1972 (5) TMI 45 - HC - Companies Law

Dividend not to be paid except to registered shareholder, Removal of Director, Company when deemed unable to pay its debts

Issues Involved
1. Winding up of the company
2. Allegations of mismanagement and fraud
3. Applicability of partnership principles
4. Alternative remedies and delay in proceedings
5. Exclusion from management and proprietary rights
6. Determination of the value of shares and separation of interests

Issue-wise Detailed Analysis

1. Winding up of the company
The appellant filed a petition for the winding up of the company on November 25, 1960, claiming that the company was a domestic or family concern in the nature of a partnership, and that principles applicable for the dissolution of a partnership should be attracted for its winding up. The appellant alleged that respondents Nos. 2, 3, and 4 were illegally diverting funds and assets to their own pockets, leading to a justifiable lack of confidence in the management. The respondents denied these allegations, stating that the petition was moved with an ulterior motive and that the company was a flourishing concern. After reviewing the evidence, the learned company judge found that the petition was not bona fide but concluded that the company was a domestic company in the nature of a partnership, and thus, partnership principles were attracted for its winding up. However, the judge did not pass a winding-up order due to the delay in the disposal of the petition and the availability of alternative remedies under sections 397 and 398 of the Act.

2. Allegations of mismanagement and fraud
The appellant alleged various acts of mismanagement and fraud, including false debits against her account, non-payment of dividends, and illegal withdrawals by the directors. The respondents denied these allegations, and the learned company judge found that some of the allegations were not substantiated. For instance, the judge found that the entry of Rs. 5,600 debited to the appellant's account was incorrect but not bogus, as the amount was spent on various household expenses over a period of time. The judge also found that the allegations of non-payment of dividends were without basis, as the dividends were being paid regularly and adjusted against the amounts due to the appellant and her son.

3. Applicability of partnership principles
The learned company judge concluded that the company was a domestic company in the nature of a partnership and that partnership principles were attracted for its winding up. However, the judge also found that there was no deadlock in the company's affairs, as the company was carrying on a thriving business and declaring dividends. The judge noted that the appellant had failed to establish any justification for her lack of confidence in the management and that the partnership principles could not be applied to the case.

4. Alternative remedies and delay in proceedings
The learned company judge noted that the appellant had alternative remedies available under sections 397 and 398 of the Act, which she had not pursued. The judge also considered the considerable delay in the disposal of the petition, which had been pending for over ten years. The judge concluded that the delay was largely due to the steps taken by the respondents to defeat the appellant's claim and that the petition could not be dismissed merely on the ground of mala fides.

5. Exclusion from management and proprietary rights
The appellant alleged that she was excluded from the management of the company and that respondents Nos. 2, 3, and 4 were not giving her a legitimate share of the profits. The learned company judge found that the appellant was not keen on participating in the management and that her exclusion from the board of directors was justified. The judge also found that the appellant's proprietary rights as a shareholder were not affected, as she was receiving dividends and other benefits due to her.

6. Determination of the value of shares and separation of interests
The learned company judge ordered that the interest of the appellant and her minor son should be bought over by the group comprised of respondent No. 2 and his real brothers and Shanta Rani, respondent No. 4, after the price of the shares was determined by the court. A chartered accountant was appointed to evaluate the assets and liabilities of the company to find out the value of the shares. The judge directed that the payment should be made in five equal instalments and that the management of the company should be entrusted to a neutral board of directors during the evaluation period.

Conclusion
The appeals filed by both the appellant and the respondents were considered, and the court concluded that the winding-up petition was not justified. The court, however, allowed the appellant an option to surrender her interest in the capital of the company for being taken over by the company, with the purchase price to be determined by the court. The appellant was given six months to exercise this option, failing which her appeal would stand dismissed. The appointment of the chairman of the board of directors and the internal auditors was to come to an end by May 31, 1972. The parties were directed to bear their own costs.

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