Dharmappa P. Hanji and Others vs Jayhind Techno Machines P. Ltd.

Aravind Kumar, J.—This petition having been admitted on January 20, 2010 and the advertisement of petition having been deferred and matter having been posted for final hearing, the same is taken up for final disposal though Sri C.K. Nanda Kumar submits that petition is required to be considered only for advertising. However, he has also addressed arguments on the main petition on merits. The petitioners are invoking section 433(c) and (f) of the Companies Act, 1956, with the following prayers:

(a) Direct the winding up of the first respondent-company, Jayhind Techno Machines P. Ltd.

(b) Appoint the official liquidator attached to this hon''ble court or any other fit person as the liquidator of the respondent-company and may be given all powers under the provisions of the Companies Act including the charge of shares, books of account, records, documents, papers, bills, etc., of the company.

It is contended that the petitioners are shareholders in the respondent-company and the first petitioner is a director of the respondent-company. It is contended that the respondent-company was incorporated in the year 1981 and is having its registered office at Belgaum and it was incorporated with the object of manufacturing of iron and steel castings as per memorandum and articles of association at annexure A. It is contended by the petitioners that though the respondent-company was incorporated in the year 1981 with an intention of conducting business and involving itself in manufacturing of iron and steel castings directly it did not carry on such business activity but the respondent-company became partner in a partnership firm run under the name and style of "Jayhind" till March 31, 1999 and thereafter it retired from the said partnership firm.

It is contended that the petitioners are of "Hanji" family owning 25 per cent. of the paid-up share capital in the respondent-company remaining 75 percent of the paid-up share capital is held by the members of "Humbarwadi" family. It is stated that Jayhind Engineering was running a partnership with participation from the members of both the families in the ratio of 25 : 75, i.e., Hanji family 25 per cent. Humbarwadi family 75 per cent. interest. The contention of the petitioner is that after retirement of the respondent-company from the partnership firm, a sum of Rs. 59,22,978 was payable to the respondent-company by the said partnership firm and as on date a sum of Rs. 14,48,305 has remained unpaid and the same is reflected in the balance-sheet of the respondent-company as loan to M/s. Jayhind Engineering. It is also contended that the respondent-company has given a loan of Rs. 44.74 lakhs to M/s. Ashok Iron Works P. Ltd., which is earning abysmal low interest at 7.5 per cent. per annum. It is contended that the respondent-company has not taken measures for commencement of its activities as envisaged in the memorandum and articles of association in furtherance of main object. It is contended that funds of the company having been advanced as a loan to Jayhind Engineering and submits that the balance-sheet of the respondent-company as on March 31, 2007, clearly shows that the respondent has not undertaken any business activity except earning interest on inter corporate loan from M/s. Ashok Iron Works Ltd. It is also stated Jayhind has not paid any interest on the amount due and payable. It is also contended that the balance-sheet for the year ended March 31, 2008, also does not reflect good financial status of the company. It is contended that the respondent-company is not engaged in any business activity for the past one year and funds are kept idle in the form of advance to sister concerns with meager interest or without interest and it cannot be termed business activity. It is also contended that the respondent-company has not declared any dividend to its shareholders and surplus income generated is misleading and does not commensurate with the total investment and shareholders and have not been benefited from the activities of the respondent-company.

It is contended that M/s. Ashok Iron Works P. Ltd., wherein Hanji family are minority shareholders have been declared by the Company Law Board in C.P. No. 54 of 2005 (since reported in-- (2008) 145 CompCas 717 as conducting affairs of the said company as prejudicial to the interest of shareholders and oppressive and the said order of the Company Law Board has reached finality in view of the order passed by this court in Company Appeal No. 11 of 2006 and though SLP No. 19910 of 2007 came to be filed it was withdrawn. It is also contended that in respect of another company by name M/s. Nutan Investments and Trading P. Ltd., wherein "Hanji" and "Humbarwadi" family are having shareholding in the ratio of 25 : 75 and in respect of the said company also a petition in C.P. No. 70 of 2007 has been filed before the Company Law Board for various acts and the same is pending adjudication.

