2007 (8) TMI 463 - HC - Companies Law

Winding up - Circumstances in which a company may be wound up - Held that - Even if there was no partition and the first petitioner was entitled to equal shareholding and say in management of the company along with his brother, the second respondent, the first petitioner having called upon the Reserve Bank not to renew or cancel the company s licence, is enough for the first petitioner to be disqualified from seeking justice and equity in having the company wound up. The first petitioner s exclusion and the third respondent s induction on the company s board need to be weighed against the first petitioner s conduct. He may have been justified in alleging that company funds had been defalcated by his brother but in issuing dictates to the company s bankers and in exhorting the Reserve Bank to revoke the licence issued to the company, the first petitioner took steps that impeded the functioning of the company. If then, the other remaining director excluded the first petitioner from the management of the company and inducted another to replace him, however illegal, such action can be justified to be in the interest of the company since the petitioners charge of defalcation against the second respondent was yet unproven. The petition fails and is permanently stayed

Issues Involved:
1. Winding up of the company on just and equitable grounds.
2. Allegations of mismanagement and lack of probity.
3. Dispute over shareholding and directorial positions.
4. Validity of the foreign money changer license and its impact on the company's business.
5. Equitable considerations and conduct of the petitioners.

Issue-wise Detailed Analysis:

1. Winding up of the Company on Just and Equitable Grounds:
The petitioners sought the winding up of the company on the grounds of a complete deadlock in shareholding and management, arguing that the company, effectively a partnership between two brothers, could no longer function due to irreconcilable differences. They cited the revocation of the company's foreign money changer license as a reason why the company had no viable business left and should be dissolved.

2. Allegations of Mismanagement and Lack of Probity:
The petitioners accused the second and third respondents of mismanaging the company, usurping its assets, and denying the petitioners any say in the company's affairs. They alleged a significant decline in the company's turnover due to these actions and claimed that the second respondent siphoned off company funds and started a rival business using the company's resources. These allegations were presented as additional grounds for winding up under section 433(f) of the Companies Act, 1956.

3. Dispute Over Shareholding and Directorial Positions:
The respondents contested the petitioners' claims, stating that the company's control had shifted to the second and third respondents following an oral family partition. They argued that the petitioners were supposed to transfer their shares as part of this partition, and thus, the company was no longer a partnership between the two brothers. The respondents also claimed that the petitioners' actions were motivated by ulterior motives and that the petitioners had already consolidated control over other family assets.

4. Validity of the Foreign Money Changer License and Its Impact on the Company's Business:
The respondents suggested that even though the company's foreign money changer license was no longer valid, the company could amend its memorandum to pursue other businesses. They argued that the grounds cited by the petitioners required investigation and could not be used to supplement the demand for just and equitable winding up without being established in a properly constituted action.

5. Equitable Considerations and Conduct of the Petitioners:
The court noted that the petitioners' conduct in having the company's foreign money changing business stopped by requesting the Reserve Bank not to renew the license was a significant factor. This action, which led to the cessation of the company's primary business, was seen as prejudicial to the company and disqualified the petitioners from seeking winding up on just and equitable grounds. The court emphasized that a petitioner should not have done anything to prejudice the company to be entitled to urge such grounds.

Conclusion:
The court dismissed the petition for winding up the company, stating that the petitioners' actions had contributed to the company's inability to continue its business. The court held that the petitioners were not entitled to seek winding up on just and equitable grounds due to their conduct. The petitioners were not precluded from pursuing their allegations in appropriate proceedings, but the petition for winding up was permanently stayed. The application for the appointment of a provisional liquidator was also dismissed, and interim orders, if any, were vacated. The parties were ordered to bear their own costs.

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