Bikkina Gopalakrishna Rao vs Seavalley Resorts Pvt. Ltd.

A. Gopal Reddy J.

This petition is filed by the petitioner who is a shareholder u/s 432 (c) and (f) read with Section 439 of the Companies Act, 1956, for winding up of the respondent-company under the provisions of the Companies Act, 1956.

It is alleged in the petition that the respondent-company was incorporated as a private limited company, limited by shares on July 23, 1987, under the name of "Sea valley Estates Private Limited" and subsequently its name was changed as "Sea valley Resorts Private Limited", and its authorised capital as on March 31, 1996 is Rs. 2,00,000 divided into 20,00,000 equity shares of Rs. 10 each. The issued paid up and subscribed capital of the company is Rs. 94,38,660 into 9,43,866 equity shares of Rs. 10 each. It is further stated in the petition that the main object of the company is to purchase, take on lease or in exchange hire or otherwise acquire and improve all kinds of immovable and movable properties, etc., and also to carry on business of builders, contractors, etc., more particularly mentioned in para. 5 of the petition.

The petitioner who is a shareholder of the company is holding 5,540 equity shares of Rs. 10 each and he was allotted 5,540 shares in the board meeting" of the company held on June 16, 1986, and the share certificates were issued in favour of the petitioner on March 29, 1995 and the said certificates were delivered to the petitioner in April, 1997.

It is further alleged that originally the petitioner was one of the partners of a firm M/s. S. B. K. Construction Company and the said firm was dissolved on December 30, 1985, and that the company was also a partner of the firm and the petitioner was the absolute owner of a vacant site to an extent of 400 square yards which is part of 5,363 square yards situated in Maharanipeta Ward, Visakhapatnam, as he purchased the same under a registered sale deed dated April 25, 1983, for Rs. 50,000. The petitioner''s capital contribution to the firm was the said piece of land in Visakhapatnam.

It is further stated that as the partners decided to convert the partnership firm into a private limited company by transferring all the assets and liabilities of the partnership firm to the new company, a dissolution deed was executed on December 30, 1985, after the settlement of accounts of the firm and the petitioner was to be allotted 5,540 equity shares of Rs. 10 each. It is further stated that subsequent to the dissolution of the firm and incorporation of the company, the company never informed the petitioner about the progress of the company or about the activities undertaken by the company, and even the share certificates were not issued and the petitioner did not receive any notices of annual general meetings or any information or correspondence from the company. Therefore, the petitioner got issued a notice on October 22, 1996, for which the company replied by a letter dated November 14, 1996, stating that shares allotted to the petitioner were released, but there was no mention regarding delivery of share certificates to him and that again on February 1, 1997, he issued a legal notice for sending the share certificates, but still there was no reply, and finally the petitioner got issued a notice dated April 24, 1997, calling upon the company to send the share certificates, upon which the company sent the share certificates for 5,540 shares, but no clarification was given regarding the other queries of the petitioner. Therefore, the petitioner again issued a legal notice on May 24, 1997, enclosing a D.D. for Rs. 100 in favour of the company to send all notices, correspondence, annual reports, etc. to him by registered post as per the provisions of Section 55 of the Companies Act, and the company has replied by its letter dated May 30, 1997, stating that "at present there is no activity that is taking place by them to keep the petitioner informed". In spite of several representations made by the petitioner, the company has not sent any notices, annual reports or correspondence to the petitioner and therefore, he made enquiries with the Registrar of Companies, Hyderabad, and he was informed that the last annual report filed by the company available with the Registrar is for the year 1995-96 and it reveals that the respondent-company is not doing any business, other than incurring nominal expenditure. In view of the fact that the respondent-company is not doing any business, for all purposes has suspended its business and no activity worth the name has even been undertaken by the respondent-company. The petitioner reliably learnt that the company does not intend to do any business for which it was established and the persons managing the company are only interested in disposing of the assets, particularly the land belonging to the company in Visakhapatnam. The petitioner has moved this application for winding up of the respondent-company under the provisions of Section 433 (c) and (f) of the Companies Act, 1956. As he being an original allottee and holding shares from the date of the inception of the company as he is a contributory u/s 439(1)(c), he is entitled to present the company petition. Hence he prayed to wind up the respondent-company.

