9911796707
TMI Blog1988 (3) TMI 390X X X X Extracts X X X X X X X X Extracts X X X X ..... .P. No. 3 of 1982, an additional ground is raised, viz., that the company has defaulted in delivering the statutory report to the Registrar and also in holding the statutory meeting, within the meaning of clause (b) of section 433. I will first state the facts and circumstances relevant to C.P. No. 2 of 1982. Kowtha Business Syndicate P. Ltd. (hereinafter referred to as "the company") was incorporated in July, 1943, as a private limited company. At the time of its incorporation, it had five shareholders, namely, (1) Kowtha Suryanarayana Rao, (2) C.V. Subba Rao, (3) C. Authikesavulu Chetty, (4) Swadharma Swarajya Sangha Ltd. (a trust registered in Madras), represented by its Honorary Secretary, C.V. Subba Rao, and (5) Indian Commerce and Industries Co. Ltd., represented by its director, Kowtha Mohanram Sastry. Its capital was Rs. 1,00,000 divided into 80 shares of 7½% tax-free cumulative preference shares, and 20 ordinary shares, both of Rs. 1,000 each. At the time of incorporation, the persons mentioned at Nos. 1 to 4 held one ordinary share each, while the fifth person, namely, Indian Commerce and Industries Co. Ltd., held four shares. In course of time, C.V. Subba Rao we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d meetings have to be adjourned because both the directors are not able to arrive at the appointed place, which is causing prejudice to the affairs of the company. It was, therefore, thought advisable for the smooth and efficient functioning of the company that one more director should be appointed to the board of the company. Now, it is significant to notice that Sri K.L. Manohar was not sought to be appointed as a director in the place of his father, Mohanram Sastry, but in addition to him. This was bound to upset the balance hitherto obtaining. If K.L. Manohar was also inducted as a director, the petitioner, Mani, would be in a minority of 2 : 1, whereas previously it was 1:1. In view of the existing differences, the petitioner naturally apprehended that this was a move to reduce his role and importance in the company and opposed the said move by his letter, exhibit A-2, dated May 3, 1980, addressed to the company. He stated that the affairs of the company have been managed well with two directors, and that the proposed addition of one more director, K.L. Manohar, in addition to his father, who is already a director, is unjustified and uncalled for. Notwithstanding the oppositio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the stocks as revealed by the books and the ground stocks. When the petitioner raised this question in a board meeting, he was overruled and no satisfactory explanation was given. Accounts were not being properly kept ; there was duplication of bills, and even cancelled bills were found mentioned in the books, which fact was reported by the internal auditor/ chartered accountant. A sum of Rs. 30,000 has been paid to C. A. Chettiar Charitable Trust every year, which is unauthorised and uncalled for. The objection of the petitioner in this behalf has been overruled. At the annual general body meeting held on September 29, 1981, the petitioner raised several questions which too were overruled highhandedly. While the notice of the general body meeting said that shareholders may attend by proxy, proxies were not allowed at the meeting. Moreover, in July, 1980, a requisition was given for an extraordinary general body meeting and K.L. Manohar was inducted as a director in addition to his father, thus upsetting the even balance obtaining hitherto. The petitioner has been effectively prevented from participating in the affairs of the company. In these circumstances, the company cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany did not hold the annual general body meetings for the past four years, nor have the annual accounts been made up or finalised. On account of non-compliance with sections 166, 210 and 220 of the Act, all the directors were prosecuted by the Registrar of Companies, convicted and sentenced to pay fine by the special judge for economic offences at Hyderabad. After the last annual general body meeting in 1978 for the year ending December 31, 1977, no further annual general body meeting has been held. The directors who retire have to seek reelection at such meeting. But since no such meeting has been held, it must be deemed that there are no directors ; yet, K.L. Manohar and Srinivasan are acting as directors, which is unauthorised. This is a ground for winding-up under section 433(b) of the Companies Act. Both the petitions are opposed by the respondent companies. The several allegations made in the petitions have been denied. It is stated that Mani himself was a director until 1981 ; that he was also in charge of the accounts of Beehive Engineering at Madras and was operating the bank account; that during the scrutiny of accounts for the year 1978, serious irregularities were f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h respect to the discrepancy in the stock of scrap. It was pointed out that according to the books, out of the scrap on ground, only 30 or 31 metric tonnes of scrap belonged to the company, while the balance belonged to the other party ; but, it is not made clear who the other party is. Donations to a charitable trust and purchase of certain materials were also objected to. Exhibit A-25 is the minutes of the general body meeting held on September 29, 1981, which shows that though the notes of the meeting mention that proxies will be allowed, proxies were actually not allowed at the meeting because of a specific provision in the articles of association prohibiting the same. It also shows that Mani wanted to ask some questions, which he was asked to put on a paper and submit. Questionnaire submitted by Mani's son was refused to be answered on the ground that he was not present at the meeting, and that he will be sent a communication in due course. Both Mohanram Sastry and Manohar were re-elected as directors. Exhibit A-27 is a letter dated October 19, 1981, from Mani to the Registrar of Companies bringing to his notice several irregularities allegedly committed by the company. