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TMI Blog2008 (9) TMI 567X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - C.P. NO. 63 OF 2002 - - - Dated:- 23-9-2008 - RAMESH RANGANATHAN, J. T. Surya Satish for the Appellant. R. Raghunandan for the Respondent. JUDGMENT Ramesh Ranganathan, J. This petition is filed under sections 433( f ), 434(1)( a ) and 439(1)( b ) of the Companies Act, 1956, read with rule 95 of the Companies (Court) Rules, 1959, seeking winding up of the first respondent-company on "just and equitable grounds". Section 433 of the Companies Act, 1956, deals with several circumstances under which a company may be wound up by the court. The opening words of the provision "a company may be wound up by the court" shows that the provision itself is discretionary (see K. Mohan Babu v. Heritage Foods India Ltd. ( No. 2 ) [2001] 5 ALD 800 ; [2002] 108 Comp. Cas. 793 (AP)). A further discretion is conferred on the court under section 433( f ) and it is only when the court is sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp. Cas. 91 ; [1976] 3 SCC 259). No general rule can be laid down as to the nature of the circumstances which have to be borne in mind in considering whether the case comes within the phrase "just and equitable" for the purposes of winding up (see D. Davis and Co. Ltd. v. Brunswick ( Australia ) Ltd. [1936] 6 Comp. Cas. 227 ; AIR 1936 PC 114 and K. Mohan Babu v. Heritage Foods India Ltd. ( No. 2 ) [2001] 5 ALD 800 ; [2002] 108 Comp. Cas. 793 (AP)). The words, "just and equitable", are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own : that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. The "just and equitable" provision enables the court to subject the exercise of legal rights to equitable considerations ; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates", which was hitherto carrying on the business of real estate, was taken over as a going concern by the first respondent-company which was incorporated on September 12, 2000, with its registered office at Tirupati. The authorised capital of the first respondent is Rs. 10 lakhs divided into one lakh equity shares of Rs. 10 each. Its main objects are to carry on business in real estate including purchase and sale of land, house plots, forming lay outs, construction of houses/flats, shops, complexes, etc. The petitioner and the second respondent were the only subscribers to the memorandum of association each of them for 100 equity shares, the first directors of the first respondent and, under the articles of association, were entitled to hold such office for life or until their resignation. Serious differences and disputes arose between the petitioner and the second respondent resulting in a complete deadlock in the ownership and management of the first respondent-company, in criminal cases being instituted against each other and, eventually, in the present company petition being filed for winding up. While ordering notice before admission, this court, by order in C.A. No. 278 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld submit that the first respondent-company was more in the nature of a quasi-partnership, that the complete lack of understanding, between the petitioner and the second respondent and the deadlock in ownership and management had resulted in the first respondent not being able to carry on its business from the year 2002 onwards. Learned counsel would contend that the second respondent had no authority in law to remove the petitioner as a director, that, in the absence of the petitioner, there was no quorum for a valid resolution to be passed, that neither was any notice issued to the petitioner calling upon her to attend, nor had the petitioner attended, any meeting in this regard, that in the absence of a valid meeting of either the board, or the shareholders of the company, appointment of two additional directors and issuance of shares to them, or removal of the petitioner as director, was ultra vires both the articles of association of the first respondent and the provisions of the Companies Act and as such was ab initio void. Learned counsel would point out several irregularities indulged in by the second respondent more particularly of his having registered plot No. 52 twi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsate the other to leave the company. Learned counsel would place reliance on section 443(2) to contend that, since the petitioner was acting unreasonably in seeking to have the company wound up instead of pursuing the alternative remedy available to her, the jurisdiction of this court under section 433( f ) of the Companies Act was barred and the company petition should, therefore, be dismissed at the stage of admission. Learned counsel would place reliance on Hind Overseas (P.) Ltd. v. Raghu-nath Prasad Piunjhunwalla [1976] 46 Comp. Cas. 91 ; [1976] 3 SCC 259 and K. Mohan Babu v. Heritage Foods India Ltd. ( No. 2 ) [2001] 5 ALD 800 ; [2002] 108 Comp. Cas. 793 (AP). Does section 443(2) bar, or is it an additional fetter for, exercise of discretion by the court under section 433( f ) of the Companies Act, is the question which necessitates examination in the first instance, for, if it were to be so held, it would be wholly unnecessary for this court to examine the case on its merits. The twin ingredients to be satisfied, under section 443(2), for the court to refuse to make an order of winding up on just and equitable grounds, is the formation of the opinion that ( i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing unreasonably in seeking to have the company wound up instead of pursuing that other remedy. Again under sections 397 and 398 of the Act there are preventive provisions in the Act as a safeguard against oppression in management. These provisions also indicate that relief under section 433 ( f ) based on the just and equitable clause is in the nature of a last resort when other remedies are not efficacious enough to protect the general interests of the company. " (emphasis supplied) It is well-settled that observations in judgments should not be read out of context. A word here or a word there, should not be made a basis for inferring inconsistency or conflict of opinions. The law does not develop in a casual manner. It develops by conscious, considered steps (see Sri Konaseema Co-operative Central Bank Ltd. v. Seetharama Raju, AIR 1990 AP 171 ; [1991] 72 Comp. Cas. 588 (AP) [FB]). Observations of the courts are neither to be read as Euclid's theorems nor as provisions of a statute, and that too taken out of their context. The observations must be read in the context in which they appear to have been stated. The judges interpret statutes, they do not interpret judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontinue working in cases where the affairs of the company are conducted in a manner prejudicial to the public interest or in a manner oppressive to the members concerned (see Atul Drug House Ltd., In re [1971] 41 Comp. Cas. 352 (Guj.)). In examining this question, and with a view to give a quietus to this long pending dispute, as the company petition filed in the year 2002 had not even been