Anisha K. Shah vs Fostenex Private Ltd. and others

Mishra, J.—The appellant herein has presented Company Petitions Nos. 62 to 64 of 1992 under sections 433(e) and (f), 434(1)(a) and

439(1)(b) of the Companies Act, 1956, for winding up of the three private limited companies, namely Fostenex Private Limited, Toolex Private

Limited and Brightenex Private Limited. Her husband Ketan L. Shah, her brother-in-law Amit L. Shah and her father-in-law L. M. Shah, it is not

disputed, held the majority of the shares with certain minor shareholdings with the other dependent members of the family of her father-in-law L.

M. Shah. They managed the affairs of the three companies in such a way that the father-in-law L. M. Shah held, of one company as the managing

director; the brother-in-law, of one company as the managing director and her husband, of one company as the managing director. She was

married to Ketan L. Shah on March 31, 1991. She stayed with her husband in the house in the occupation of other members of the in-laws'' family

for some days. She was only newly wed. When she had returned to her parents and was away from Pondicherry, it is stated, her husband

committed suicide on June 10, 1991. Her case in brief is that she was denied the status of a widow of her husband by her father-in-law and

brother-in-law and other members of their family and leaving the details how their relationship got estranged, in sum that she found no provisions

for her, not even the transfer of shares of the above three companies in her name and when she found, it was no longer possible to ensure that she

received what legally belonged to her from her father-in-law and brother-in-law, she moved a civil suit in a sub-court in Pondicherry for partition of

the properties of the family in accordance with law and filed petitions for winding up of the companies in this court on grounds, inter alia, that she

has received no assets as a share in the companies she has moved a petition for appointment of a provisional liquidator to take charge of the affairs

of the companies. The respondents-companies have filed applications seeking dismissal of the petition for appointment of a provisional liquidator.

The trial court has accepted the case of the respondents and declined to appoint any provisional liquidator. It has, accordingly, dismissed both the

applications.

While moving the appeals, learned counsel for the appellant has also moved a petition for an interim order for appointment of a provisional

liquidator and/or such order/direction that may be deemed fit and proper. The respondents have entered appearances after notice. We have heard

learned counsel for the parties and found that not only the application for interim order or direction, but the appeals themselves can be disposed of

and accordingly heard learned counsel for the parties in full.

The respondents who have entered appearance have not denied the fact that the three companies are private limited companies and that the

above named father and sons had a chunk of shares in their names in all the three companies. They have also not denied the claim of the appellant

that she is the widow of one of the two sons who along with their father managed the affairs of the three companies and that after his death, she

alone is entitled to inherit all assets that exclusively belonged to him and/or in common and/or in jointness with other members of the family

including his father and brother, who along with him were in the management of the three companies.

It has transpired that the shares which were held by the appellant''s husband in the three companies were not initially registered in her name after

the death of her husband. The respondents alleged that all such shares which belonged to her deceased husband have been transferred in her name

and she has, accordingly, become a member of each of the three companies in the place of her husband. They, however, do not admit that the

appellant should be made a director or managing director of one of the companies or should be allotted a position in the management of the

companies as her husband had been occupying. According to them, she is entitled to the shares which her husband possessed and all such benefits

which go with the shares, but not a right to have any say in the management of the companies. They have questioned the very bona fides of her

applications for winding up of the companies on the so-called just and equitable grounds, as according to them, these companies have done

nothing to deny to the appellant her legal dues which do not go beyond the right to hold the shares in the companies which her husband held until

his death. Learned counsel for the appellant has contended that the appellant has no other way to protect her interest in the three companies.

According to him, although her husband''s shareholdings are not in any manner does less than the shareholdings of her father-in-law and brother-in-

law, the respondents have transferred in her name only some shares and not all and thus, have denied to her all that they must have legally done

immediately after the death of her husband. He has submitted that her husband held the position of managing director in one of the three companies

(Toolex Private Limited) and even though her father-in-law and brother-in-law together held the majority shareholdings, they are obliged to

appoint her as the director/managing director in the said company and when they have not done so, they have committed an unjust act which alone

is a ground to justify a winding up order. There could hardly be any case other than the case of the appellant, according to learned counsel, in

which a widow of a substantial shareholder of the companies and a managing director of one of the companies, has been oppressed by the

members of her husband''s family who together have the majority shareholdings. They have only abused their powers (1) to deny to her all

legitimate shares; (2) to give to her the position of her husband in one of the companies; and (3) at least to deliver to her the benefits of her

husband''s shares bestowed upon her. Learned counsel for the appellant has pointed out, it is not in dispute, that the companies have been making