In response to the notice before admission, the managing director of the company filed a counter admitting the incorporation of the company, It is further stated in the counter that the authorised capital of the company as on March 31, 1996 is Rs. 2 crores divided into 20,00,000 equity shares of Rs. 10 each and the issued paid up subscribed capital is Rs. 94,38,660 divided into 9,43,866 equity shares of Rs. 10 each and that the company has acquired 7,500 square metres of land in S. Nos. 120, 121 in Maharanipet, Visakhapatnam, with the sole object of constructing a five star hotel in the said site and with the above object the land was converted from residential to commercial by the approval of the Government of A. P. by G. O. Ms. No. 502 (MA), dated September 19, 1986. After the above conversion, the respondent-company had approached the Government for exemption of the above land from the provisions of the Urban Land Ceiling Act and the Government through its G. O. Ms. No. 689, dated August 7, 1991, exempted the above land from the operation of the urban land ceiling for the sole purpose of constructing a five star hotel with a condition that it must be completed within three years. In the meanwhile, the respondent-company obtained permission from the Municipal Corporation, and also from the Department of Tourism for the hotel project and when the company was making serious efforts to get financial assistance from the IFCI and the IDBI, the period stipulated by G.O. Ms. No. 689, dated August 7, 1991, was getting expired, then the respondent-company applied for extension of two years time with effect from August 7, 1996. The Government by Memo No. 85474/92-4, dated January 4, 1995, extended the period by two years which expired by August 7, 1996. When the respondent-company was negotiating with the Government, a third party viz ; Kanaka Durga Builders changed the said use of the above land from commercial to residential by G.O. Ms. No. 282, dated June 12, 1995. In view of the change of use of land, the financial institutions did not pass their application for the loan applied for the construction of the five star hotel.

It is further stated that questioning G.O. Ms. No. 282, dated June 12, 1995, the respondent-company filed W. P. No. 27120/95 before this court, for changing the land from commercial to residential purpose and the third party Kanaka Durga Builders also filed W. P. No. 22997/95, seeking a direction that the above land of the company should be taken over by the Government as the land use changed from commercial to residential and obtained status quo order. Both the writ petitions were heard together and this court by its order dated July 2, 1997, allowed the writ petition filed by the respondent-company and dismissed the writ petition filed by the Kanaka Durga Builder. This court while allowing W. P. No. 27120 of 1995 directed the Government of A. P. to consider the application filed by the respondent-company on July 16, 1996, for extension of time under the provisions of Urban Land Ceiling Act, and for enabling the respondent-company to complete the five star hotel in time. As the Government has not taken any action for extension of time in spite of the directions of this court given in W. P. No. 27120 of 1995, the respondent-company filed W. P. No. 32874 of 1998 and the same was disposed of by this court on November 5, 1998, with a direction that the application made by the petitioner on July 16, 1996 and August 11, 1997, before the principal Secretary to the Government, Revenue/UC-III Department shall be considered and disposed of in four weeks. Thereafter the Government of A. P. in G. O. Ms. No. 108, dated February 9, 1999, rejected the request of the respondent-company for extension of time for utilisation of the exempted land beyond August 6, 1996, and also withdrew the exemption granted by G. O. Ms. No. 689, dated August 7, 1991. Questioning the same, the respondent-company filed W. P. No. 4120 of 1999 and the same is pending in this court and this court by an order dated March 3, 1999, suspended G. O. Ms. No. 108, dated February 9, 1999. Therefore, in view of the unforeseen circumstances, the respondent-company could not proceed with the construction of the five star hotel and prayed for dismissal of the company petition.

Learned counsel for the petitioner contended that since the inception of the company, the company is not doing any business and it has not even started any business activity. Therefore, the company has to be wound up u/s 433 (c) and (f) of the Companies Act, 1956.

On the other hand, learned counsel for the respondent-company contended that in view of the legal impediments caused for proceeding with the construction of the five star hotel, which is one of the objects of the company for which it was incorporated, the respondent-company could not proceed with the construction, as stated in the counter and the suspension of business is due to the legal impediment, which had crept in from the date of its incorporation. It is contended that the main object and purpose for which the company was incorporated was to construct the five star hotel in the land acquired by the company and to do the hotel business and since the Government has not granted exemption under the Urban Land Ceiling Act, the company cannot proceed with the business in violation of the statutory provisions. In the above circumstances, he prayed that it is not a fit case for ordering winding up.

