9911796707
TMI Blog1992 (4) TMI 198X X X X Extracts X X X X X X X X Extracts X X X X ..... private limited company in the nature of a partnership as the bulk of the shares are owned by members of two families who are closely related to each other. After the incorporation of the company on October 25, 1985, Mr. P. Venkatasubramaniam who was the initial subscriber and managing director of the company wrote to the petitioner at Bombay, vide letter dated November 30, 1985, and sought his participation in the business venture. By the said letter, the said P. Venkatasubramaniam proposed to have only relatives as shareholders and the share capital will be Rs. 1.10 lakhs. Pursuant to the said request, the petitioner met the said Mr. P. Venkatasubramaniam on February 3, 1986, for a discussion and, in the meeting held on the said date, the said Mr. P. Venkatasubramaniam, hereinafter called PV, agreed with the petitioner's family that the petitioner's family will invest and hold 50 per cent, shares of the company and that the petitioner will be made a working director of the company. This was also confirmed by the letter dated February 18, 1986, sent by PV stating that, for all practical purposes, the petitioner is deemed a director of the company with immediate effect. Upon this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointment was for a period of three years from May 23, 1988, but till date the petitioner has not been paid his salary at all. The petitioner states that he consistently acted only for the benefit of the company. When the said PV and the company urgently required funds, the petitioner pledged his personal National Savings Certificates and obtained a short-term loan of Rs. 18,650 on October 5, 1987, which was to be repaid within three months but PV has not paid the same till date. Besides the above amount, the petitioner also arranged for a personal loan of Rs. 23,000 and the petitioner's relatives have also advanced Rs. 36,000 to the company, which has not been repaid. The residence of the said PV and the registered office of the company are one and the same. Taking advantage of this, the wife of the said PV, Mrs. V. Subbalakshmi, who is also a director in the company, used to personally collect the mail and refused the petitioner any access to the same. This curtailed the right of the petitioner as a wholetime director to know about the day-to-day activities of the company. The petitioner's protest against this met with only further disregard shown to him. The petitioner was not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Rs. 1.05 lakhs, and the loans advanced by the petitioner and his relatives together with interest would be paid in due course. PV refused to commit this repayment in writing. PV refused to permit the petitioner to attend the factory and instructed the workers not to allow the petitioner into the factory premises. Indeed, by a letter dated February 28, 1989, the petitioner was instructed not to visit the factory without his consent. At the same time, the said PV made false and insinuatory allegations that the petitioner had instigated the workers against the company. These allegations were clearly contradicted by the statement of one R. Alagariswamy, who was also present at the time when the petitioner sought to visit the factory. The petitioner further states that, from the beginning, it has been the intention of the said PV to get money from the petitioner and his family, and that he had no intention to give due participation to the petitioner in the affairs of the company. The gross mismanagement on the part of the said PV has resulted in the company being financially crippled. The company has been unable to repay the loan/interest to the Tamil Nadu Industrial Investment Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his qualification and experience. The respondent-company further states that, at the time when the company was floated, the petitioner was without a job and that, therefore, the company chose to utilise his services. The other allegations made in the company petition have also been denied. The allegations that the petitioner and his family members were inducted only for their money and that there was no real intention of involving the petitioner in the active participation and management of the affairs of the company are all imaginary and unsustainable. The respondent company have, therefore, prayed that this company petition may be dismissed and justice rendered to them. On behalf of the petitioner, exhibits P-l to P-19 were marked and on behalf of the respondent-company, exhibits R-l and R-2 have been marked. No oral evidence was let in by both parties in this case. Hence the matter was posted for arguments on October 3, 1991, and the arguments were heard on various dates. Mr. Arvind P. Datar, learned counsel appearing for the petitioner, submits that the respondent-company is liable to be wound up on the following five grounds: 1.There is a complete failure of substratum and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent-company in the pleadings by way of evidence. Thus, in the present financial state of affairs, there is no hope whatsoever of the respondent-company becoming a viable unit. In addition, the respondent has not paid any interest to the financial institutions particularly the Tamilnadu Industrial Investment Corporation. (iii) The activities of the respondent have virtually come to a standstill. The respondent-company has a press mould with installed capacity of 30,000 kgs. per annum and hand mould of 4,800 kgs per annum. The actual