profits, but since the appellant made attempts upon her father-in-law and brother-in-law for accounts and money and other properties, they have

failed to declare any dividend and have not paid to her a single penny, whereas they have withdrawn salaries of Rs. 15,000 and Rs. 12,000 per

mensem, (as admitted in the Bar) besides many perquisites as managing director and director of the companies. According to learned counsel for

the appellant, it is well known that the relief u/s 433(f) of the Companies Act which is a just and equitable clause, is in the nature of a remedy of a

last resort and is allowed other remedies are not efficacious enough to protect the general interests of the companies. The appellant has been

advised to move the applications for the winding up of the companies on the said grounds only because resort to suit has failed to achieve even the

preparation of an inventory by a commissioner appointed by the court because her father-in-law had managed to avoid any inspection of the

records of the companies. Learned counsel has drawn our attention to a memo filed by the advocate-commissioner appointed by this court in the

instant proceedings, that is to say, C. P. No. 62 of 1992, which reads as follows :

In pursuant to the commission warrant issued by the High Court of Judicature, Madras, in Company Application No. 1153 of 1992 in Company

Petition No. 62 of 1992, I was accompanied by the petitioner and petitioner''s father from Madras to Pondicherry, on June 5, 1992, by 10.30

a.m. we reached the respondent-company by 3.30 a.m. on June 5, 1992, one Mr. A. L. Shah was present at the office of the respondent-

company Mr. A. L. Shah has told me that he and his father are the directors of the company, he also told me that his father Mr. L. M. Shah is not

in the company.

""I submit that I issued notice to Mr. A. L. Shah asked him to produce the share register and minutes book of the respondent-company. Mr. A.

L. Shah has gone through the notice and asked me to show the court warrant. I gave him a xerox copy of the commission warrant, after he has

gone through the warrant, he has returned both notice and commission warrant saying that he would not give any records without permission from

his father. Then I asked Mr. A. L. Shah to call his father, Mr. A. L. Shah rang up to his father and informed about the commission warrant and

notice.

""I submit that Mr. Lalit M. Shah came to the respondent-company by 4.40 p.m. on June 5, 1992. I gave notice and the xerox copy of the

commission warrant but Lalit M. Shah has refused to receive the same thereafter I asked him to obey the order of Mr. L. M. Shah has gone

through the notice and warrant given by me and told that the share register and the minutes book will not given without his lawyer''s permission. I

asked him to receive notice and make an endorsement as he told me. Finally, he has received notice after long discussion and made an

endorsement in the notice as ''received this copy. I will allow the commissioner to examine books etc. on consulting my lawyer''. The endorsement

made by L. M. Shah in the notice is enclosed with this memo.

""I submit that the respondent-company directors, viz., Mr. A. L. Shah and L. M. Shah have not co-operated with me till 5.25 p.m. on June 5,

1992. In the above circumstances, I was not able to execute the commission warrant issued by this court. Hence I request that this court may be

pleased to pass a suitable order to execute the warrant.

(This content is found in all the three reports of the advocate-commissioner in all the three company petitions).

Learned counsel for the respondents has, however, submitted that it is not proper for the widow of a deceased member of the companies to say

that these companies are in reality only a camouflage for a partnership business. The true elements as to when a private company should be

acknowledged as a partnership is indicated in several judgments of the Supreme Court and this court including the judgment in the case of Hind

Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, and a Bench decision of this court in the case of Kasturi G. v. M.

Murali [1992] 74 Comp Cas 661. Learned counsel for the appellant has greatly relied on the observations of the Supreme Court in the case of

Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, , which read as follows (at page 104 of 46 Comp Cas) :

When more than one family or several friends and relations together for 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. In a given case, the principles of dissolution of partnership may

apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership.

On the allegations and submissions in the present case, we are not prepared to extend these principles to the present company.

On invoking the just and equitable clause, he has pointed out the following observations in the judgment of the Supreme Court in the case of

Hind Overseas Pvt. Ltd. [1976] 46 Comp Cas 91 :

The principle of ""just and equitable"" clause baffles a precise definition. It must rest with the judicial discretion of the court depending upon the facts

and circumstances of each case. These are necessarily equitable considerations and may, in a given case, be superimposed on law. Whether it

would be so done in a particular case cannot be put in the strait jacket of an inflexible formula.

and emphasized the observations in this behalf in the said judgment which read as follows (at page 105) :

...... It is now well established that, the sixth clause, namely, ''just and equitable'' is not to be read as being ejusdem generis ''with the preceding

five clauses. While the five earlier clauses prescribe definite conditions to be fulfilled for the one or the other to be attracted in a given case, the just

and equitable clause leaves the entire matter to the wide and wise judicial discretion of the court. The only limitations are the force and content of

the words themselves ''just and equitable''.