He further contended that there is no mismanagement as alleged in the petition by the other shareholders of the company or by those who are at the helm of affairs, and in the absence of any such pleas or evidence, it is not a fit case this court can extend its arm and order for winding up of the respondent-company.

In support of his contention he relied on a judgment in the case of Registrar of Companies v. Bihar Wire and Wire Products Pvt. Ltd. 1975 45 Comp Cas 194, wherein the Patna High Court held that (headnote) :

"The mere fact that business has not been commenced by a company within a year or that business has been suspended for a whole year or more by itself is not a ground for a court to order winding-up of a company, although they give jurisdiction to the court to do so. It has to be found out whether the non-commencement or suspension of business was for some good reason. The fact of commencement or suspension of business is evidence which indicates that the company has no intention of carrying on business or that it is likely to do so. The decisive question is whether there is a reasonable hope of the company commencing or resuming business and doing it at a profit and whether the substratum of the company has disappeared. Another consideration in the matter of order for winding up is taking into consideration the wishes of the majority of the shareholders about continuing the business."

Learned counsel for the respondent also relied on a decision in Paramjit Lal Badhwar v. Prem Spinning and Weaving Mills Co. Ltd.1986 60 Comp Cas 420, wherein the Allahabad High Court discussed about the suspension of business and held that there must be suspension of all business and not some part of it. It was further held that a company can be said to be commercially insolvent, if it is not in a position to meet its current liabilities, as they arise in the ordinary course of business. It was also held that if the company petition is filed by its erstwhile secretary-manager with mala fide intention, then the company cannot be ordered to be wound-up.

Learned counsel also relied on a decision in Tani S. Bhargava v. Sovintorg (India) Pvt. Ltd. 1991 71 Comp Cas 631, wherein the Delhi High Court held that :

"If the company is unable to do business owing to restraint order of court and if assets are sufficient to meet liabilities and majority shareholders opposed to winding-up petition dismissed.".

Lastly learned counsel for the respondent relied on a decision in Daulat Makanmal Luthria v. Solitaire Hotels Pvt. Ltd. 1993 76 Comp Cas 215, wherein the Panaji Bench (Goa) of the Bombay High Court held that (head-note) :

"A winding up has to be resorted to only when other means of healing an ailing company are of absolutely no avail. Remedies are provided by the statute for matters concerning the management and running of a company. The extreme and irretrievable step of winding up must be resorted to only in very compelling circumstances.".

The above decisions relied upon by learned counsel for the respondent-company are aptly applicable to the facts and circumstances of the present case. In the present case, the petitioner has not alleged any mismanagement of the affairs of the company by the majority of its shareholders. Even assuming that, if a notice was not issued to the petitioner, to participate in the general body meeting, no prejudice is caused to him, as long as the respondent-company complies with the statutory obligations, as per the Companies Act and hence the company cannot be wound up. Section 172(3) of the Companies Act also provides that, an omission to give notice to any of the members or other persons to whom it should have been given shall not invalidate the proceedings at the meeting of the company.

Moreover, in the present case the audited reports of the respondent-company have already been filed for the years 1996-97 and 1997-98 before the Registrar of Companies. Therefore, the respondent-company is complying with the statutory obligations under the Companies Act and there is also no mismanagement alleged by the petitioner in his petition. The only complaint of the petitioner is that notice was not sent to him and that the respondent-company has suspended its business, which is not sufficient for ordering the winding up. The suspension of business by the respondent-company is neither intentional nor for any other reasons, but for the reasons beyond the control of the respondent-company as stated by it in the counter. The respondent-company has made all possible efforts to proceed with the construction of the hotel, the purpose for which, it has been incorporated. But due to some unforeseen circumstances beyond its control as stated in its counter, the respondent-company could not proceed with the construction of the five star hotel.

In view of the foregoing reasons, I find no merit in this company petition and accordingly, it is dismissed at the stage of admission. No costs.