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld on July 5, 1980, at Vijayawada. Exhibit R-5 is a letter from the company (signed by a director) to Mani pointing out several irregularities in the payments made by him at the Madras end. Exhibit R-6 is the resignation letter of Mani dated April 25, 1981. Exhibit R-7 is a lawyer's notice sent to the company on behalf of Mani, denying his sole responsibility for managing the affairs at the Madras end, and stating that Srinivasan was also fully associated with him in all the activities and that he was also in equal control and supervision of the Madras office. It was stated that there is nothing for Mani to explain with respect to the alleged irregularities pointed out in exhibit R-5. Exhibit R-3 is the company's reply (to Mani) to exhibit R-7. All these documents show the growing differences between the parties both before and after Mani's resignation. Exhibit R-22 is a certificate from the chartered accountants of the company stating that the books of the company for the years 1979, 1980 and 1981 are subject to audit. Exhibit R-23 is a letter from Mani to Manohar, dated April 21, 1980, stating that board meetings have not been called for the earlier two years and that it should b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e three families has totally lost its confidence in the others on account of the latters' acts of oppression, highhandedness and mismanagement, it is just and equitable that the company be wound up. On the other hand, the contention of the respondents is that the companies are not in the nature of partnerships ; that the affairs of the companies are being managed well and that they are making profits every year, and that just because some of the shareholders are dissatisfied and/or out voted, the winding up of the company is not called for. It is urged that it is not enough for the minority shareholders to urge that they have lost confidence. They must show that their loss of confidence is for good and sufficient reasons and that it is justified by the acts of the majority shareholders. In this case, the petitioner has singularly failed to establish the same. Indeed, the record shows that it is he who is at fault. The companies cannot be wound up at the mere caprice or wish of a minority shareholder, or minority shareholders, as the case may be. The law on the subject has been elaborately dealt with by the Supreme Court in Hind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of the company is not the real structure, and on piercing the veil, it is found that in reality it is a partnership. While laying down the above principles, the Supreme Court noticed several Indian and English cases, including the oft-cited cases Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch 426 (CA) and Ebrahimi v. Westbowne Galleries Ltd. [1973] AC 360 (HL). In the former case, it was held by the Court of Appeal that if a private company could be fairly called a partnership in the guise of a private company, then the things which might be a ground for dissolution of a partnership will apply also in the case of a private company, and that in this connection, the deadlock is not material. In the latter case, the House of Lords, while reiterating that the words "just and equitable" do not admit of a precise definition, referred to some of the circumstances which may be relevant in holding that a private company is in the nature of a partnership. They were stated to be ; (i)whether it is an association formed or continued on the basis of a personal relationship involving mutual confidence; for example, whether a pre-existing partnership has been converted into a limited company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a director in addition to Mohanram Sastry, Mani could not reasonably object. His resignation from the directorship was evidently in a huff. It cannot also be said in the circumstances that he was forced to resign from the directorship. All that happened was that in Kowtha, they wanted to have one more director, namely, K.L. Manohar, in addition to Mohanram Sastry and Mani-it is immaterial whether it is for the reasons stated in the explanatory note or for some other reasons. Evidently, Mani felt that the unique position he enjoyed until then-being one of the two directors, he had a veto in every matter-would no longer obtain, and that he would become a minority of one against two on the board. But, as I have said earlier, there is nothing unusual in Srinivasan's family and Mohanram Sastry's family claiming two directorships since they together held 2/3rd shareholding interest. It, therefore, cannot be said that the resignation of Mani was a case of exclusion, nor can it be said that he was forced into that position. It must also be stated that the objections raised, or queries sent by Mani, or his son, are not so serious or grave as to warrant a finding of mismanagement on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, if any, complained of by him. The provisions of sections 397 and 398 are there, which he never chose to avail of. In any event, there is no evidence before me to hold that the petitioner has been oppressed or that he has been unreasonably excluded from the management of the affairs of the company. The unfortunate differences and animosities between two closely related families, it is evident, are reflected in this litigation. It is not really because the company is suffering or that there is any mismanagement that a winding up is asked for. It appears to be more on account of personal and temperamental differences. Mr. Kannabhiran argued that, according to the articles of association, there is a restriction upon the transfer of shares. He refers to article 5 of the articles of association of Kowtha, which says that "no transfer of any share in the capital of the company shall be made or registered without the previous sanction of the directors who may, without assigning any reason whatsoever, decline to give such sanction". (To the same effect is article 111(2) of the articles of association of Beehive). He submits that in view of this provision in the articles of association, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : "Provided that if the statutory report is forwarded later than is required above, it shall, notwithstanding that fact, be deemed to have been duly forwarded if it is so agreed to by all the members entitled to attend and vote at the meeting......". It would be evident that the complaint in this case is not about the statutory meeting or statutory report referred to in sub-section (1) and sub-section (2) of section 165. This company had commenced its business long prior to 1978. There can, therefore, be no question of holding a statutory meeting in 1978. For the same reason, forwarding of statutory report is equally out of place. The complaint, however, is about the non-holding of the annual general body meeting as required by section 166, and not approving and submitting the annual accounts and balance-sheet as required by sections 210 to 217. But clause (b) of section 433 refers to the statutory meeting and statutory report referred to in section 165 only. It is, therefore, evident that clause (b) of section 433 is not at all attracted in this case. For the above reasons, both the petitions fail and are, accordingly dismissed, but, having regard to the close relationship bet ..... 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