Even though according to him, this is the legal perception of the extent and reach of the just and equitable clause in section 433(f) of the

Companies Act, he has pointed out from the said judgment that in all such cases, it will be necessary that the applicant has to make out a prima

facie case before the court can take any action in the matter and the interest of the applicant alone is not the predominant consideration, but the

interest of the shareholders of the company as a whole apart from the interests of the others have to be kept in mind at the time of consideration as

to whether the application should be submitted on the allegations in the petition.

The salutary observations of the Supreme Court in Hind Overseas Private Limited Vs. Raghunath Prasad Jhunjhunwalla and Another, , are

adopted by a Bench of this court in the case of Kasturi (G.) v. Murali (M.) [1990] 2 LW 177 ; [1992] 74 Comp Cas 661 (Mad). We do not

have any doubt that unless the facts of the case indicate that the members of the company belong to such category and class of people who

together are expected to form a partnership and who are expected to share among themselves equitably and almost equally the benefits of the

company, the court shall not presume the existence of a quasi partnership. It shall, however, so do when there are telltale facts which go to on

other conclusion, but that there is a partnership in the garb of a private limited company. The court must in such a situation do justice and

acknowledge the existence of some sort of understanding between the members of the company to share the profits among themselves and keep

the management of the company in their hands. In Kasturi (G.) v. Murali (M.) [1990] 2 LW 177 ; [1992] 74 Comp Cas 661, this court has

pointed out that in all cases of quasi-partnership, the courts have held that the company was in substance a partnership, it is was a small private

company founded on a personal relationship involving mutual confidence between the members and quoted a passage from Palmer''s Company

Law (Volume I, 24th Edition) at page 1370 (paragraphs 88-07, 88-08 and 88-09) which is as follows :

It has sometimes been suggested that there is an exhaustive list of situations that may fall within the scope of the ''just and equitable'' clause, but it

now seems that, although such classification may be convenient for purposes of presentation, the words ''just and equitable'' require a more flexible

interpretation. In the words of Lord Wilberforce : illustrations may be used, but general words should remain general and not be reduced to the

sum of particular instances. By way of illustration, under this clause winding up orders have been made on the grounds :

That the substratum of the company was gone. The substratum is held to be gone when the main object for which the company was formed has

become impracticable...... that one of the principal shareholders refused to produce accounts or balance-sheets, or to pay dividends, they having a

majority of the voting power.

That the petitioner was excluded from all participation in the business :

That in the case of a small private company, the company was in substance a partnership and the facts would justify the dissolution of a

partnership.

''The last two illustrations relate only to small private companies founded on personal relationship involving mutual confidence between the

members. If in such a case a member commits a breach of good faith which the members owe each other as the result of that personal relationship

and thereby acts inequitably, equitable considerations, imported into section 222(f) by the words ""just and equitable"" may apply and enable the

court to order the winding up of the company. This was the case in Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360, where without wishing

to be exhaustive, Lord Wilberforce described the situation in which such equitable considerations may assert themselves thus......

Proceeding thus to judge the dispute in the instant proceedings before us in the light of the law on the subject, we are inclined to accept prima facie

that three companies of the parties are an extension of a partnership into a private limited company. The facts also indicate that these companies

were/are founded on a personal relationship involving mutual confidence between the parties. There are sufficient materials to indicate that at least

the father-in-law and brother-in-law of the appellant have acted in breach of that confidence and denied to the appellant her shares and the benefits

which go with the shares in a company.

With the above aspects in mind, when we take notice of the conduct of the parties, we cannot but express out dismay at the attitude of the

parties who are presently running the companies in denying even the basics which the widow of a substantial shareholder of the companies was

expected to receive from them. This we say without even for a moment saying, what the appellant should get from the family of the father-in-law as

the share of her husband. It is a preliminary and a basic understanding of any person who is holding the office of management of a public limited or

private company that the business which he is managing is not his alone but is the business of all the members of the company and thus, the benefits

of the business should go not only to him or them who are managing the companies, but to the shareholders as well. We have not received any

explanation in spite of our efforts to know why, when it is admitted by the respondents that they are profit making companies, they have not

declared dividends. The non-declaration of dividends must adversely affect the appellant only and not her father-in-law and brother-in-law, who

are deriving substantial emoluments and perquisites from the companies. In the case of In re A Company (No. 00370 of 1987) [1988] 1 WLR