It is contended that there is no business activity of the respondent-company from the date of incorporation and it has not engaged in any business activity and as such the petitioners seek for winding up of respondent-company on the ground that no useful purpose would be served by keeping the respondent-company alive and active. It is also contended that on account of the respondent-company not commencing the business activity the substratum of the company has been lost and no useful purpose would be served in keeping the respondent-company alive. On these grounds the petitioners seek for winding up of the respondent-company.

The respondent having appeared on service of notice, have filed written objections to the petition and opposed the winding up of the respondent-company. It is contended that the company petition is not maintainable and no extraordinary circumstances is made out by the petitioners to invoke section 433 of the Companies Act. It is further contended that if the petitioners are aggrieved by the act or deed of the respondent-company of oppression or mismanagement, they are at liberty to approach the Company Law Board and cannot invoke section 433 of the Companies Act. It is further contended that the respondent-company is a debt free company with reserves and surplus of Rs. 73,00,000 and it is admitted by the respondent the pattern of shareholding between the petitioners and respondent. It is further contended that the respondent-company was incorporated with the object of manufacture, machining of iron and steel castings and it would cover all objects as are permissible under law and by virtue of clause 13 of the memorandum and articles of association of company it can enter into partnership or into any arrangements for sharing the profits, amalgamation, union of interest, reciprocal concession or incorporation, etc. It is contended that the respondent-company was a partner in M/s. Jayhind Engineering a partnership firm and the said partnership as per clause mentioned in the partnership deed, it was agreed no interest would be payable to any partner on the amount due to him and as such no interest is payable by the firm to the respondent-company. It is also contended that during the existence of the said partnership, the board decisions were taken in adherence to clauses 13 and 31 of the memorandum and articles of association. It is contended that during the said period, i.e., till September, 2006 the board of directors consisted of two directors, namely, the first petitioner herein and Sri Gundappa D.S. Humbarvadi who is the managing director of the respondent-company. It is contended that the first petitioner is a party to all the decisions taken by the board and having actively participated in the board deliberations, the petitioners now on account of certain disputes between the two families out of vengeance, the present petition is filed. It is also contended that till the year 1999, the respondent-company having invested amount as a partner in Jayhind Engineering and in turn carrying on machining and manufacturing of iron and steel castings was earning good returns on the investment made and thereafter the respondent-company has invested its funds in M/s. Ashok Iron Works P. Ltd., which is earning interest at 7.5 per cent. per annum and as such the claim of the petitioner has been denied. It is also contended that the respondent-company is a debt free company and averments made in the petition has been denied in toto.

The petitioners have filed rejoinder and traversing the statement of objections filed by the respondent and denied the contents of the same.

Heard the learned advocates for the parties, namely, Sri C.K. Nanda Kumar appearing for the petitioner and Smt. Vijetha R. Naik appearing for the respondent-company. Sri Nanda Kumar reiterates the averments made in the petition and the grounds urged in support of the prayer made in the petition and would draw the attention of the court to the memorandum and articles of association which is produced at annexure A to contend that the main object of the respondent-company with which it was incorporated was to carry on the activity of machining of castings of steel, iron, ferrous, non-ferrous material as enumerated in the objects at clause A and the objects incidental or ancillary to the main object cannot be held to be the main object of the respondent-company. As such he would contend that the defence set up by the respondent about having invested in a company as a partner which carries on castings of steel and iron would not fall within the main objects of the respondent-company. He would also draw the attention of the court to the respondent-company, the balance-sheet, directors report for the year ended March 31, 2007 and March 31, 2008, which is produced at annexures C and D respectively to contend that the respondents themselves have admitted that the respondent-company has not carried on any business activity during the year and as such it would suffice to attract clause (c) of section 433 of the Companies Act. He would submit that on perusal of the balance-sheet of the respondent-company, it would go to show that no business activity has been carried on by the respondent and the object with which the respondent-company was incorporated having faded, there cannot be any justifiable reason to withhold the winding up, since the petitioners being shareholders are not receiving dividend and it is also contended that the respondent-company having not engaged itself in the business activity for which it was formed and not exhibiting efforts to commence the business activity as envisaged under the memorandum and articles of association the substratum of the respondent-company has been lost and no useful purpose would be served in keeping this company alive. As such he seeks an order of winding up to be passed.