capacity utilisation is as follows : Press mould Hand mould 89 90 91 89 90 91 Production 168 10 Nil 1420 643 784 kg. kg. kg. kg. kg. kg. Capacity utilisation 0.56% 0.03% 0.00% 29.58% 13.39% 16.33% This shows that the press mould machinery is lying unutilised whereas the same has been purchased for Rs. 12.32 lakhs by taking a term loan from the Tamilnadu Industrial Investment Corporation. The figures mentioned above have been taken from exhibits P-18 and P-19, namely, the balance-sheets filed by the respondent-company itself. Mr. Arvind P. Datar, in support of his contentions, has invited my attention to the following two d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Hema Sampath submits that the petition merely states that the substratum has disappeared without any basis and with mala fide intentions. The balance-sheets filed are subsequent to the filing of the above petition and the company can be restarted at any time if the Damocles sword of the petition is removed. The decision in Kumarapuram Gopalakrishnan Ananthakrishnan's case [1978] 48 Comp Cas 211 (Cal), deals exhaustively with the meaning of "substratum" of business. The petitioner must prove the three things mentioned above. The petitioner has failed to prove the same as alleged. According to the respondent, the company has enough assets and the project is very good and the business can go on and grow and winding up could not be resorted to and the company can be restarted at any time if the Damocles sword of the petition is removed. I am unable to appreciate the contention of learned counsel for the respondent. In my view, the petitioner has made out a prima facie case in the petition. If the averments in the petition are read with the documents, it will be seen that -- (a)it is impossible to restart the company or carry on the business except at a loss, as could be seen from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it is only the unreasonable conduct of PV the managing director of the company, his financial irregularities with the banks, and expulsion of the petitioner that has led to the filing of the present winding up petition. Copies of the orders of the courts below referred to by the respondents have also been marked as documents, exhibits R-l and R-2, before this court. Further, Mr. Arvind P. Datar says that a civil revision petition was filed before this court against an order in C.M.A. No. 58 of 1989, but the same could not be pursued as the matter had become infructuous and that the petitioner decided to return to Bombay. Hence, it is false on the part of the respondent to state that the petitioner filed the winding up petition only after these orders were passed. On the contrary, exhibit P-13 dated March 8, 1989, is a notice of the meeting to remove the petitioner and the petitioner has issued notice for winding up the company on March 9, 1989, itself and filed the present company petition soon thereafter. The petitioner, therefore, submits that the respondent is not correct in stating that no prima facie case has been made out. In my opinion, the petitioner has established th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that there is absolutely no scope or hope of revival of the respondent-company and hence the respondent-company is liable to be wound up on the first ground alone. Ground No. 2: If the shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case of winding up on the just and equitable ground: The Supreme Court in the decision in Hind Overseas P. Ltd. v. Raghunath Prasad jhunjhunwalla [1976] 46 Comp Cas 91 , 104 has laid down the above principles which have been made as ground No. 2. As mentioned above, ground No. 2 would, in my mind, apply to the present case as there has been lack of probity and there is no hope or possibility of continuance of business. The petitioner and his family invested in the share capital of the respondent-company on the basis that he would be made a director. Although the funds were invested in March/December, 1986, the petitioner was made a director only in May, 1988, vide exhibit P-5. Right from the beginning, the managing d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue to his feeding false information to the banks, the company had to face financial constraints. When personal animosities cropped up, the managing director of the company showed his bona fides by offering to quit the company, vide exhibits P-8 and P-9, but the petitioner did not take up the offer for obvious reasons. Referring to exhibits P-7, P-9 and P-10 to P-12, Mrs Hema Sampath submits that these exhibits clearly reveal the subversive activities of the petitioner. He was constantly in touch with the banks and the dealers and was spreading tales about the running of the company and he also tried to turn the workers against the company and due to these, the company could not function smoothly. An extraordinary meeting was to be called to remove the petitioner from the board under exhibit P-13. The petitioner filed O.S. No. 222 of 1989 in the Sub-court, Madurai, for an injunction restraining the company from passing any resolution removing the petitioner from the board. Injunction was refused. The appeal C.M.A. No. 58 of 1989 before the first Additional District judge, Madurai, was also dismissed. Copies of the orders have also been marked as exhibits R-l and R-2 in these proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e clause : (i)The company should be formed on the basis of personal relationship and mutual confidence. (ii)There should be an agreement or understanding that some of the shareholders