the Narasaraopet Electric Corporation was acquired by the Government of Madras. The learned judges held that the memorandum of association catalogued as many as 32 items, one of which was to supply electrical energy to Narasaraopet which was taken over by the Government and it was open to the company to carry on other businesses in order to achieve one or more objects of the company. There is no proper discussion of the question as to whether the substratum of the company had disappeared as the main object could not be carried on in view of the acquisition of the undertaking by the Government……” (emphasis supplied)
The judgment of this Court, in Golkonda Engineering Enterprises Ltd v. Ginni Vyappar Ltd ((1997) 1 CompLJ 404), relied upon by Sri V.S. Raju, relates to amalgamation of two companies, and not to winding up proceedings under Section 433(c) of the Act. Likewise, the observations of the Allahabad High Court, in Paramjit Lal Badhwar v. Prem Spinning and Weaving Mills Co. Ltd ((1986) 60 Com.Cas. 420), are inapplicable as Section 13(1)(d) necessitates compliance only by companies formed after the Companies (Amendment) Act, 1965, and not those incorporated prior thereto. Unlike in the present case, the respondent company, in Paramjit Lal Badhwar (Supra), was incorporated in the year 1921 and started carrying on its business of manufacturing cotton yarn from the year 1923 much prior to the Companies (Amendment) Act, 1965.
As the respondent has not been carrying on business in pursuit of its main objects for the past several years, and does not appear to have any intention of doing so in the immediate future, it must be held, prima facie, not only to have suspended its business for a whole year, but also to have lost its substratum, attracting the ingredients of Section 433(c) of the Act. As a prima facie case has been made out, the company petition must be, and is accordingly, admitted.
As required under Rule 24 read with Rule 99 of the Companies Court Rules, 1959, admission of the company petition is required to be advertised in two daily news papers. The petition shall be advertised in Business Standard (English Daily) and Andhra Prabha (Telugu Daily), Hyderabad editions on or before 31st day of October, 2012.