In support of his submission he would draw the attention of the court to the order passed by the Company Law Board in C.P. No. 54 of 2005 (since reported in-- (2008) 145 CompCas 717 namely, M/s. Ashok Iron Works P. Ltd., contending that the petitioner''s family and respondent''s family are having the same shareholding pattern, i.e., 25 : 75 and it has been held in the said petition that there is oppression by order dated October 26, 2006 and this order came to be affirmed by this court in Company Appeal No. 11 of 2006 and the same has reached finality since SLP filed against the order passed by this court in SLP No. 19910 of 2007 has since been withdrawn and as such he would contend that the said oppression would also extend to the respondent-company since it is managed by them in the same shareholding pattern and as such it is contended that no useful purpose would be served by keeping the respondent-company alive and active and seeks for winding up which according to him is just and equitable to the shareholders. In support of his submission he would rely on the following judgments:

(i) Lawang Tahang Vs. Goenka Commercial Bank Ltd.,

(ii) Rajahmundry Electric Supply Corporation Ltd. Vs. A. Nageswara Rao and Others,

(iii) Needle Industries (India) Ltd. and Others Vs. Needle Industries Newey (India) Holding Ltd. and Others,

(iv) A. Sreedharan Nair Vs. Union Hardwares (Private) Ltd., A. Sreedharan Nair Vs. Union Hardwares (Private) Ltd.,

(v) Registrar of Companies Vs. Shreepalpur Cold Storage Private Ltd.,

(vi) AIR 1963 Orissa 1 (State v. Mayurbhanj Spinning and Weaving Mills).

(vii) O.P. Basra and Others Vs. Kaithal Cotton and General Mills Co. Ltd.,

(viii) Lt. Col. R.K. Saxena Vs. Imperial Forestry Corporation Ltd., Official Liquidator,

Per contra Smt. Vijetha Naik, learned counsel for the respondent company reiterating the plea raised in the statement of objections would contend that the petitioners and respondents representing two families, namely, "Hanji" and "Humbarwadi" are having identical shareholding pattern in different companies and the respondent-company having come into existence in the year 1981 was carrying on the business in the same manner for the past 30 years and on account of certain disputes having arisen between the two families, the petitioners have come up with this petition seeking winding up by invoking extraordinary jurisdiction u/s 433(c) and (f) of the Companies Act with vengeance. She would also contend by relying upon the minutes of the board meeting held on March 2, 2002, of the respondent-company whereunder the first petitioner has participated in the said meeting and it has been resolved therein to authorise the managing director of the respondent-company to negotiate the terms and conditions of the loan with M/s. Ashok Iron Works P. Ltd., not exceeding Rs. 45,00,000 and contends that the first petitioner being a party to the said resolution cannot now contend that they were not aware of the working of the respondent-company. She would also draw the attention of the court to the proceedings of the board of directors of M/s. Ashok Iron Works P. Ltd., dated March 30, 2007, whereunder the first petitioner herein had participated and the agenda regarding raising of share capital of the company was considered and resolved to raise the minimum paid-up share capital through rights issue. She would also draw the attention of the court to the auditors report to contend that a reference has been made therein with regard to inter corporate loan given to M/s. Ashok Iron Works and the respondent-company having earned profits of Rs. 2,64,671 and as such she contends that it cannot be held that there is no business activity of the respondent-company. She would draw the attention of the court to clause 13 of memorandum and articles of association to contend that under the said clause the respondent-company would be entitled to participate in the partnership or enter into any arrangements for sharing the profits, amalgamation, union of interest, reciprocal concession or incorporation with any person, partnership or company and which is conducive to the business of the respondent-company and having done so with the consent of the petitioners, it cannot be held or construed now that the respondent-company is not carrying on any business. As such she would contend that the respondent-company is carrying on the business as envisaged under the memorandum and articles of association. It is also contended that the respondent-company has passed a resolution not to declare the dividend which has been communicated to the petitioner by communication dated September 27, 2008 and this decision of the board is taken by majority and it cannot be construed that there is no business activity carried on by the respondent-company. She would also contend that petitioner is guilty of acquiescence, since the first petitioner all along have participated in the deliberations of the respondent-company and being aware of the manner in which the business activity of the respondent-company was carried out and as such they cannot seek winding up of the respondent-company and the plea now put forward is without merit and the present petition is filed only on account of certain disputes having arisen between the two families and to wreck vengeance against the respondent-company. She would also contend that the respondent-company has earned profit and the first petitioner having participated in the board deliberations either by supporting or opposing is now seeking for winding up of the respondent-company on the alleged ground of not carrying out the activity for which the respondent-company was incorporated which according to her is contrary to the facts, since the very same activity has been carried out from the date of incorporation of the respondent-company till date. It is also contended by Smt. Vijayetha Naik that the substratum of the respondent-company is not eroded since the respondent-company is earning profits and its reserves and surplus worth Rs. 73,00,000 is available as is reflected in the audited balance-sheet dated March 31, 2008.

