2008 (9) TMI 567 - HC - Companies Law

Winding up of the first respondent-company on just and equitable grounds - Held that - As a result of the deadlock in the ownership and management of the first respondent, there has been continuous statutory non-compliance of the provisions of the Companies Act. Not only has the company failed to keep proper books of account under section 209(1) with respect to the monies received and spent, it has also failed to hold annual general meetings or to lay either before the board or the general body, as required under section 219(1), the balance-sheets and profit and loss account of the company for the past several years. Neither the balance-sheet and profit and loss account nor the report of the board have been prepared annually nor have copies thereof been filed with Registrar of Companies as stipulated under section 220(1). The first respondent has not even appointed auditors under section 224(1) let alone the auditors report being placed before the general body and kept open for inspection of its members. But for owning valuable landed property, the first respondent has not been carrying on any business for the past several years. The deadlock in ownership and management of the first respondent is complete and appears incapable of resolution, leaving no other recourse except for winding up proceedings to be initiated.

Issues Involved:
1. Just and equitable grounds for winding up.
2. Discretion under Section 433(f) of the Companies Act.
3. Applicability of Section 443(2) of the Companies Act.
4. Prima facie case for admission of the winding-up petition.
5. Allegations of mismanagement and deadlock in the company.

Issue-wise Detailed Analysis:

1. Just and Equitable Grounds for Winding Up:
The petition seeks the winding up of the first respondent-company under sections 433(f), 434(1)(a), and 439(1)(b) of the Companies Act, 1956, on "just and equitable grounds." The court emphasized that the "just and equitable" clause is not to be read ejusdem generis with the preceding clauses in section 433, allowing wide judicial discretion. The principle defies precise definition and depends on the facts and circumstances of each case. The court noted that the clause recognizes the personal relationships, rights, expectations, and obligations among the individuals behind the company, which are not necessarily submerged in the company structure.

2. Discretion under Section 433(f) of the Companies Act:
The court has discretionary power under section 433(f) to wind up a company if it deems it just and equitable. The discretion must be regulated by law and the well-known rules of equity, not arbitrarily. The court noted that the use of the word "may" in the provision indicates that it is not imperative to order winding up even if it forms the opinion that it is just and equitable to do so. The court must consider equitable considerations and cannot put them in a straitjacket.

3. Applicability of Section 443(2) of the Companies Act:
The court examined whether section 443(2) bars the exercise of discretion under section 433(f). The twin ingredients under section 443(2) are the availability of some other remedy to the petitioner and whether the petitioner is acting unreasonably in seeking winding up instead of pursuing that remedy. The court noted that section 443(2) does not bar the exercise of jurisdiction but further limits the discretion under section 433(f). The court must be satisfied that the other available remedy is not efficacious for the discretionary jurisdiction to be invoked.

4. Prima Facie Case for Admission of the Winding-Up Petition:
The court considered whether a prima facie case had been made out for the admission of the winding-up petition. The petitioner alleged serious differences and disputes with the second respondent, resulting in a deadlock in the ownership and management of the company. The court noted that the petitioner and the second respondent were the only directors and shareholders, and the disputes had led to the cessation of the company's business. The court found that the allegations and counter-allegations, including forgery, mismanagement, and misappropriation of funds, prima facie reflected a lack of probity in the ownership and management of the company.

5. Allegations of Mismanagement and Deadlock in the Company:
The court noted that the petitioner alleged several irregularities by the second respondent, including the unauthorized removal of the petitioner as a director, appointment of additional directors, and issuance of shares without proper notice or quorum. The court found that the second respondent had not provided sufficient evidence to support his claims. The court also noted the statutory non-compliance by the company, including failure to hold annual general meetings, prepare balance sheets, and appoint auditors. The deadlock in ownership and management appeared incapable of resolution, leaving no other recourse except for winding up proceedings.

Conclusion:
The court admitted the winding-up petition, finding that a prima facie case had been made out under the "just and equitable" clause. The court directed the advertisement of the admission of the company petition and scheduled a date for filing proof of publication.

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