admitted, this court explored the feasibility of the parties arriving at a compromise. In its order dated August 30, 2007, this court noted that both counsel had stated that the matter was at an advanced stage of compromise and that a memorandum of compromise would be filed along with individual affidavits of both the petitioner and the second respondent. Thereafter, the matter underwent several adjournments and eventually, on March 18, 2008, this court made it clear that, in case, the parties failed to report compromise within two weeks, the matter would be taken up for hearing on admission. Thereafter, the matter was heard and this court, in its order dated July 11, 2008, considered it appropriate to permit both the petitioner and the second respondent to inform it in writing whether they we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e informed the court that the second respondent was not willing to pay Rs. 4 crores to the petitioner in view of the lack of trust between the parties. The efforts made by this court, to have the dispute amicably resolved, failed. The only contention urged, on behalf of the second respondent, in seeking relegation of the petitioner to the forum of Company Law Board, is that the Company Law Board could direct one of the parties to buy the other party out. As this contention, in view of the above referred events, does not merit acceptance, and as the ground of constitutional deadlock cannot, admittedly, be resolved by the Company Law Board, it must be held, prima facie , that the petitioner cannot be said to have acted unreasonably in not pursuing the remedies under sections 397 and 398 instead of invoking the jurisdiction of this court under section 433( f ) of the Act. The next question to be examined is whether a prima facie has been made out for admission of the company petition under the "just and equitable clause". The petitioner would allege that the second respondent, with the criminal intention to cheat her and the company, had forged her signature and had withdrawn c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectors were present in a board meeting, and had consented to such an appointment, could a resolution passed in this regard be held to be valid. The counter affidavit is silent as to whether any notice, as stipulated under section 286(1), was issued to the petitioner, whether she attended the said meeting and whether the resolution appointing these two persons as directors was with her consent for either in her absence, or without her consent, no such resolution could have been passed. The respondents, for reasons best known, have not chosen to place before this court either a copy of the intimation given by them to the bank on September 23, 2000, or the bank's letter dated March 5, 2002, regarding appointment of two additional directors. Even assuming that these two persons were appointed, under section 260, as additional directors in a board meeting, they were entitled to continue only till the next annual general meeting and not thereafter. The counter affidavit is silent as to when the annual general meetings of the first respondent, were held. It is necessary to note that, under section 166(1), every company shall, in each year, hold an annual general meeting and not more th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice was issued for any board or general meeting for the purpose of removing the petitioner as a director and submit that the procedure under the Act for removing a director had been followed. He would submit that the petitioner, who had received notices from the company, had deliberately avoided attending the meeting wherein the resolutions were passed removing her from directorship and that, in accordance with the resolution passed by the general body, Form No. 32 was filed by the first respondent with the Registrar of Companies. Under section 284 of the Companies Act, the power to remove directors has been conferred only on the general body of the shareholders, and not on the board, that too after a special notice is given of the resolution to remove the director at the meeting, a copy thereof is sent to the director concerned who is entitled to make a representation and to be heard, on the resolution, at the meeting. Section 283 relates to vacation of office by a director and, under sub-section (1) thereof, the office of a director shall become vacant if the ingredients of clauses ( a ) to (1) thereunder are attracted. The counter affidavit filed by the respondents does not r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e equal shareholders and had equal rights over the assets and liabilities of the company, she was deprived of the profits which the company had earned during the course of its business, that the second respondent had breached the trust and had misconducted himself, that it was impossible for both the directors to continue the business any further and that there was no other recourse but to have the company wound up under the just and equitable clause as it was in the best interests of her investments and of third parties/customers who had invested monies, on the trust reposed by them on her, for nearly Rs. 1 crore. On the other hand, the second respondent would contend that the petitioner's sole interest was to freeze the company and, when she was prevented from doing so, she was attempting to have the company destroyed. The first respondent-company, which took over a partnership firm on as is where is basis, is itself in the nature of a quasi partnership. The petitioner and the first respondent, the only two directors for life under article 8 of the articles of association, are also the only two shareholders each holding 50 per cent. of the subscribed capital of the first respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titioner, having claimed to be a director, could not absolve herself of her responsibility of ensuring statutory compliance. The petitioner would allege that no resolution was passed either by the company or the directors to register lands in favour of third parties, that the second respondent had started collecting amounts from third parties in respect of the lands to be sold by the company in the course of its business, totally by passing the petitioner and representing himself to be the managing director, though he was not properly appointed in accordance with the articles of association of the company or the provisions of the Companies Act. She would allege that the second respondent, totally ignoring the investments made by third parties, had started collecting monies from others and was registering plots that were earmarked to those who had already made part payment of Rs. 97,69,900. The petitioner would state that, since the second respondent had indulged in mismanagement, forgery, fabrication and manipulation to enrich himself at her cost and at the cost of other investors, the very purpose of converting the partnership firm into a company was lost, that it was the second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagement 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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