In reply Sri C.K. Nanda Kumar, learned counsel for the petitioner would submit that it is just and equitable to order winding up of the respondent-company since from the date of incorporation, the respondent-company has not carried any activity except earning interest on the funds available/lent to M/s. Ashok Iron Works which company has also now been held to be acting contrary to the interest of the shareholders and for act of oppression an order has been passed by the Company Law Board which is also required to be extended to the activities of the respondent-company in question and as such he submits that the finding given by the Company Law Board is squarely applicable to the respondent-company since it is managed by the same shareholders who are also managing M/s. Ashok Iron Works. On these grounds he seeks for allowing the petition.

Having heard the learned advocates for the parties, the only point that arise for my consideration in this petition is:

Whether the respondent-company is required to be wound up u/s 433(c) and (f) of the Companies Act?

The brief background of the facts of the case

The respondent-company was incorporated in the year 1981, as per certificate of incorporation issued by the Registrar of Companies in Karnataka and the main object of the company agreed to be pursued by the promoters is reflected in the memorandum and articles of association which is appended to the petition as per annexure A. The authorised share capital of the respondent-company is Rs. 24,00,000 divided into 2,400 equity shares of Rs. 1,000 each. The issued, subscribed and paid-up capital as on March 31, 2007, is Rs. 88,000 divided into 88 equity shares of Rs. 1,000 each and as on March 31, 2008, the issued, subscribed and paid-up capital was increased to Rs. 1,76,000 (176 equity shares of Rs. 1,000 each). It is not in dispute that the petitioners who constitute the members of "Hanji" family are owning 25 per cent. of the paid-up capital and remaining 75 per cent. of the paid-up share capital is held by another family known and called as "Humbarwadi" family. The respondent-company having been incorporated in the year 1981 has been admitted as a partner in a partnership firm under the name and style of "M/s. Jayhind Engineering" and the respondent-company is stated to have retired as partner from the said partnership firm on March 31, 1999. The said partnership firm, namely, M/s. Jayhind Engineering is run by Hanji and Humbarwadi family in the ratio of 25 : 75. Likewise one more company by name M/s. Nutan Investments and Trading P. Ltd., is having a share pattern of 25 per cent. with Hanji family and 75 per cent. with Humbarwadi family which company in turn has a shareholding in M/s. Ashok Iron Works in the same pattern and the said M/s. Nutan Investments Trading P. Ltd., has a shareholding of 4 per cent. in M/s. Ashok Iron Works P. Ltd., and remaining 96 per cent. of M/s. Ashok Iron Works is in the share of 25 : 75 between Hanji and Humbarwadi family. These aspects clearly go to show that all these companies are run by two families of "Hanji" and "Humbarwadi" respectively. The respondent-company was incorporated in the year 1981 and the object with which it was incorporated was to manufacture, iron and steel castings directly. It is not stated in the petition as to what transpired between 1981 to 1999. Even the statement of objections filed by the respondent is also silent about the activity of the respondent-company for this period. However, the fact remains that, from 1981 to 1999, the respondent-company was a partner in the firm M/s. Jayhind Engineering and there was no dispute to enter into such a partnership, and the respondent-company is said to have made certain investment in the said partnership firm as a partner. Till the respondent-company retired from the partnership firm on March 31, 1999, there was no qualms between the parties on this investment made by the respondent-company. The balance-sheet produced by the petitioner along with the petition in question is for the period ending March 31, 2007 and March 31, 2008. A perusal of the balance-sheet would go to show that under the assets column an amount of Rs. 14,48,305 is reflected as loan to M/s. Jayhind Engineering and a sum of Rs. 57,57,179 is reflected as loan to M/s. Ashok Iron Works P. Ltd. (as on March 31, 2007) and as on March 31, 2008, the said amounts are reflected at Rs. 4,48,305 and Rs. 60,46,101. The profit and loss account for these two years reflect that the income earned by the respondent-company by way of interest in a sum of Rs. 4,10,391 and Rs. 4,30,148 respectively and on these investments. The profit and loss account does not reflect as to whether there is any business activity carried on by the respondent-company. It is the contention of petitioners (amongst whom the first petitioner is one of the directors of the respondent-company) that the respondent-company is not carrying on the business activity for which it was incorporated. From the date of incorporation, i.e., 1981 till 1999 what was the activity which was carried on by the respondent-company has not been stated by the petitioner. The grievance of the petitioner commences from the year 1999 as per paragraph 8 of the averment made in the petition. The first petitioner being the director of the respondent-company has participated in all the deliberations of the respondent-company and is a privy to the business transaction carried on by the respondent-company from 1981-1999. Ordinarily the court do not travel beyond the company''s balance-sheet to ascertain its financial position as it would be the index in so far as its financial stability. To invoke the provisions of clause (c) section 433, the words as found in clause (c) has to be read in its entirety.