1068, it has been held that a failure to meet the reasonable expectation of members to receive dividend can provide a ground for winding up

petition. In Anglo-Continental Produce Co. Ltd. In re [1939] 1 All ER 99 , it has been pointed out that oppression of minority shareholders will be

a ""just and equitable ground"" where those who control a company exceed or abuse their power to such an extent as to seriously prejudice the

interests of minority shareholders. It has been held in the case of Zinotty Properties Ltd. In re [1984] 3 All ER 754 that the failure of the majority

shareholders to appoint the petitioner therein as a director after he subscribed for the company''s shares on the understanding that he would be

made a director will justify a winding up order. This is a case, in our opinion, in which the court cannot silently and mechanically observe the

companies being highjacked by those who have not intended fully to honour the interests of a daughter-in-law of the family. There is a serious

allegation in the reply affidavit of the appellant in C. P. No. 64 of 1992, which runs as follows :

I am further advised to submit that since no provision had been made so far as I am concerned and in view of the fact that I had been totally

excluded and not even given personal belongings, just like in a partnership when a person dies"" ""and his legal representatives are excluded from the

affairs of the partnership. It is a fit case that the principles relating to dissolution of partnership should be applied and in fact by death if there is

nothing contrary in the partnership deed the partnership would stand automatically dissolved. Similarly, the company in question should be treated

as partnership and it would also be wound up particularly when there is no enmity and a person like me, a poor widow is totally excluded and no

provision had been made for me and when even my personal belongings are not being returned.

Learned counsel for the respondents has seriously disputed the allegation that the personal belongings of the appellant have been retained by

her father-in-law and brother-in-law. This allegation may or may not be true. But what is established is that the appellant''s father-in-law and

brother-in-law have made no provision for the appellant whatsoever. Having come to the above conclusion, when we proceed to decide what step

the court should take to ensure on the one hand that these private limited companies do not suffer, but on the other hand at the same time, the

appellant''s interests are protected in full, the find difficulty. It will appear easy for a person aggrieved like the appellant to seek the winding up of

the companies and before the final adjudication, to appoint a provisional liquidator, but a court may find it difficult in spite of its satisfaction that

there is prima facie case for the winding up of the companies and the equity in such a situation demands that the appellant should be provided with,

if no better, at least that much which her husband would have provided to her, had he been alive. It will not be in the public interest if on account of

any order of the court the activities of the three companies came to a standstill. The balance of convenience in such a situation, in our opinion, is

somewhere between the appointment of a provisional liquidator to replace completely the father-in-law and the brother-in-law of the appellant

who are in total control of the three companies, and such control that the court may put upon them, that is, the father-in-law and brother-in-law of

the appellant, so that they may not deny to the appellant a due position in the affairs of the companies. Keeping in view the above, we are inclined

to direct that the companies shall continue to function as they have been, subject to the condition that the appellant shall be taken as one of the

directors in all the companies as her husband had been and shall be paid all emoluments that her husband were paid by the companies. To achieve

the above, we direct in the instant case as follows :

(1) The respondents shall furnish before the learned company judge, the detail of the constitution of the board of directors of all the three

companies as it existed before the death of the husband of the appellant and the details of such re-constitution which has taken place after the

death of the husband of the appellant within two (2) weeks from today.

(2) The respondents shall also furnish to the court the details of all withdrawals by the father-in-law and brother-in-law of the appellant from the

companies and shall accordingly indicate as to what the appellant''s husband would have drawn, had he continued in the respondent-companies

with the position he had occupied before his death.

(3) The respondents shall deposit in Company Petitions Nos. 62 to 64 of 1992, the amounts equal to the amounts the appellant''s husband would

have drawn, had he been alive, from the respondents-companies, up to date within a fortnight from this date and shall go on depositing each month

such amount as the appellant''s husband would have drawn from the respondent-companies for appropriation to himself, by the 15th of next

month, until final orders in Company Petitions Nos. 62 to 64 of 1992.

(4) The appellant shall be entitled to withdraw the amount deposited by the respondent-companies in the afore-mentioned proceedings to the

extent of half of the amount deposited in each case in a lump sum every month, without furnishing any security and the rest, if necessary, by making

appropriate application and on furnishing security as determined by the learned company judge.

(5) This order, is subject to any order that may be passed in any other appropriate proceedings, but shall prevail over any other that may be

passed by a court subordinate to this court.

The appeals are accordingly ordered and are allowed to the extent indicated above. There will be no order as to costs.