would participate in the conduct of the business as in the case of a partnership. (iii)The exclusion of a director/member from management would justify the winding up even if removal of the director is in exercise of the powers of the majority shareholders. A similar view has been taken in Lundie Bros. Ltd., In re [1965] 35 Comp Cas 827 (Ch D). The House of Lords' judgment has been followed by the Court of Appeal in Topps Chewing Gum Ltd., In re [1975] 1 All ER 1017, 1028. In this case, the relevant passage from the, decision of the House of Lords is quoted and a xerox copy thereof has been enclosed. Under the Partnership Act, section 44 stipulates the clauses which would justify dissolution of the firm ; it was submitted that the provisions of clauses (c), (d ), (f) and (g) of section 44 would squarely apply. The relevant clauses are set out below: "44. (c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudically the carrying on of the business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would, therefore, justify the winding up of the respondent-company. I see much force in the contention of learned counsel for the petitioner. Mrs. Hema Sampath, in reply to the above contentions, submits that the principles of dissolution of partnership cannot be liberally invoked in a winding up petition. Learned counsel invited my attention to the judgment in Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla, [1976] 46 Comp Cas 91, 104 ; AIR 1976 SC 565. In the said decision, at page 574 in paragraph 13, the Supreme Court held as under: "When more than one family or several friends and relatives together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besides, it is only when shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on the just and equitable ground. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 433(f) of the Act. I am unable to agree with the contentions raised by Mrs. Hema Sampath on this point. The principles of dissolution of a partnership can be invoked if the company is in the nature of a partnership. The petitioner has specifically alleged that the present company is in the nature of a partnership and liable to be dissolved as could be seen from paragraph 21 of the petition. This averment has not been denied in the counter-affidavit. I have carefully analysed the reasons mentioned in the arguments of Mr. Arvind Datar on ground No. 3 mentioned above. I am of the view that the principles of dissolution of a partnership would apply and justify the winding up of the respondent-company. The facts of the present case would also justify this court in exercising its discretion and ordering winding up of the respondent-company. The petitioner had been thrown out of the management of the company unjustifiably, and the winding up petition has been filed by the petitioner on the ground that it is just and equitable to wind up the company. The petitioner denies that he has filed the winding up petition to stall his expulsion from the company. The notice for this pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fidence for a particular business objective, viz., manufacturing of light fittings and that the same has completely failed. There is no hope or scope of reviving the company. Hence, there is no alternative remedy except to wind up the company. In such a situation, it has been held that the affairs of the company should be terminated as soon as possible. Reliance was placed on the decision in Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch. 426, wherein it was observed by Lord Cozens-Hardy M.R. as under (at page 432) : "If ever there was a case of deadlock I think it exists here ; but whether it exists or not, I think the circumstances are such that we ought to apply, if necessary, the analogy of the partnership law and to say that this company is now in a state which could not have been contemplated by the parties when the company was formed and which ought to be terminated as soon as possible". This decision was quoted with the approval by apex court of our country in the decision in Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 , 105: "In an application for the winding up of a company under the just and equitable clause, allegations in the petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g up. I have given my deep and anxious consideration to the grounds raised by both parties and the arguments advanced by both parties. The financial position of the company is beyond redemption as the sales are only Rs. 90,000 per annum as against the outstanding loans of Rs. 15.3 lakhs and accumulated carry forward loss of Rs. 8.8 lakhs. The expensive machinery of Rs. 12 lakhs was not utilised during the year 1991 and the affairs of the respondent-company have virtually come to a standstill. There is evidence to establish that banks have refused credit facilities because of the present position. The reference to the decision of the Calcutta High Court in Kumarapuram Gopalakrishnan Ananthakrishnan v. Burdwan-Cutwa Railway Co. Ltd. [1978] 48 Comp Cas 211, is not correct In that case, the proposal to run a Railway could not be implemented as the Railway business was taken over by the Government. However, the company had no creditors or liabilities and had sufficient share capital to carry on other business specified in the memorandum of association. In the present case, the respondent is unable to repay even the interest and the share capital has been completely wiped out. Replying ..... X X X X Extracts X X X X X X X X Extracts X X X X
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