Section 433(c) reads as under:

if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year.

In this background, when facts of the case are examined and the balance-sheet, for the year 2007-08 produced along with the petition is also examined it would go to show that there is activity of the company carried and it has been earning profits. A perusal of the profit and loss account annexed to the balance-sheet would also go to show that the respondent-company has earned interest. Though Sri C.K. Nanda Kumar, learned counsel for the petitioner would stress on the auditors'' and directors'' report as per annexures C and D to contend that it is admitted by the directors themselves that the respondent-company has not carried on business activity during the year. It is also required to be noticed that in the very same report it is also stated that the directors have categorically stated that the only source of income earned by the respondent-company is interest on Inter Corporate Loan given to M/s. Ashok Iron Works P. Ltd. The first petitioner being a director of the respondent-company from the date of its incorporation and having participated in all its business activities over the years as also in its deliberations and having conducted the business by not only having participated in the business of the respondent-company but also other companies of which the Hanji and Humbarwadi families are also the shareholders is now attempting to seek its winding up on the ground that it has not carried on the business activity for which it was incorporated and attempting to portray himself having woken up from his slumber to seek winding up of the respondent-company on the ground that it does not carry on the activity for which it was incorporated and it would not serve the purpose for which it was incorporated. Sri Nanda Kumar has relied upon the judgment of the Calcutta High Court reported in Lawang Tahang Vs. Goenka Commercial Bank Ltd., at paragraph 8 of the judgment to contend that the substratum of the respondent-company has disappeared and the benefit if any that would accrue by keeping it alive would only enure to the benefit of the majority shareholders and not to the minority shareholders.

It is noticed that as per clause 13 of the memorandum and articles of association, the respondent-company was entitled to enter into a partnership to promote and aid the main object of the company and if in the prudence of the board of directors of the respondent-company they have thought fit to enter into the said partnership for which decision the first petitioner was also a party and probably the beneficiary cannot now contend that by virtue of retirement of the respondent-company as a partner from the said M/s. Jayhind Engineering and on account of such retirement the amount of Rs. 14,48,305 payable, has not been paid and as such it does not benefit the shareholders to keep the respondent-company cannot be accepted. Since from the year from which the respondent-company entered into partnership till retirement in the year 1999 the petitioners did not raise their voice on this participation and were privy to the said resolution of the respondent-company to enter into partnership as a partner with M/s. Jayhind Engineering. In view of the same contention of the petitioner that by investing the funds of the respondent-company must be held that the substratum of the respondent-company has disappeared cannot be accepted. At this juncture it would be of relevance to extract the judgment of the hon''ble Supreme Court in the case of Madhusudan Gordhandas and Co. v. Madhu Woollen Industries P. Ltd. [1972] 42 Comp Cas 125:

In determining whether or not the substratum of the company had gone, the objects of the company and the case of the company on that question would have to be looked into. In the present case, the company alleged that with the proceeds of sale the company intend to enter into some other profitable business, such as export business which was within its objects. The mere fact that it had suffered trading losses will not destroy its substratum unless there is no reasonable prospect of it ever making a profit in the future. A court would not draw such an inference normally. One of its largest creditors, who opposed the winding up petition would help it in the export business. The company had not abandoned the objects of its business. Therefore, on the facts and circumstances of the present case it could not be held that the substratum of the company had gone. Nor could it be held that the company was unable to meet the outstandings of any of its admitted creditors. The company had deposited money in court as per the directions of the court and had not ceased carrying on its business.

Applying the law laid down above referred to the facts on hand and when examined it would go to show that respondent-company has been earning profits as reflected in the balance-sheet. No creditors have been demanding winding up of the respondent-company and its financial resources are sufficient to meet any contingency. Hence, it cannot be held that the substratum of respondent-company has eroded.

A perusal of the pleadings namely order passed by the Company Law Board in C.P. No. 54 of 2005 (since reported in-- (2008) 145 CompCas 717 and communication dated June 27, 2008, by the first petitioner to the respondent-company would clearly depict that there is internal bickering between the two families on account of which several litigations have cropped up including the present one. The petitioners on one hand and the respondent on the other are attempting to settle scores by filing petitions in various forums against each other. The merits and demerits of the contentions raised by either of the parties with regard to various litigations are not delved upon in this petition as those matters are seized by different forums. The petitioners having acquiesced by participating in the deliberations of the respondent-company and also having signed the board resolution from the year 1981 to 1999 are now attempting to keep the pressure exerted by them on the respondent family by this petition also. The endeavour of the court while exercising jurisdiction under clause (f) of section 433 is to find out whether it is just and equitable to wind up the company and not to allow the personal scores to be settled. The High Court of Madras in the case of K.S. Mothilal v. K.S. Kasimaris Ceramique P. Ltd. [2003] 113 Comp Cas 562, under similar circumstances while considering the exercise of equitable jurisdiction has held as under (headnote):

The true position of a shareholder is an investor and he will be entitled to participate in the profits of the company in which he holds shares as and when the company declares, subject to the articles of association, that the profits or portion thereof should be distributed by way of dividends among the shareholders. That apart, the shareholder has a further right to participate in the assets of the company, which would be left over after winding up, but not in the assets as a whole....

(iii) That except making a bald averment in the petition, that the company had lost its substratum, there was nothing to suggest that the company had lost its substratum. Apart from the lands in Madras, the company owned extensive agricultural lands in Tuticorin District and a rice mill. On the admitted materials, the liabilities of the company, if any, were only minimal or marginal when compared to the value of properties or assets owned by the company. There might be a misunderstanding between the members of the family, who held majority shares among themselves and attempted to over-reach other members of the family. It might be that the only major business that was being carried on had been stopped, but on that score, it could not be held that the substratum of the company had been lost. Even after the sale of the lands, there would be sufficient surplus and the company could very well proceed with one or more of the objects, which were approved in the memorandum of articles of association and already steps had been taken as seen from a resolution. Therefore, it could not be said that the company had lost its substratum. Where the substratum was not completely gone and other business could be carried on, the company should not be directed to be wound up on the ground that it was just and equitable''.

On perusal of the balance-sheet of the respondent-company it would go to show that the respondent-company is earning interest on the amount lent to M/s. Ashok Iron Works P. Ltd., and it is in this manner its activities are said to have been carried out from the date of its incorporation till date for which the petitioners did not have any objection and till the internal disputes surfaced between the parties. On perusal of the grounds urged in the petition and taking into consideration the statement of objections, I am of the considered view that this is not a fit case that the respondent-company is required to be wound up u/s 433(c) or (f) of the companies Act. Accordingly the following order is passed:

ORDER

The company petition is dismissed. No order as to costs. In view of the petition having been disposed of C.A. No. 877 of 2008 does not survive for consideration and accordingly it is hereby rejected.